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By Ciaran Mulhall on 26/07/20 | Overview


 
There are various things to report this week, but first we will hear from Ciaran Mulhall on how he sees important developments with the EU and the Euro this week.

"Following tough negotiations, EU leaders this week reached an agreement on the Recovery Plan, with the final deal maintaining the €750bn envelope, but reducing the volume of grants to €390bn (from the €500bn initial proposal). Despite a somewhat less ambitious final package we see the outcome as an overall positive, for three core reasons,
  • We estimate that, together with the European Central Bank’s sovereign bond purchases, the Recovery Plan will effectively close the Euro area’s funding gap over the 2020-22 period.
  • The total envelope of EUR 750bn—390bn in grants and 360bn in loans—is larger than we expected and will provide the Euro area with more of an area-wide safety net than a smaller envelope would have done.
  • We think that the strong commitment from EU leaders, subject to the European Parliament, as ever, to finalize the agreement earlier than we expected, points to continued EU integration down the road. While a single fiscal policy might still be some way off, this is a step towards that goal.
To finance ‘Next Generation EU’ they decided, for the first time in European history, to enable the Commission to borrow funds on the money markets and use these funds to finance the recovery.

We continue to believe the Euro area is well-placed to recover from the Covid-19 shock. This despite some uptick in positive test results this week in Europe – particularly in France and Spain and indeed in Eastern Europe. 
 

Covid-19 and its effects continue

While the move higher in cases in Europe has gone (so far) unnoticed by market participants, this is in contrast to the growing storm over the Sun Belt outbreak, which has pushed US new virus cases to an average of 66,000 per day, over the last week. Several states have further tightened measures to control the disease. States representing about 80% of the population have now paused or reversed reopening plans, 70% of the US population is now under a face mask mandate of some sort.

While there's strong evidence that such targeted measures are effective, we think it is hard to know if they will be sufficient to bring COVID 19 under control. Should these measures turn out not to be enough to contain the virus, we think some states may need to shut down still more consumer activity.

We discussed at length a couple of weeks ago our preference for European risk assets over United States ones, so we will not go over old ground – save to say the building blocks continue to come together. The test to our thesis will come on any "risk off” move lower – if we are right, we are expecting to see some relative outperformance from European bourses as against US assets. With the move lower late in the week – we have already begun to see this theme play out – particularly as it seems apparent that some profit taking is now due in the Technology sector that has driven the outperformance of the US markets, in recent years.

The sharp move up in the Euro against the dollar, has already taken out the early March 2020 old twelve-month highs as well.”

Ciaran Mulhall
Solus Capital Partners Ltd  
 

Corporate announcement - Monogram Capital Management Ltd

We have two other things to report: we are pleased to say Monogram Capital Management Ltd has entered into an Investment Advisory Agreement with icf management ltd, in connection with the VT icf Absolute Return Portfolio fund.

This reflects the joining together of the fund with the RJMG Global Total Return Fund and with both Monogram and Solus Capital Partners Ltd.
 

New larger fund, with UCITS structure – our GTRF comes home

A larger fund with a standard UCITS structure and widespread availability should allow both original components to thrive and naturally to be more cost effective for investors.

This provides a continuation of our twin approach: the low-cost systemic Monogram model, which continues to perform well, alongside a revived and streamlined actively managed fund. We will report further on this in due course.



On a less happy note, I am sad to report the passing of John Gwilym Hemingway, at the age of 89. He had been influential in the course of both RJMG and before that RMG, and latterly in MCM.

His support and wise counsel will be sadly missed.
 

Finally, we too will take a break here, for such summer as 2020 affords us, and will return suitably refreshed on the 16th August 2020.

We wish all our readers a safe and tranquil fortnight. 
 

By Charles Gillams on 19/07/20 | Overview


Our central view as set out by Ciaran Mulhall last week, in rather more detail, is of a strategically positive outlook, based on a steady economic recovery underpinned by advances in healthcare. With a dynamic expectation of US and dollar weakness, as the US hits elections and faces arguably overpriced tech holdings. Tactically we would then also exploit the larger market dips, to deploy more cash, as volatility stays elevated.

What Do Markets Really Think?
At least that’s the theory; equity markets are always both a discounting mechanism of future events and cashflows and also the sum of all the participants’ active market views. Volatility is telling us that while the average market position must exist, the dispersion of values is pretty large. So, prices are reflecting a right old mish mash of underlying opinions.

There are clearly also major distortions as well, from state actions both direct (buying securities) and indirect (the rising number of shares with state imposed, ex-post restrictions on profit distribution) or other less obviously direct interference (state aid propping up inefficient loss making national airlines) and indeed the ongoing capriciousness of lock down rules. Plus, a lot of guesswork on how, and if, governments intend to pay for this all.

So the best we can do is guess at the median position, but aware that has a dose of extreme optimism in it (certain vaccine candidates and tech stories) and extreme pessimism (almost anything to do with banks) or indeed related to big ticket assets, from now retired jumbo jets, to Central London offices.

There is a lot of second guessing about where new legislation is going to strike, or indeed to create opportunities. While Huawei is certainly hurting, along with many of its customers, now suddenly saddled with modern, efficient, infrastructure that is nevertheless instantly obsolete, Ericsson by contrast benefits from unexpected new demand and pricing power. The risk of such legislative volatility seems unusually elevated for the next twelve months, as the fiscal implications of elections are worked through and the world’s conflict with China heats up still further. China feels rather like a bush fire now, new blazes will just keep breaking out, till the weather changes.

Indeed geopolitics, although by definition hard to predict, has considerable scope for surprises as the heat of summer starts to fade and the attraction of establishing "facts on the ground” while the US undertakes a messy transition in its command structure, may still tempt eager generals and their masters, over the rest of the year.
 
Does The Bond Equity Mix Still Work?
Another problem is that this particular hybrid market has elevated prices for both US tech but also for ultra-defensive holdings like gold and fixed interest, so models (some of our own included) based on a balance of the two contrasting asset classes, are struggling to see how any fall in equity prices can be fully compensated for by any further rises in the value of defensive holdings. Although history suggests there are so few options, this relationship should continue to hold, it looks rather extreme just now.

As we have also noted given the absence of yield and despite the punishment for holding cash meted out by many banks, that does mean simply holding cash, may not be a terrible idea in the short term.

Will Anyone Ever Pick Up The Tab?
The other possible explanation for a relaxed market, is a slowly spreading belief that it does not matter if debt levels stay elevated for a long time. Providing governments can continue to manipulate yields, such debt is apparently ‘affordable’.

There is a sense that either state by state or collectively governments can also resist demands for repayment, and that they can somehow control outflows from weak currencies and provide strong enough incentives in favour of supportive domestic investing. The so-called Japanese model, pliant household savings, supporting ever greater deficits.

Indeed, much of such covert national protectionism, as far as liquid assets are concerned, has been slipped through already, through withholding tax or money laundering legislation targeting the free flow of capital (although of course never admitting that is the underlying aim).

Where then do we stand on this theory of almost unlimited deficit spending? Well as ever with markets what will happen, is rather less important than when it will happen. We are fairly sure about the what, namely at some point it must fail.

Indeed, we would argue that point is possibly already passed. Market prices are neither allocating capital fairly nor efficiently, as the failure of sustainable growth across much of the OECD shows. COVID-19 is just accelerating that process by rendering substantial existing investments worthless and unproductive.

But how about when? Well although it is always later than you think, such a correction apparently still remains comfortably distant. The trigger is not apparent to us and for most of this century we have seen received wisdom on markers for maximum sustainable debt levels, just rush past the window, at an ever-accelerating pace. Indeed, such arbitrary debt ceilings are starting to look less like sound economics, more like tools for political repression.

But the system remains a mish mash, a work in progress, in transition. While investors in owning the market, are almost forced to invest in both sides of the argument.

Just as the tower of Burford Church, at the heading of our piece, still remains remarkably sturdy, but itself is a mish mash of architecture through many centuries, and of course with the ruins of both innovation that failed and ancient foundations that were plundered, all now decorously removed by time.  
By Ciaran Mulhall on 12/07/20 | Overview



 

Waiting for the post COVID 19 world to Unfold

Ciaran Mulhall of Solus this week sets out his tour d’horizon for the rest of the year ahead.

COVID Watch
"As we try and assess where the world economy stands - six months into the first global pandemic in 100 years – we are struck by the extent that developments are still being driven by the virus. Both monetary and fiscal policy has had some effect in terms of dampening the economic shock, but the long term path of global growth is still very much dependent on the successful sourcing of a vaccine along with developments in treatments that reduce the fatality rate. Lock downs or no lock downs, as the United States currently shows, if people do not feel safe returning to their pre Covid 19 routines then they are unlikely to do so, regardless of what is or is not officially permitted.

Figure 1 Covid-19 Confirmed Cases 5 Day MA % Change

 
Before we discuss our concerns for the future - it is important not to ignore the recovery in growth we have seen over the last couple of months, estimates suggest that global GDP has now made up roughly half of the 17% drop seen from mid-January to mid-April, with substantial gains almost universally. Global manufacturing and service PMIs surged nearly everywhere in June and are now back to around 50 in many countries. Suggesting some return to expansion, albeit from a lower base than before.

Figure 2 Bloomberg Economic Surprise Index


However, the sharp increase in confirmed coronavirus infections in the US (see chart at the top of this piece) has raised fears that the recovery in global growth might soon stall.

A significant part of the increase reflects higher testing volumes—which together with younger patients and better treatments, will likely keep measured fatality rates lower than in the March/April wave. Nevertheless a broader look at the Centre for Disease Control criteria for reopening, shows that not only new cases, but also positive test rates, the share of doctor visits for covid-like symptoms, and hospital capacity utilization, have all deteriorated meaningfully in the last few weeks. Moreover, these pressures have already persuaded many states and cities to put reopening on hold or start to roll it back. But again, regardless of the official reaction, consumer behaviour has begun to front run the worsening backdrop, as evident by the slowdown of, for instance, online restaurant reservations after an initial sharp bounce back.

Figure 3 OpenTable United States Restaurant Reservations YoY %

 
Reasons to be cheerful about the world economy
There are reasons to be hopeful that we are not about to embark on a re-run of the March/April collapse in US economic activity.
  1. Consumer services accounted for only a little over half the GDP decline through April. The disruptions elsewhere—i.e., in manufacturing and construction—continue to unwind quickly, judging from the strength in the ISM survey, automaker production schedules, and particularly most housing indicators, where we have seen a strong ‘V’ shaped recovery.
     
  2. We are optimistic that measures such as the closing of bars, stringent bans on large gatherings, and more widespread face mask mandates, could lower the virus reproduction rate back towards the critical 1.0 reading. As we approach the second full week in July, it is true we have yet to see the confirmed case data slow – but further corrective action (particularly at the state level) is happening nearly daily, which should dampen the spread.
     
  3. The vaccine news has improved significantly – with the likelihood of having some form of FDA approved vaccine ready before the turn of the year.
It is important to point out though, that the virus is still in the driving seat – to force down the R number in the US from this point will require a greater degree of co-operation from the population than we have seen (outside of the north east) to date.

Powell Policy - the monetary and political backdrop
We now expect the Federal Reserve committee to publish its much-heralded fundamental framework review within the next couple of months—including an expected shift to average inflation targeting—with the possibility of more aggressive outcome-based forward guidance. In terms of what that revised forward guidance might look like, our view remains that the most natural approach for a central bank with a dual legislative mandate would be to combine the two, e.g. by requiring core PCE inflation of 2% year-on-year and a labour market at or near the committee’s estimate of full employment. This would appear to force a more expansionist policy, with both targets currently well adrift.

Biden Burden - likely US Election outcomes
Looking ahead to the presidential election in November - polls have swung further in former Vice President Biden’s direction. He is ahead by about 7pp in Florida—currently the most likely "tipping point” state for reaching 270 electoral college votes—and prediction markets now imply a 55% probability that the Democrats will gain control of the White House, as well as both chambers of Congress. While the macroeconomic backdrop is very different – this outcome would not be too dissimilar to what happened in 2009. In any event this result would imply an increase in the Federal corporate income tax rate, alongside higher personal taxes on upper income earners.

While the above would pose a challenge for risk assets - other implications of such a political shift could be more market friendly. Although tensions with China will undoubtedly persist regardless of the election outcome, a re-escalation of the trade war would become less likely and the prospects for international cooperation on vital issues such as climate change would improve.

Europe and beyond
Outside the US, the cyclical news is generally positive. We are very optimistic in Europe, where the new infection numbers remain low (again see chart above)—the spike in confirmed cases in Germany last month has proven temporary—and the high-frequency economic indicators are showing a robust rebound. After hesitating initially, policy has also turned very supportive.

Although we expect the EUR750bn Recovery Fund to shrink slightly to EUR600bn before implementation, it is coming alongside aggressive ECB asset purchases that should suffice to close the sizable "funding gap” of its underperforming Southern member states.

Turning then to Emerging Markets, case numbers and fatalities remain extremely low in most of Asia but continue to surge in Latin America, with CEEMEA in between. The same ordering is also visible in the economic growth numbers, with Asia back in solidly positive territory but Latin America lagging. Although we expect growth to bounce back relatively sharply later this year, even in countries with weaker virus control performance, the crisis is likely to have lasting effects on the level of GDP and the degree of spare capacity. This should keep inflation low and enable EM central banks to keep monetary policy very easy for some time.

The way ahead
So, taking all the above into account where do we currently stand in terms of our investment process and its three pillars (Strategic, Dynamic and Tactical)

Strategic: Positive
Global economic activity continues to rebound as the world learns to live with the virus by keeping selective restrictions in place. While this level of economic activity will remain materially below potential growth, we remain confident that both the fiscal and monetary response can continue to support markets as we wait for a vaccine.  This suggest to us that we should remain invested in risk assets, with a somewhat lower level of risk-free assets, given that their return profile (outside of EM) is now so poor. We continue to use cash holdings to dampen portfolio volatility (remember the VIX is still around 30%) – cash that can be deployed during what we expect to be many risk asset drawdowns in coming months.

Dynamic: United States underperformance and a weaker USD
We expect the US to underperform in the near term as it partly reverses its overly hasty reopening in the consumer sector, combined with stretched valuations particularly in the Technology space. This suggest to us that Europe – after several years of underperformance, could see at least some positive fund flows particularly as valuations are much less stretched.

The weaker USD theme should also benefit Emerging Markets – particularly in Asia where, as we noted above, the effects of the virus has been modest. We continue to favour a large position in Large Cap Asian stocks (ex-Japan) with a focus towards China where we see significant further stimulus coming down the tracks.

Tactical: Plenty of Trading Opportunities
There is a certain amount of tension between these forecasts, and cyclical assets might struggle to reprice higher until that contradiction has been resolved – historically it has been difficult for global markets to move ahead without the United States at least keeping pace. Indeed, with the negative market view combined with the pending US presidential election – we see plenty of reasons for markets to sell off over the next few months. But any drawdown of 7-10% will likely be met by us allocating at least some of our cash pile to the dynamic themes already outlined.”
By Charles Gillams on 05/07/20 | Overview


We have staggered, crawled, festered and fretted our way to the half year mark. So a time to reflect a bit on that, draw breath, even book a holiday and consider where this goes next, both as a business and as a market, and although not our remit here, no doubt, as individuals too.

As We Were
We will start with the parochial. We have long wanted to have more and indeed improved products to manage. The world of investing is an endless challenge, as however well you do, each quarter is a new one. The products people want today are seldom the ones wanted yesterday or indeed tomorrow, but underlying that you are, in the end, trying to produce a long-term product, some weird hare/tortoise hybrid that also looks attractive and is indeed plausible.

Investors entered the year keen to saddle a post Brexit hare, only to suddenly want to reverse course, dismount, hide and then ride a defensive armadillo instead, while still going forward at full tilt; all on a dime. Fairly clearly this was an impossibility. Our own evolution was a little slower, we brought on board a pure momentum model, which has the twin benefits of eliminating fallible judgements and providing enhanced transparency. Although at the same time our existing RJMG Global Total Return Fund found some favourable weather, making money in March when few others did so and indeed in June, another choppy month.   

But that for us was a departure point with the RJMG fund; we took the decision to place it all into cash, so that investors could move over to form a larger, still actively managed, fund, in the same space, with a rather more modern structure and lower costs. We hope to announce that transaction and our own ongoing involvement shortly.

We also decided our alphabet jumble of a name, while historically valid, had served its purpose. From now on we will sail under the Monogram flag. Encouragingly the Monogram model has also made money through these crazy markets. So, we have two products, with similar aims but very different approaches, giving investors a choice, a mix and match option even, depending on their own market view.
 
Smashing The Compass - Tesla and Gold
Having trained as an economist, then worked (and invested) all my life with the policy certainties it claimed to produce, I am now in the hapless position of not understanding how it will all operate next. I regard myself as in good company, as in a week when Tesla hit a market capitalisation of well north of US 200 billion and gold (simultaneously) dug in for an assault on $1,750 per ounce and who knows where beyond that, something is clearly out of kilter and there is little market consensus.

Add in government debt well above anything I have ever experienced, an apparently unstoppable expansion of ‘welfare’ spend and unemployment (real or disguised by being wrapped in loose furloughs) at a peak. I believe Tesla is incapable of surviving without fresh capital (we used to have a word for that type of stock), and I know gold is useless except possibly for avoiding the pilfering of governments. So, I can explain neither price excess, would wish on fundamentals to own neither, but of course in the world we live in, I have stakes in both, so intertwined are modern financial  products.

What then do I observe? Well for one thing a lot of prices are wrong. We are confidently told that inflation is not a threat (providing you are not measuring hot stocks or shiny metal) but I see plenty of evidence that it is. A lot of prices are rising, from services, through insurance, to basic consumer products.

Now that at least I do understand, the cost of providing everything has risen and must rise further.

The capacity of a coffee shop, for example, has at least halved, and you can see some units won’t now re-open just to trade at a loss. Some will try to strong-arm governments into extended tax holidays and subsidies and with perhaps more immediate success, invite landlords to repossess property stock if they want. But unless other inputs (staff costs are inflexible downwards) and processed food (generally at rock bottom already) can materially shift, something must give, if your capacity halves.

I rather doubt the utility of governments pouring grants and easy money into insolvent businesses, just to stop them evolving a viable business model. While I can at least assure those, who seem happy to take government favours and trade on at a permanent debt fuelled loss, that they are making themselves a hard new taskmaster, often for no purpose.

So, assuming governments can’t support this world for ever (they can’t), prices must then go up. Or in the old Soviet model, services must go down. Those who fly with certain endlessly bailed out airlines will know the experience of buying services from such zombies. High prices and lousy services follow, as the subsidised ruins squeeze out the better competition and protect their old monopolies with seemingly unlimited state aid.

So, I am expecting price rises, from one source or another. Although as ever international trade, which allows the direct import of cheap labour output, will focus inflation onto services and limited supply assets (time for an all gold Tesla?).
 
There are a ton of other issues apart from inflation but knowing whether you expect prices to rise or fall is pretty fundamental in economics. So, try to pin that down, you will invest very differently from if you expect deflation. Of course, low demand and fixed supply, should indeed be deflationary, and if the money supply was normal, would have to be.

But I am not seeing that price lowering effect, and now doubt if we will this year.

Tear Up The Map?
However, to my mind there is little evidence that governments can repeat the "success” of the 2008 crisis. At least for those smug regulators and politicians who still observe it as such, although I tend to feel if that was a success, what does failure look like?

I do see the democracies as being in a real bind in this world.

It is hard enough to navigate economic policies that seem to be a weird mix of applying full throttle and maximum braking all at once; if at the same time control of the steering wheel changes on a whim, disaster surely beckons.

So the summer should be, for both markets and individuals (and one wishes governments) a time to get to grips with this, to target far better the largesse spewing from an uncontrolled spigot, and work out which management teams have either the competence, or good fortune to be able to thrive in this.

So far, I see a great deal of "let’s just keep going” evident in both markets and board rooms. But increasingly we are going to (as I did this week) pick up the annual accounts of major companies and ask how on earth I thought I could ever own such a shambolic strategic mess.  
      
Markets are already thinning out, so perhaps it will all drift sideways till the start of Q4. After the first half there is no need for the traditional summer high jinks in markets, to increase volatility, quite the opposite.

But that maybe is just delayed not cancelled, unlike many more pleasurable events, in 2020.
By Ciaran Mulhall on 28/06/20 | Overview




This week Ciaran Mulhall looks at the strange divergence between bearish fundamentals, bearish market participants and the hot money bubble.

"That Was Then
It was in late 1996 that Fed Chair Alan Greenspan first mused about the challenges of measuring inflation in a high-technology world and the difficulty of knowing when "irrational exuberance has unduly escalated asset values.”

These days central banks not only take published inflation measures at face value, they even actively intervene to push asset markets higher. Despite the publicity given to day traders and their magic Scrabble bags (for those who don’t know what I am talking about, trust me you are better off), it’s probably fair to say that in aggregate investors are far from "irrationally exuberant.”

So, the actual price action? Well, that is another matter altogether.

When Greenspan’s famous speech hit the tape in December 1996 – risk assets sold off quite quickly. While the Federal Reserve engendered an immediate reaction and equities duly traded lower for most of the next week or two, ultimately the comments did little to stop risk appetite from marching on – and for a number of further years, before ultimately blowing out in the top of 2000.

That just goes to show that talk is cheap, but equally there is not much appetite to take away the asset market punchbowl when the party is still roaring along.

This Is Now
Coming back to the present day with the huge and unprecedented range of global central bank monetary support currently being provided, it remains evident that certain categories of investors are, even so, reluctant to drink the dodgy brew. Equity market sentiment remains "bearish” and has been that way for most of the rally from the March lows, as this table shows.

Table 1 AAII - Bullish/Bearish Sentiment (Source AAII)
  June 25, 2020 June 18, 2020 June 11, 2020 June 4, 2020 May 28, 2020 4-week Avg.
Bullish 24.14% 24.37% 34.28% 34.55% 33.07% 29.34%
Neutral 26.96% 27.85% 27.67% 26.58% 24.80% 27.27%
Bearish 48.90% 47.78% 38.05% 38.87% 42.13% 43.40%
Bull-Bear Spread -24.76 -23.41 -3.77 -4.32 -9.06 -14.07
 
This is in contrast to the credit markets, where in this time of unparalleled economic uncertainty, ratings agencies are warning of looming down-grades and corporations are rushing to borrow ‘rainy day’ money more quickly than ever. All of which comes on top of an already record high level of corporate debt relative to GDP. Investment-grade credit is even so trading close to the highs seen earlier this year.

Figure 1 iShares iBoxx $ Investment Grade Corporate Bond ETF


Clearly, we can thank the Fed and their massive intervention for this apparent miracle and as Chair Powell talked about a couple of weeks ago – the Federal Reserve is prepared to do nearly anything to support the "real” economy (rightly so) and the knock on effect to asset prices will be something they will consider at a later date. Or in other words for the Fed to be passive because of asset price inflation, is now just not a sustainable position.

Obviously, this is wonderful news if you are a borrower, though if you are a lender the ultimate benefits remain to be seen. We have talked before about the difference between solvency and liquidity.

Hangover Time?
Even so there is no guarantee that a nasty reversal is imminent, but we would not bet against it. You can at the least be fairly sure that the next three months in stock markets are not going to look like the last three.

Table 2 Equity Market Returns QTD %
NAME Change % QTD
DOW JONES INDUS. AVG 14.14%
S&P 500 INDEX 16.42%
NASDAQ COMPOSITE INDEX 26.72%
BRAZIL IBOVESPA INDEX 28.51%
Euro Stoxx 50 14.97%
FTSE 100 INDEX 8.59%
CAC 40 INDEX 11.68%
DAX INDEX 21.67%
NIKKEI 225 19.00%
HANG SENG INDEX 4.01%
CSI 300 INDEX 12.28%
S&P/ASX 200 INDEX 16.29%
 
This has been an incredibly challenging period for anyone willing (or foolish) enough to look beyond the money printing extravaganza. While major difficulties also remain in forecasting public health outcomes and indeed their economic impact.

The result is the essentially unprecedented divergence between negative sentiment and positive price action.

Money managers are not irrationally exuberant -- far from it, in fact.

Price action, on the other hand, has clearly been exuberant -- in some quarters, to a near record degree. How rational or irrational that proves to be, remains to be seen.”
 
By Charles Gillams on 21/06/20 | Overview
A few reflections on political risk, this week, from Charles Gillams


With COVID-19 starting to drift away into debates about culpability this week, we wonder what else we should worry about. Since while humanity will always devote its efforts to the most recent disaster, it will be always be hurt more by the next one. The desire to always fight the last war is ingrained.

Deja Vu All Over Again?
 
So, is this perhaps a rerun of 1968? Well despite having lived through those years, I have no real idea, and only a dim perception of what that year of unrest entailed. But it was a notable attempt to overthrow democracies, a time of military retreat, of the spawning of new violent anarchist factions. A time of a change in mood, even if now largely regarded like 1848, as a year of rebellions that failed.

What I notice is a palpable fear by the establishment, a feeling of a loss of control. A sense that what has been built up and defended has rather failed and is now expecting a rather good kicking. There is a defensive, appeasing feel in the hierarchies, an unwillingness to defend their ground.
So where do I see this? Well it feels most acute in the USA in the twilight of the Trump term. We have been saying for two years that Trump is unelectable, and that whoever replaces him will veer to the left.

That trend has been pretty clear since before the Mid-Terms, but only now do we see a range of institutions, from the Supreme Court to Wall Street, via the military and arguably including the Federal Reserve, suddenly look slightly craven as they all want to get on the right side again and disown Trump.

COVID-19 and the inoffensive lure of Sleepy Joe have between them shredded the last defence of an administration that has combined economic good sense and military pragmatism with a stunning mix of incompetence and disregard for any semblance of due process.

Although much of this current realignment looks sensible, you wonder why it was not sensible before. American (and European) inequality needs a long hard look, in particular at the sprawling impoverished areas that ring many cities. I am not sure either incremental legislation, or indeed directly distributed resources, are the only solutions and I am reasonably clear abolishing police forces is not either. There has to be some viable social infrastructure and most of those measures don’t help provide that.
 
What's Got Into The Fed?
 
Yet with the Federal Reserve no longer interested in inflation (and especially not wage inflation) it has to move to look at employability and resource allocation, to tackle its remaining employment mandate. There is a deep fear that the COVID-19 recession will shake out a lot of unemployable excess labour, worldwide, so the struggle for employment will become more bitter.

As in the UK, the standard punishment for local authorities and state institutions with no money, has been to load them with more debt. Unpalatable though rewarding failure is, punishing today’s citizens for the errors (and excess consumption) of the past has always looked like lazy justice. Both countries need some far-ranging debt amnesties to restart municipal government. Federalism and devolved power have been a notable winner from this crisis, especially in Germany, also incidentally leading on such amnesties.

But that debt restructuring needs to go along with a determination not to burden current citizens with past errors. So, a far greater flexibility in the municipal workforce is needed, perhaps by taking discipline and performance away from local decision making. Perhaps that should be implemented nationally. Placing the burden of re-hiring, re-training, retiring and discipline in a different (and possibly nationally funded) budget. If these topics are now broadly already in the Fed’s domain, why not complete the shift?

Exit Wounds
 
I also suspect the yearned-for return of due process is unlikely. Everyone has been pushed too far towards the extremes. I doubt if any significant Trump nominees will survive unless they have tenure, and the reckoning with Trump and his family is set to be long and divisive, however justified.
It now looks increasingly hard to predict the Senate election, and indeed to see Senators that are willing to stand up to a powerful presidential mandate. While the return to Republican rule looks to be unlikely before 2029. So, investors who (as they appear to be) are assuming that the good times unleashed by the 2016 election will continue, seem curiously misguided.

Of itself the US election will be increasingly discounted, but the tremors it sets off will be hard to call. Especially if populism continues to sway law makers (as it will), I can see some quite destabilising legislation being pushed through, that could well undermine the US economy.

While geo-politics is hardly likely to be peaceful either, as the long twilight of Trump and the absurd prolonged post-election interregnum, will make the more adventurous or desperate dictators and rogue states keen to grab an edge. China’s broad-based attacks, expansionism and bloody imperial adventures, slightly chilled by the unpredictability of Trump, are back underway.

So, do we see a rerun of 1968? Yes, in a lot of ways, a long post war expansion was grinding to a halt. There was a disaffection with the old ways. Along with a feeling of hopelessness, that simply grabbing power, moving the democratic counters round, may not solve a deeper desperation.  Political reform seems even further off now than it did then. The mix of mass unemployment, excess debt, a staggering new raft of regulation and unenforced, multi layered laws, designed to gesture as much as to rule, does not bode well. 

Well it is easy to be gloomy, despite the current exuberance of markets fuelled by vast excess liquidity, I am still not that fearful of the prolonged impact of COVID-19. But the related political risk has certainly jumped in the last few months.

What About The UK?
 
Well a rigid, over centralised system, absorbed in its own institutional battles has predictably failed to deliver in a crisis, headless chickens come to mind.

There is too much power focused in Downing Street, and too little skill, and that is endemic, the party involved is largely irrelevant. As we have noticed before, whatever the spin, the competence of power is easy to read in the trajectory of sterling.


(Click picture to link to original article)
 
Once again, however big the Parliamentary majority, that vote in the currency markets, is being lost.
As the evergreen Rolling Stones wrote, (in 1968);

"And I went down to the demonstration, to get my fair share of abuse,

Singing we’re going to vent our frustration, if we don’t we’re going to blow”.

….. because you can’t always get….
 

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