Investment Bulletins
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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