Porridge Extra - New Politics and Policies, Trump, Brexit and upside surprises..
The New Trump Fiscalism and the ongoing pains of Brexit may lead to upside surprises this year...
Bill Blain
By the time you are reading this we will be living under the Trump Presidency. The world will be spinning onwards towards a series of potentially lumpy European Elections and whatever these might suggest for the ongoing unity of the Eurozone. Despite UK premier Theresa May outlining her vision of a “clean and clear” Brexit, markets will remain just as vulnerable to whatever the latest tweet, rumour or sigh suggests abouts Britain’s increasingly fractured relations with Brussels, and her ability to close a decent deal.
In short: nothing changes. Markets will remain volatile. Lots of very predictable lie speedbumps ahead, and that’s without even considering the worries we might have about no-see-ems that might emerge from China, Russia, Emerging Markets, Oil or a meteor strike.
Over the last few months I found myself with some time on my hands as I recovered from an operation. My chums in investment banks, institutional investors and academia bombarded me with the latest missives, textbooks and learned tracts on markets and economics. As an Economist I’ve always admitted the Dismal Science is hardly a science at all. Just like alchemists in the 12th Century always believed they were close to transmuting base metals into gold, modern economists think they are close to discovering the fundamental rules that drive economic activity.
Probably not. It was originally called political economy. That’s what it seeks to understand. How the body politic functions and why economies do what they do.
There are a host of trendy themes in modern economics. The end of globalisation is one popular concept for the liberatti to fret about. Another theme I particularly like is what I call the “Die Liberal Die” thesis: a growing realisation that 50 years of rising political correctness, and meaningless gibberish about truth and fairness in society, has resulted in increased income inequality and a dearth of opportunity for the majority. The theory explains why voters have rejected the liberal status quo via Brexit and Trump.
Most readers will be familiar with the effects of failed liberalism – far from attaining comfortable wealth, we’re likely to retire poorer and with less to hand on to our even poorer kids than any previous generation. We’re likely to shuffle off our mortal coils in hock to increasingly wealthy financiers after we give them our homes for an “equity release” mortgage because our pensions aren’t there.
Who to blame? Let’s march on the elites, blame the failure on Liberal Government, and Globalisation – which has taken all our jobs and opportunities and handed them to others – and march to a new promised land. Anyone for Corbyn?
But, I reject the thesis we’ve reached the end of the liberal globalisation phase. What we are seeing is a hiccup in a glacial and unstoppable process of ongoing global complexity. What we are also seeing is, hopefully, the end of a period of “Economic Double-Plus Wrong-Think”.
The economic consequences of the great market crash of 1929 created the depression and protectionism of the 1930s – a process that only changed as a result of the Democrats “New Deal” of fiscal spending, but also the beginnings of rearmament in the run up to World War II. We now look to the era and can see where policy errors lay.
I suspect we will look back to 2007-2017 and conclude similar mistakes were made. For the past 10-years since the global financial crisis, we’ve seen the hundreds of very bright, clever and well-read economists employed by “Them”: the central banks, the government think tanks, and regulators who have enacted a whole series of “rational” economic policies:
As the bank’s collapsed, the think-tankers determined getting money into the business sector was paramount to stimulate recovery.
The central bankers decided upon monetary experimentation – executing quantatative easing on a massive scale. By buying back government bonds, they expected to force investors and banks to invest money into the corporate sector and drive recovery that way.
The regulators decided the root of the global financial collapse was banks being under-capitalised. So they demanded new rules splitting up banks, and that they should vastly increase their capital bases. The effect was immediate: banks stopped lending at just the time the global economy needed new capital.
The result has been disaster. Far from putting money into constructing new factories and infrastructure, corporates have used the cheap money (zero interest rates) to finance the repurchase of their own stock (making executives richer and workers poorer) while investors have chased down yields and returns, with the cumulative result nothing has been added to real economic wealth – just redistributed to the haves from the have-nots.
Banks have become the least attractive investments in Europe. They remain dysfunctional, inadequately capitalised and largely incapable of boosting growth. (Unlike in the US, where swift enforced capitalisation has enabled them to get rich at everyone else’s expense again!)
And in terms of growth.. the global economy appears hopelessly mired. Time for change.
It’s hardly surprising the last 10-years of financial crisis, zero interest rates and soaring stock markets despite the absence of growth (a factor of investors being forced to seek returns wherever they can find them because interest rates are so low), has created an increasing hunger for change. The problem will be coping with the environment of change.
Loathe him or loathe him, President Trump has created an extraordinary cabinet of talents. Forget his Republican label. He is the first independent to win the presidency since the founding fathers. The potential to use fiscal stimulus and tax reform to stimulate the economy explains the massive gains in the US markets since the election.
Will it happen? Well.. the underlying pressure is there in the economy for growth. If you have ever driven on an American Freeway you know the need for infrastructure investment. If it doesn’t happen it will because of a failure of US politics – tax reform and spending bogged down in warfare between the presidency and the Republicans. (There is bound to be tension, but most Republican’s accept the bitter truth: their broken twisted party needs Trump even more than he needs them!)
Meanwhile, what of the prospects for the UK and the ongoing risks that Brexit really will cripple the economy?
Let me digress for a moment: there are ways in which the Dismal science of Economics can help us understand the likely outcomes for Brexit. There are “rules” based on rational behaviours and complex econometric models. One of the best known of these mathematical aspects is the “prisoners’ dilemma” from Game Theory – which predicts that although the best optimal outcomes are achieved by cooperative behaviours, its more likely one side or other will sell out the other in fear they may be sold out themselves, and greed is a bigger driver than cooperation.
Brexit may prove an example of game theory in action. Clearly it’s better for everyone if we (and by that I mean every European from Rekyavik to Moscow) admit Brits are not good Europeans. Britain has never been, and probably never will be, part of Europe. Our foreign policy for the last 1000 years or so has been financing other Europeans to keep it unstable. We are islanders who sincerely believe a foggy day in the English Channel means the continent is cut-off.
So let’s all embrace the opportunity – the Brits will be happier outside, and Europe will be less difficult without us. Let’s agree to work together – a classic win-win outcome under Game-Theory.
But it won’t work that way. European politicians know the Euro is in danger of unravelling. Their economic objectives (of staying in power, or in the case of the Brussels Euro-ocracy of maximising their control), depends on persuading electorates the UK is to blame. Which means punishing the UK with a Euro-divorce that ultimately won’t create jobs but will maximise their votes by being tough. The response of European politicians to Brexit is salutary: where the electorates are economically literate they seek a pragmatic exit, where the electorate can be whipped into a frenzy, the politicians are the ones demanding the UK be punished.
And let’s not forget only 52% of the UK electorate voted for Brexit. Some of the remainers remain vocal in continuing the fight to keep us in – but canvassing colleagues and clients I find the mood is changing. Even hardened remainers are now saying… “Brexit means Brexit”.. they are reconciled to the UK on the outside as probably a good thing.
Where does this leave us?
Brexit and Trump are two main themes driving the markets. Far from the end of globalisation, I believe the new politics and the new (fiscal) policies will drive growth. That means you need to start worrying about all the risks of rising rates, inflation, boom and bust.. ah happy days again… I suspect Trump will create some sort of boom in the US, and I fear the US Fed will be slow to catch up, meaning some kind of interest rate shock is on the horizon.
Brexit is now in the hands of Europe. If they are pragmatic it will happen in a way that benefits us all, but I suspect the growing sense of disunity and crisis that will grow this year across Europe means the UK will remain a whipping dog. I really can’t understand why Therese May made March her firm deadline for enacting Clause 50. She could have waited for distraction to grow!
My conclusion? The surprises in 2017 might be to the upside!
Bill Blain