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Thursday, 23 November 2017

The Pilgrim's Progress

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President Trump continues his progress across East Asia where he is being greeted with much pomp and circumstance. 

His anodyne speeches go on and he behaves as though he were being lauded as the most powerful man in the world. In fact he is being treated to the sort hospitality any one of us would offer to an otherwise rather odd uncle who has let it slip that he has decided to leave us his grand estate and accumulated fortune. Trump will, I suspect, be remembered in history as the man who began the process of passing world leadership from Washington to Beijing. 

His rather fatuous remarks about the uneven playing field upon which trade is conducted between China and the US, followed by the observation that he does not blame China for it as it is every government’s duty to do the best for its people, reflects his impotence and lack of leverage over China. The fiery anti-Beijing rhetoric of the campaign period has gone as is its repetition in his early days in office. What is left is a much less booming version of the old hollow accusations and without the even more hollow-sounding threats. 

The best he can come away with, power politics and North Korea aside, is a renewed commitment from China to clamp down further on systemic patent fraud but even there the horse has pretty much bolted and Chinese technology has probably by now learnt enough to no longer need to plagiarise US achievements in quite the way it has in the past.

 

Crop circles 

The US certainly still has a lot to offer the rest of the world in terms of agricultural produce although in that area too it will have to learn that it no longer sets the standards and that it must, like it or not, accept that it can no longer determine what others must countenance and that it must adapt to the demand of its customers. 

By relinquishing the moral leadership on the “green agenda” to Beijing, Trump has also possibly weakened the position of US food producers although it is hard to find strict correlation between the Asia trip and recent low prices for wheat, which traded down at US$427.25 per bushel on the CBOT. That said and as a matter of record, after a long and persistent fall over the past five years, the current level in the mid-US$400 is fairly stable. 

We should never forget when looking at commodity prices that there are two major influences on them. The first is obviously the demand and supply side of the actual raw material, the second is the wider value of the dollar in which most commodity markets are priced. This goes not only for commodities but Japanese stocks also reflect the greenback.

 

Rising sun

The Nikkei has rallied hard in the past month and a half. It closed at 22,868.71 today after an unusually volatile session that saw it swing around in an 830-point range, to close down 45.11 points. But overall it has had a storming time which began on September 8 at 19,274.82 and peaked yesterday at 22,937.60. Funnily enough, dollar/yen hit an interim low on the same date, September 8, at ¥107.83 and that itself peaked on November 1 at ¥ 114.15. An 18% rise in the stock market is faced with a 2% decline in the yen. For years now investing in Japanese equities has been a leveraged play on the currency that has by and large resulted in foreign investors either losing money or making money, only to hand it back a little later on. Unless my memory serves me wrong, this is the first period in some time when even a currency-hedged holding in Japan looks like delivering a proper and sustainable return. 

Incidentally, I have missed this move completely. Too many years of frustration have left me skeptical of Japan and I still can’t see the country escaping from the dual squeeze of the demographic time bomb on one hand and Chinese competition in global markets on the other. Yet money is flowing into the Japanese equity markets as though there were no tomorrow. Maybe there isn’t? 

10-year JGB yields are at 0.03%. They have in fact not been above 1% in the past five years and at 0.03% they are below even their own one-year average, which stands at 0.055%. Japan’s money markets are even more synthetic – why then do we still refer to them as markets? – than those closer to home whereby there is sense that the BoJ will be able to hold its breath for longer than most of its peers. Is there still time to buy into Japan? The decision is a bit like the one around bitcoin. It looks wrong but has been right for far too long for rational judgment to be formed.

 

Priti vacant

Finally, Theresa May has lost another Brexiteer from her cabinet. International development secretary Priti Patel, an old-style Thatcherite, was forced to resign from the cabinet last night. To blame this on May and her waning authority would be disingenuous and although bringing a seat at the top table, the minister for aid and development isn’t exactly a cornerstone in running the country. 

Brexit is a mess although it is good to now watch and hear an increasing chorus of European captains of industry banging the table and demanding that the EU side of the negotiations stop trying to play chicken with the British negotiating team and get on with it. The key to the EU side of the argument has always been to make leaving the EU so painful that nobody else would consider it. Sterling hit its low to the euro at € 1.08 during my enforced absence and has now recovered to the €1.13 area. Any signs of a bit more give on the side of Brussels and it could be at €1.15 before you can say “There’s a deal to be done….”. Best now to be sterling neutral. 

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