Blain’s Morning Porridge – March 3 2021: The Shift towards the East
“The nature of monkey was irrepressible!”
This morning: While Bonds dominate market moves, the BIG future investment picture is about how geopolitics move towards new US relationship with China – particularly where Europe stands. The US is potentially the biggest loser.
As always… markets usually worry about all the wrong things; typically the most immediate and visible perceived threat ahead of them. The main factor pushing price action today is the relative value proposition between bonds and stocks; and how will central banks maintain the positive conditions for stocks? (People do seem to have lost sight of how to price risk when it comes to relative yields – a bond yielding 3% and a stock yielding 3% have very different risk profiles.) It’s the uncertainty on how much longer easy money can be sustained that is causing prices to wobble up and down in a state of tottering imbalance!
However, if you are trying to figure the key investment driver for the next 10-years – the noise around today’s markets is obscuring a very real key issue: the ongoing struggle for global economic dominance between China and the US.
A dramatic shift is underway – and its largely geo-political, meaning a market focused on immediate speculative price moves is missing much of its future influence on prices……
Look at today’s market and it’s all about the immediate: Will the ECB’s apparent slowdown in QE buying result in a positive Bund yields? Shock! Horror! Will clipping a bond coupon in Luxembourg to reinvest in stocks trigger an equity upside hurricane in New York? How does a 5 basis point rise in 10-year bond yields trigger 10% falls in Bitcoin and Tesla? How many analysts does it take to guess the volume of ARK ETFs outflows or inflows on any given move in bonds? Speculation and common sense compete in a volatile market. To be fair, its speculation that is getting most of the attention.
Lest we forget the global economy faces real, longer term challenges:
The Climate Crisis has not gone away. It will increasingly dominate the news flow after the BBC realises we’re past peak-scared on Covid. When the headlines scream hysterically about the tragedy of 8 people over 80 being admitted to hospital with Covid – you can be pretty sure it won’t be Laura Doomsberg asking why can’t reopen the economy…
Another the big question might be splitting out the hype from the practical realities of new tech adoption. Every day we hear about new fantastical tech miracles coming our way. Flying taxis, autonomous cars, 3D printing, Quibits, artificial intelligence, and space tugs… It’s all so exciting. But which are real, and which will remain unrealised pipedreams? I’ll leave that one for the venture capital fantasists..
I’ll stick with geopolitics as the area to watch.
Whatever some Economic Wunderkid at Morgan Stanley says about 6.5% US growth driving global recovery this year – it’s more likely to be China growth, economic recovery, and rising commodities demand that creates, leads and drives the strong recovery underway in post-Covid Asia. De-facto, the global economy is already split East and West.
That’s an important issue for asset allocators. Why focus so much on the increasingly low-growth, demographically challenged Europe, or the potential of a politically unstable US, when global growth is strong, and markets cheaper in Asia? That’s why it’s so critical to consider how the long-term economic/market accommodation/showdown between China and the West plays out.
The future pace of China growth will set by the National People’s Congress when it meets this week to ratify China’s 14th Five-year plan (officially it’s called a programme) during a series of meetings known as the “Two Sessions”. The economic plan will call for further rebalance of the economy towards domestic consumption, but critically to complete the strategic technology shift for China to produce everything from high-value aircraft, semiconductors, quantum computers, and low-carbon tech to directly compete with the US and other hi-tech economies. It will target carbon-neutrality in 2060.
The meeting will throw up challenges for Western investors. The NPC will clamp down hard on Hong Kong as President Xi Jinping consolidates power. Human rights abuses in Xinjiang and the Uighers are increasingly cited as reasons to hold back from investment into the new China. Questions will arise about the South China Seas.
If you are looking for reasons not to invest in China there are plenty. Nor is China’s economy perfect. The real estate sector is in crisis with multiple defaults. The degree of squander in its Belt & Road trade initiatives is right up there with European infrastructure projects in terms of the amount of money wasted.
It will all be about Geopolitics. If the US decides the only way to beat China is a second cold war – outcompeting China economically while politically isolating it from markets, then it will need the support of the rest of the global economy – particularly Europe.
And that’s where this gets really interesting – which way will Europe lean?
A few years ago that wouldn’t even have been a question. The US and Europe were perfectly aligned in all things; democracy, free markets, the global economy, ecology and human rights. Not any more. Following Trump, unquestioning European support for the US is not a given.
Europe has changed. That was very clear yesterday when a headline shot across the screen: Exports from Germany to the UK plunged around 30pc year-on-year in January as Brexit took effect, according to a preliminary estimate published by the country’s federal Statistics Office. Wow. Europe is going to be looking for new markets as desperately as the UK.
Brexit is important in terms of the geopolitics of China. Europe has made clear the UK will be punished harshly for leaving. It’s not just shellfish and goods that are going to be blocked, its intellectual services like finance and insurance that are also closed to perfidious Albion. The expulsion of UK financial services from Europe on the basis of unproven equivalence has so far benefitted US derivatives markets, but for how long? How long before the French determine FinanzplatzEuropa doesn’t need US firms either – they speak the same financial language as the detestable Brits and they are all Anglo-Saxons together.
4 years of Donald Trump undid much of what held Europe in close alliance to the US. Walking away from the Paris Climate Accords was just one thing, but insulting them on defence was quite another. With Donald Trump still lurking out in American Political landscape, apparently mulling another run in 2024 – Europe is unconvinced President Biden’s promises of reengagement with Europe make much sense or are even deliverable.
Nor are the Germans particularly bothered. They were the ultimate beneficiaries of World War 2 – which ultimately resulted in a single homogeneous European defence of Germany against a wrathful Russia, and a single European market dominated by Germany. To the losers went the spoils. China is not a threat to Germany’s/Europe’s borders, and China is German’s single most important market – which is why Merkel’s approach of “equidistance” between the US and China, was very not Donald Trump.
Meanwhile, Brussels is flexing its powers and increasingly superceding the smaller nations of Europe. Admittedly the response to Coronavirus exposed the weakness of the European Commission, the unelected Kommissars who actually do run Europe. EC President Ursula von der Leyen, or VDL as we now know her, and her team of “shunky retreads” as the Australian ambassador described them, are symptomatic of change in Europe. Power is concentrated, and there is a growing sense in Brussels that 450 million Europeans in a single block are a force to be listened to. (What the populations of Europe’s free and independent nations think of that is immaterial – but are another reason to punish the Brits.)
And if China offers stable trading relationship and better markets than the US – then why not engage? There will be issues – such as human rights – to be discussed, and there will be ways of sweeping such concerns under the proverbial carpet.
Five Things To Read This Morning
Torygraph – The City has to break free from EU rule, say Lord Hill
FT – US Treasury bond wobble heightens concerns over health of $21 trillion market
Bberg – Crispin Odey Hits Hedge Fund Jackpot with Bond Bet
WSJ – Greensill Problems Build as Regulator Watches Over Banking Unit
Oz Financial Review – A glimpse into Greensill’s Gupta Exposure
Out of time and back to the day job..
Bill Blain
Shard Capital