Blain's Morning Porridge, submitted by Bill Blain
“I’d rather play jazz. I hate rock and roll.”
Another challenging week in prospect for global markets…. But let’s move on from worrying about how dangerous bond yields look, why the glue holding the horns on the Unicorns seems to be coming unstuck, or fearing just how horrid the coming global recession is going to be. Instead, let’s cut through the distractions, and figure out why things are so bad.
Friday’s US employment report was neither fish nor fowl – it looked a classic slower for longer new economy number; just enough new jobs to convince markets the expansion continues (slowly), while leaving the threat of recession firmly on the table. But the rest of last week’s data slew – including tumbling purchasing manager numbers (PMI) - were dismal, so the bias will remain towards recessionary threats.
Numbers from around the globe confirm the recession risk. Germany, China, and the rest confirm protectionism and talk of trade wars has done enough to dampen entrepreneurial animal spirits to swing the dial towards slowdown. Strip it down to the basics, and the global economy is slowing.
And… It’s largely due to crappy politics.
Someday economic historians will look back at this decade and wonder WTF early 21st politicians were thinking. But that’s the path of economic history; mistakes, ups and downs, and the occasional inspired decision or policy. At the moment we’re stuck in the “mistakes” part of the political cycle.
Whatever we see this week in terms of company news, oil shocks, or economic data, the most important stories will be about ongoing political instability. Putin and Xi must be laughing their heads off. In their eyes the West looks hopelessly destabilised and tripping over political Gordian knots, squabbling among themselves and achieving nothing. While they bicker, nothing real is happening.
And they will be right to be laughing. Our elected leaders are making a terrible stramash of the whole leadership thing…
Look behind the headlines, and look for the opportunities Politics present.
UK: Here in the UK, the Brexit farce has made us a subject of global humiliation. We’ve seen the electorate’s faith in the basis of Parliamentary democracy profoundly challenged. It feels everything else in UK politics has become an irrelevant sideshow. Yet, it could all turn very quickly. Opinion polls suggest the Tories will walk a general election – I saw one paper quote a 15% lead over Labour. Agree with Tory politics or not, but a strong empowered government with a substantial majority would be a massive plus; putting politics back on path. An election would be a massive buy UK signal.
(Foreign readers might not understand the current UK political conundrum: the Government (which thinks it will win an election) can’t call an election, but the Opposition (which thinks it might lose) can. So the SNP and Labour won’t allow an election. Therefore, we have no functional political leadership – just Boris doing his utmost to pretend.)
Although Boris’ latest plans for an Irish border that isn’t a border look a typical Heath Robinson lash-up sticky-backed plaster solution to an apparently intractable problem, it sounds and looks like many European politicians perceive it as a basis for potential compromise. The only – THE ONLY – Thing That Matters Now is getting a Brexit deal – even if it’s not ideal, pragmatists would agree the details can be sorted later. (I just know a French chum of mine is going to go ballistic at that, and will rant at me about how the deal must protect Europe from the UK arbitraging the union. Honestly Jean-Claude, we hadn’t even thought about it.. but now you mention it….)
Any sign of a Brexit solution would be another massive buy signal. (But I wonder.. it needs pragmatic compromise, but I suspect many of the UK Opposition and the European leadership would rather fail in order to dis Boris Johnson.)
USA: The US is a more difficult issue. Washington DC has spiraled into full-scale war over Ukraine-gate. Battle-lines have been drawn. Republicans are obliged to support a President whose actions disgust the majority, versus a braying horde of Democrats virtue signalling their contempt of the President’s abuse of his office and power.
Yet, Trump could still prove the likely winner. He’s thrown enough mud at Biden that some of it has stuck. The Democrats might score some cheap shots, but while he distracts them they aren’t winning the long-game, which requires a clearly united new policy for America. (When Roosevelt was planning the New Deal, he wasn’t wasting time on petty political point scoring.)
The risk is Trump says/tweets/does/has done something profoundly stupid and enables impeachment. Don’t completely discount it – nothing would really surprise me anymore. Sure, it would be really messy, but it may put a more trade savvy administration in place (a clear market plus), and it opens up the potential for Warren to win the subsequent election (not so clear, as it would likely herald a new era of US political gridlock.)
Europe: Let’s not forget the erstwhile democracies of Europe. They really aren’t much better from a political perspective. Tensions are bubbling away under the surface. Closer integration remains a problem, the unresolved issues over banking union and fiscal policy/reform in a changing ECB are nor agreed, while immigration is a major issue that could yet trigger a populist backlash. In many ways Brexit has been a challenge the EU has been able to unite around – but its paper-thin. I had to laugh at a hapless Dutch MP lecturing the UK on Sunday night about how the EU’s prime concern over Brexit is to support Ireland and No Border, while telling us its all Boris’ fault. Really?
I wonder if Ireland’s demand for no border will really trump the attractions of a Brexit compromise? In such a call, I suspect Ireland could well find itself under that proverbial bus. In fact, I hope it happens – a compromise that benefits the UK and the majority of Europe is a far better outcome. Ireland is not just a UK problem. If Leo wants to play global statesman – his opportunity might well be coming.
As I said… an interesting week in prospect with politics set to dominate.. unless we get a new no-see-em like something new in the Middle East, an escalation in Hong Kong or an unforeseen market wobble….
As Troy Tempest’s boss once said: “Anything is possible in the next 20 minutes…”!