Global Politics – the future, and how much instability will feed into markets?

Blain’s Morning Porridge – Jan 9^th 2023: Global Politics – the future, and how much instability will flawed politics feed into markets?

“There need to be specific concrete limits attached to any debt-ceiling increase..”

This morning: Political instability is turning into a global competition as Bolsonaro supporters storm Brazil’s Government, the CCP reopen China’s Borders to chaos, and the US Speaker deals with political hi-jackers to secure his seat. All will have consequences and should make markets nervous.

It’s bad enough pretending Liz Truss never happened, but now the whole world is fascinated by the distraction of fraternal gripes among the UK’s Royal Family. It should not be important – but the UK’s critical Soft-Power is unravelling faster than the Red Army ever could have managed. Monarchy has gone from strength to liability in a generational moment.

An aside:

Long, long time ago…  I worked beside a young man who was Right Honourable the something of whatever. He’d clearly got his job in investment banking by dint of ancestry, title and family wealth. He had the lot: weak chin, receding hairline in his early 20s, and teeth a racehorse would envy. He did not give any thought to our clients. Business was something other people did. Yet he was the most funny, entertaining, and kind person – and a complete and utterly hilariously entertaining idiot. Timekeeping was a foreign country. Sobriety (even in the heady days of the 1985 Big Bang) was something other people did.

He was sacked after he and some chums decided it would be terribly funny to do a runner (leave without paying) from an Indian restaurant in Brick Lane, and someone got badly hurt trying to escape across a railway line. It was hushed up.

(I should also state another market chum is also an aristocrat; but he is possibly the most successful broker in recorded history, smarter than a planet-full of supercomputers, more popular with his clients than Christmas, and knows every single investor who ever bought a bond. He is absolutely from a completely different genetic phylum than the evolutionary dead-end that spawned the useless but charming Giles Cholmondeley-Clusterf*ck-Smyth I knew years ago.)

But, enough about Prince Harold…. (Full disclosure: I punched my brothers more than once. They punched me back. Harder. Mum told me I deserved it. I did. Decades later I remain incredibly proud of them both.)

Back on planet market…

Soft power matters. So does politics.

For the first week of the new year the markets have been up/down but flat of any real trading conviction. Friday turned into an up-day because US wages weren’t quite as strong as feared, therefore the Fed might hike less. In some ways that’s a positive; at the micro level stocks and credit are reacting to real data such as slumping sales, wage demands, balance sheet ructions, and regulatory reversals.

Markets are becoming more rational – factoring how rising rates, the end of QE, and inflation mean the days of easy money, implicit central bank backing for markets and fervid speculation are over. The result is the fundamental reappraisal of corporate valuations and future expectations – the most visible result is the collapse in big tech valuations in the face of limited earnings. The market is now focused and pays attention to the micro implications of future growth relative to rates.

Traders have been taking careful note of what the Fed thought a month ago about future macro issues (last week’s Fed Minutes), and will watch this week’s retail and lending numbers for signals of what Christmas sales leave for future retail trade and consumption. They will continue to trade on how inflation/interest/rates are shaping up for defining the depth of global recession.

The analysts are filling the media space with predictions of recovery/recession, fundamental repricing, but no one really knows where we are headed – it’s a very reactive, news/data driven flat market. That is what markets should do: buy/sell price future expectations on the facts as we perceive them.

The fly in the ointment is flat markers become susceptible to external pressures. When there is no real direction or conviction, markets become vulnerable to phycology – and the dangers of headology and “overthinking it.” Sentiment abhors a vacuum. In the absence of markets news, externalities and tends garner attention. In these fervid times no news quickly becomes bad news…

The lack of conviction or direction leads me to conclude there is something else, much deeper going on. And there is.. Sometimes you need to look behind how the trees were shaking in the storm and figure out why the forest just got blown down….

All of which leads me to the big market event of last year – the ClusterTruss moment that saw the UK’s Virtuous Sovereign Trinity (the stability of the gilts markets, the solidity of sterling and the UK’s reputation for political competency), undone in a single stupid mini-budget, triggering a run on the pound, and the near breakdown of the gilts market. It has left the adult in the room (Prime Minister Rishi Sunak) with very few options except crippling austerity for the economy. The UK has gone from a high-growth attractive economy to sick-man-of-Europe in a heartbeat.

It’s not a lesson other nations have paid much attention to.

It was an extraordinary weekend for global political madness: the storming of the Brazilian government by Bolsonaro supporters, the chaotic reopening of the Chinese economy despite its unpreparedness for Covid, and the 15 votes required to put Kevin McCarthy in the US Speaker’s chair are all symptoms of a pandemic of political failure around the globe. All of these will have profound consequences on markets as they raise fears of where they may lead.

Maybe that’s what we’re missing…. Just how vulnerable markets are to political failure, and what we are missing in terms of what such failure tells us.

Whatever deal was made in Washington to elect the new speaker, it showed the third most powerful job on the planet just went to a man who was held to ransom by a random bunch of (for want of a better expression) MAGA/Trumptard extremists. McCarthy dealt with hi-jackers. The holdouts absolutely know everyone else is wrong and will quiet happily close the government, trigger a technical US default, trash ‘Merica’s global alliances, all to demonstrate just how right they are. It’s scary – but that’s apparently the way democracy works these days.

There is no collective responsibility, no sense of doing right – just the abiding sense governments will do what they want to achieve their end – of remaining in power. Give Liz Truss some credit… she knew when the game was up and left.

The potential consequences of the apparent breakdown in US democracy are limitless. We have to hope the bulk of Republican representatives will realise the Nation should come first, and will stand against them – even it means appearing to be RINOs (Republicans in Name Only) by voting with the Democrats to avoid the damage a government shutdown or a failure to support Ukraine could cause.

I remain hopeful.. after all, as Winston said: “The Americans will always do the right thing, after first exhausting every other possibility”.

However, the damage has already be done. Europe is increasingly aware the continuation of the transatlantic alliance is vulnerable. They see a very different new global order emerging – not just in China and South East Asia, but around India (which will shortly become the most populous nation), and also the increasing power flexing from the Middle East – who know they have limited time and plenty of money to transform their economies. Both India and the Gulf have signalled their breach with the USA over Ukraine. The gulf has influence to burn.

Global geopolitics are constantly evolving, but we seem to heading towards a critical juncture – comparable to the late 1890s as the global powers began to understand how the Pax Britannica was ebbing, and that something new would emerge to replace it. It took the First World War for the switch to become apparent. The Germans and the French thought they could be the next global hegemon, but of course it was the USA that has been behind the often reluctant Anglo Saxon ascendency of the past 100 years.

We Anglo Saxons succeeded because we did “mercantile” better: made stuff, sold stuff… But the UK became London as we sacrificed manufacturing for financial services. Big Tech and Big Finance left middle America the no-stop-zone Donald Trump recognised as fertile soil for MAGA populism.

No nation remains top for long. They tire, they wither, they are overtaken. The question is who replaces the USA?

It’s not nailed on to be China. While there is clearly wealth and value across China, the cracks across the economy are increasingly apparent. The veneer of fantabulous wealth across China’s multiple new manufacturing hub cities looks cracked and mildewed as it becomes clear the economy is in crisis, the property market is overvalued, the bright shinny infrastructure of roads to nowhere needs to be maintained, and demographics are moving against it.

Without growth, the Chinese Communist Party will struggle to keep the populace under control and happy, meaning an ever increasing share of the economy will be squandered on surveillance and security instead of growth. The CCP are not daft – they saw what lost the USSR the Cold War against the west on the Economic front line.

Macro-Geopolitics is the art of reading the runes to predict how the changing axis of global trade will influence the future direction of stock markets and individual companies. I am not a great user of charts on the Morning Porridge – mainly because trying to integrate them into the prehistoric website interface that is WordPress is just too difficult for anyone over 40 – but try to think about the strategic direction of future trade as a great big four-D Venn cloud bubble – innovation, invention, influence, and growth. Four variables and a multitude of potential outcomes.

My read:

• We are set to see further erosion of the Anglo-Saxon transatlantic consensus and US hegemony. The dollar will weaken – for conventional reasons as the recession will be shallow, inflation will fall, and US rates will remain low, but also as the global market factors in increasingly dysfunctional US domestic politics, leading to falling demand for US treasuries, impacting the cost of US debt, which will become a real economic issue.
• Europe will pivot away from the Atlantic and seek new relationships with the Middle East and India.
• A stronger EU is unlikely. It will remain fractious and difficult to maintain due to ongoing internal European divisions: lack of German leadership, France First, and a natural desire to diminish spending in Scandinavia, and Benelux. Southern Europe likely to find itself on front line with new refugee crisis – and will struggle to gain EU support without Northern buy-in.
• Middle East and India have already made clear their political break with US – it remains to be seen how much they align with rest of globe. Just how the Gulf transitions from oil to new energy, and how its uses it wealth to invest in global power and influence will be fascinating.

And this may all happen much faster than we think – within the next decade.

Five Things To Read Today:

WSJ                 Wall Street Sets Low Bar For Corporate Earnings Season

BBerg              China Considering Record Local Debt Quota, Wider Budget Deficit

FT                    Wage Inflation aint dead yet

BBerg              Global Central Banks Aren’t Declaring Victory Over Inflation Yet

FT                    We need to pay more attention to misaligned economic signals

Out of time and back to the day job..

Bill Blain

Strategist – Shard Capital