Bruised but Whole

Sorry for lack of comment y’day – but it was a manic day. Fortunately, it calmed down by the evening giving me time to watch the US Presidential Inauguration

Blain’s Morning Porridge – 21st Jan 2020: Bruised but Whole

We’ve seen a force that would shatter our nation rather than share it… 

Sorry for lack of comment y’day – but it was a manic day. Fortunately, it calmed down by the evening giving me time to watch the US Presidential Inauguration beamed from Fortress Washington. Great stuff, if a little heavy on the key message: “let’s be nice to each other and reconcile”.  I was particularly impressed by Young Poet Laureate Amanda Gorman – most of the papers agree she nailed it.   

I would love to write about Mr Trump and say exactly what I think, but the Porridge’s mission is focused on the relevance of politics to markets. Mr Trump was America’s problem. Respect and tolerance, and the coronavirus, are the immediate problems for Americans to solve. I sincerely hope they do.

Joe Biden may prove the right man for the job at the right time – he’s the ultimate centrist and experienced political operator. He’s not colourful. Dull, Boring and Predictable is the perfect prescription for the USA after 4 years of chaotic buffoonery. 

Biden’s first Hundred Days and the tone his cabinet and Congress set will be even more significant than usual – especially when it comes to how the “normalisation” of the CEO’s office of the US will affect geopolitics and global flows. No one is likely to miss trade-policy implementation by twitter. Promising a 100 million Covid-Shots in the first 100 days may hold him hostage to fortune – but shows a determination to address the Pandemic.

Around the globe traders and investors are going to have to relearn the skills of political analysis as they watch and listen carefully to what a quality cabinet of experts rather than fawning acolytes sets out to achieve. What they say will be critical in understanding how the Government and Fed will address the chronic imbalances between impossibly priced speculative markets and an economy showing (again) severe signs of stress. 

What the administration says and does to address the way in which stimulus has inflated financial assets while leaving so many jobs in peril will be critical. Equality is not just about race, but wealth and opportunity. These are massive challenges for any government. Addressing inequality in business is equally important – how large companies can thrive on cheap plentiful debt, while SME’s and startups struggle to access cash.

For the rest of the world, it’s business as usual – which for markets includes taking a stance on how the US political malarky is likely to play out. The signs don’t look cosmetically good – the international media is bound to focus on the millions of Americans still denying the election results, and Trump’s threat… “I’ll be back!”

Perception is everything. If the US shows signs of self-repair, then we’ll start to believe again – and buy the dollar. If the noise and hostility continues, and congress is gridlocked… then not so much. 

The process started yesterday with Biden’s 17 signature role back of Trump’s less rational plays – a clear signal to the world and the nation that things have changed. 

The immediate knew-jerk response from the right was a series of hysterical warnings as right-wing commentators and shock jocks decried policies like re-joining the Climate Accords and Paris Agreement, and the World Health Organisation – it’s called re-engagement. There is alt-Right horror at the prospect of higher minimum wages, opening the doors to Muslims, not finishing the wall, and reuniting families divided by harsh immigration laws.

Its noise.

The first order business for Biden is China. It’s likely to be defining theme of the decade.

Sleepy Joe is wide awake to the reality China no longer bothers to hide. Allowing China to join the World Trade Organisation and the subsequent embracement of the Middle Kingdom in the expectation it would become a capitalist state similar to the West is now exposed as a hollow fail. China’s agenda is and always was simple – overtake the US and the West and become dominant to ensure its own economic prosperity. 

Does that mean conflict? Not necessarily. But it does mean global trade will be redefined in coming years. China and West need markets – but the rules have changed. Globalisation will likely take a new route as a new cold war/cold trade war develops. Who wins depends on who has what cards to play.

China has played its hand aggressively, but promises much. (How much it delivers is another issue…)

The first job for Biden is get Europe back on side politically and as a market partner. The degree to which Trump alienated Europe’s elites is simply not understood on the far side of the pond. In four years Trump unwound 80 years of American exceptionalism and its image as the Bastion and Arsenal of democracy. European politicians won’t forget Trump in a hurry. European voters were shocked.

Some of the Eurocracy will play Biden like a hooked fish – it’s in their interests to advance the cause of a strong European independent superstate standing alone. They will argue Europe should remain detached from the increasing divided and, perhaps, unstable USA. Why embrace America if China promises more? Fortunately, China’s Wolf-Warrior attempts at aggressive diplomacy in recent years are proving as clumsy in its denial of human rights and bullying of nations like Australia.

The UK is in a very different position. We are even more short of friends. Boris will jump up and down with joy if he got the first phone call and has been promised an early visit from President Biden. Much will be made of the special relationship in London, while the new generation of Washington power analysts wonder what it is. But, a friend is a friend, and after Trump the USA has its work cut out to remake them. 

In terms of immediate market reaction, it was a hopeful start as the US stock market jumped the moment Biden recited his oath. That might have been hopes for better and stronger government, a well thought out infrastructure renewal programme, reform of education and healthcare, limited re-regulation and calm, rational policymaking. 

Or, it might have been the promise of another $1.9 trillion stimulus programme. 

Five Things to Read This Morning

FT – Crises facing Biden threaten to create vicious cycles

WSJ – Mountain of Small Loans Looms Over Europe’s Pandemic Hit Banks

BBerg – Ant Group’s Valuation Drops to $108 billion on Crackdown

BBerg – China Needs to Tame its Wolf Warriors

ZH – EU President: Unbridled Power Held by Big Tech CEOs must be “Reined In”

Out of time, and back to the day job! 

Bill Blain

Shard Capital

billblain@morningporridge.com