Blain’s Morning Porridge – Nov 24 2020: Glimmering Hope?
“Up the hill, the sheep bleat, oblivious to the rise and fall of empires.”
Walking Home For Christmas Charity Appeal
First of three full-length hikes on Sunday – 22km up three hills, Butser, Old Winchester and Beacon, on the South Downs Way. Slightly bruised ankle… 10 K stroll planned for lunchtime today to test it.
This year I am joining my colleagues at Shard Capital to raise money for the UK ex-military charity Walking With The Wounded. The Charity supports ex-military and their families in need of urgent mental health care so they can thrive and contribute in their communities once more. This year our veterans faced the new battlefield of the Coronavirus and the mental challenges it raised for us all.
She-Who-is-Mrs-Blain – my wife Nicky – and I are the bubbliciousTeam Morning Porridge. Get your wallets out and please consider making a donation to WWTW’s Walking Home For Christmas appeal! I would consider a small thanks for your daily Morning Porridge, but it’s a very worthwhile charity this difficult year: https://www.walkinghomeforchristmas.com/teams/team-morning-porridge
Thanks.. Bill & Nicky Blain
Short Porridge this morning as we are moving into an office! I’ve just about mastered working from home, but working with builders and their toys is “problematical”. We’ve found some local office space instead!
In the news today – Trump bowing to the inevitable and telling officials to cooperate is not a concession, and why what’s going on in China debt is a “compare and contrast” moment that could set the scene for decades.
US – Trump bows but won’t concede
I’ve written so much about the US in recent months because it’s got me hooked – it’s been an entertaining and shocking amalgam of all the very worst TV reality shows. It’s been unmissable. You’ve got a whole series of grotesques (on both sides) competing in a strange and curious popularity contest where decency, honour, truth and fairness are mere commodities. At the end, the most popular one is crowned King of the Jungle or, in this case, President-Elect.
(Before I get screamed down as an American Hater, I am inordinately fond of the USA. My hero was my Uncle Jack, who’d run away to sea in the 1900s and became very successful in Pennsylvania. America was far more exciting then 1960s/70s Scotland. We almost moved, but my dad turned down the offer of a great job in Albuquerque – but these mist-covered mountains held him home.)
The election shenanigans have provided fascinating insights into the mindset and function of an economy that might be teetering at the top of its long-term curve. The questions are: has the US reached its natural peak as the world’s dominant economic and military power? Has the current wobble just been a minor stumble before another step higher? Or is the US at that point all great nations eventually reach – when another country surpasses them?
It happened to the UK sometime in the first half of the 20thcentury when the nation was exhausted, broken and financially drained following the World Wars, but the rot set in earlier from imperial overextension, competition from industrialising foreign powers, and the stultifying rise of bureaucracy clogging our arteries. The UK was tired when we lost the top spot.
It happened earlier to France though financial crisis and revolution. Even tiny Holland had a couple of years running global trade. Spain’s days in the sun were darkened by insidious imported inflation from the new world… the Arab conquests came, assimilated and went. Byzantine lethargy kept the city going nearly 750 years after it apogee, the Romans fell through corruption, inflation and cultural assimilation.
Every great empire has its day.
What about America? It faces two immediate problems. The first is that a house divided against itself cannot stand – the great lesson it seems to have forgotten from the Civil War. The polarised division between the people and the ill they hold their countrymen in is heart-breaking – they way it which divisions have gamed and played for political gain through the election and its messy aftermath has been trully shocking. The damage has been deep. There are few signs they will listen to each other – which means the next four years will be critical.
Biden is a return to an earlier age. His administration will be one that tries to re-establish the previous consensus – it will not be mould-breaking or radical. The appointment of the highly respected Janet Yellen to Treasury is a safe move. She’s highly competent and will hold the respect of a Republican senate. John Kerry as Special Envoy for Climate is a “interesting” one. There are a fair number of older names on the cabinet list – causing some comments about a Gentocracy, but its balanced by a diverse group of younger names. The new administration is as much a political play to appeal for unity in the house.
Will it work? It will need more than 4 years to not only establish unity and consensus, but then to actually address all the issues facing the US in terms of infrastructure, equality, health, education and social welfare. All are challenges, and come at time when the economy is still stilted by the effects of monetary distortion – more on that later.
However, the most important lesson, and challenge from history, perhaps comes from Ancient Rome. As the Republic became Empire and fell into degeneracy, the lesson was Fish Rot from The Head Down.
Trump is not a fool, but his style of leadership, the absence of empathy or decency, and the shameless nepotism, bullying and abuse of his position raise the likelihood others will follow his model. The danger is he won’t be a one-off. There is a danger he has set the future model for the Presidency – his kids are not the only ones that smell the opportunity.
Once the President appoints a horse as a Senator, it’s only a matter of time before another just buys the office outright as highest bidder in an auction.
Compare and Contrast with China.
If America has passed its zenith, then China steps up. They do things different in China. Not necessarily any better from a decency and honour perspective…. according to our western sensibilities.
The current round of corporate defaults by “state-backed” companies has attracted the ire of many commentators – appalled the Chinese are not standing behind their implicit guarantee of regional state-sponsored industry. That’s the first thing you learn as a baby banker – the difference between an implicit and explicit guarantee.
Yet a series of defaults is an opportunity for the Chinese Government to shake-out ailing state businesses. They have promised to investigate and deal harshly with any corporate misbehaviour – which is a sweet way to transfer blame from failed state industrial plans and strategy by pining the blame on management.
A round of defaults may not be a bad thing for China – some creative destruction, removing dead weight industries, and freeing the state from any obligation to support and bail out the economy. A couple of show trials of corrupt management and the state neatly purges the problem of the corporate/state relationship. The banks will struggle but be sustained and discipline regions not towing the Beijing line. Tough on the millions of Chinese workers that lose their livelihoods, but that’s also opportunity for the State to reinforce its control and iron-rice-bowl ability to provide.
Taking a sharp dose of industrial default pain and letting failing companies fail is straight out of Capitalism 101. The invisible hand requires the discipline of failure to function. Letting it happen means the Chinese economy won’t be burdened for decades by the consequences of bailouts and long-term interest-rate distortions like QE. At the end of the day, China becomes even more capitalist while the west remains mired in the distortions of experimental monetary policy and implausible low growth sapping interest rates.
All of which raises questions for the market. Invest in an ESG unacceptable modern capitalist economy or invest in the imperfect past?
Five Things to Read This Morning
FT – Yellen prepares for second act at pinnacle of economic policymaking
WSJ – Bitcoin Trades Again Near Record, Driven by New Group of Buyers
FT – Sunak should be wary of tokenism with green gilts
BBerg – Germany’s DAX Will Get Bigger and Stricter After Wirecard Fiasco
Torygraph – Vaccine may mean $1 trillion boost for global economy
Out of time, and back to the day job…
Bill Blain,
Shard Capital