Some things I think, I think - Post-Brexit edition

- Donald Trump will (continue?) to do better than expected

Yes, in many ways he’s a very flawed candidate and he’s exceptionally unpopular one.  His opportunity lies in Secretary Clinton’s weaknesses as a flawed campaigner with her trust/honesty issues (whether they’re perception or real, is irrelevant) and a popularity level that’s in the Trumpian realm.  They’re literally the most unpopular candidates to run for President – they key for each, might just be avoiding appearing in the press in the final week!  In all likelihood, the favorable demographics and Mr. Trump’s weaknesses should be enough for Secretary Clinton to win, assuming she gets enough of those young voters who stubbornly only turnout to vote for President Obama, to the polls! That said, I wouldn’t expect a majority in the popular vote or much of a mandate despite the claims otherwise. 

- Limits of monetary policy and R*

One of the more thought provoking things that Our Man has read recently is this essay from San Francisco Fed’s John Williams that came out just before the staff of various Central Banks met at Jackson Hole.  In it, he argues the world has changed (and the neutral rate of interest is lower), thus monetary policy needs to change and that monetary policy is not the only answer.  Suggested changes on the monetary policy side include a higher inflation target, or replacing inflation targeting with a flexible price-level or nominal GDP targeting framework.  Both of these suggest a lower-for-longer (maybe forever) since with inflation (and GDP) undershooting existing targets (and thus increasing the distance to future targets) the pressure to increase rates diminishes further.  As for what lower-for-longer/ever means…well, there are some thoughts on that below. 

- People’s QE

It may go by a different name, and under many different guises, but it’s coming to a country near you…soon!   With monetary policy at close to its limits, and rising populist sentiment in numerous countries around the globe, the stage is being set for “People’s QE”.  What does Our Man mean by “People’s QE” – think massive fiscal spending, supported (directly, but possibly indirectly to get around legal issues) by an aggressive Central Bank QE program.   It will be done differently across countries, but the most successful will by those countries that realize “infrastructure spending” in the 21^st century while not yet well defined likely doesn’t mean the same as it did in the post-World War 2 period!   Our Man’s sneaking suspicion is that Britain, with the readymade excuse of Brexit and seeking global competitiveness, will do it best with a mixture of old school infrastructure spending (bridges, roads, etc), new-style infrastructure spending (start with internet/cellular connectivity, but who knows what else, maybe it’s drones, etc), education (especially in very pro-Brexit areas) and healthcare (updating hospitals, from the bricks and mortar to processes/etc). 

- Regulation 

 Despite all the talk in the political realm, Our Man rather suspects that increased scrutiny on Banks and Financials (post-08) was the start of a trend rather than a one-off, and wouldn’t be surprised to see Technology and Healthcare cos next in the regulatory firing line. 

- The market will either be much higher or much lower within the next 12mos

Our Man just can’t tell you which but is pretty sure it ain’t going to hang around here.  The downside case is the clearest with investors able to take their pick of potential issues, including China, slow growth, falling Earnings/high valuations, Europe and the Euro, Brexit, etc.  The upside case is more complicated, but linked to negative rates (and the prospect of negative or low rates for some time).  At a certain level negative rates make sense; it’s an acceptance that we can’t afford our debts, and thus pricing the interest rate at the level at which we can amortize them.  If this is true, and as yields turn negative and assets fall in real terms (with central banks adding money to prevent nominal falls), then the answer is to buy duration, and stocks are exceptionally long duration instruments.  So if you think negative yields are here for the long-haul, you want to be buying stocks…hand over fist.


Portfolio Update 
Our Man’s felt that the market is sitting at the edge of the binary path for a couple of months now, and so he made some changes to the portfolio earlier in the third quarter.  Out have gone all the commodity-related positions (Gold, Silver, and Gold Miners) which have generated exceptional profits year-to-date, but are stretched following their strong runs and vulnerable to dollar-strength.  Into the portfolio have come some (levered) market equity positions, in particular as Our Man’s Technical book saw a tentative buy signal – expect to see more, if the market’s price action suggests much higher highs ahead.  The Currency and International positions remain unchanged, though the Argentinean equities are nearing the end of their (so far successful) investment horizon.  Our Man full expects to sit here, not doing much, and let price determine whether some of these positions are sold or are joined by substantially more equities.

BREXIT and Power to the People

As noted, Our Man wasn’t particularly shocked by the Brexit result and given there have been numerous post-mortems, Our Man’s going to limit his thoughts. 

It seems pretty clear that “Leave” ran a much better campaign than “Remain”, starting off with just having a better and more productive name.  Strategically Leave had three prongs, (i) Sovereignty, (ii) Immigration, and (iii) Anti-status quo (and with the major parties both on the Remain side, status-quo has a wider scope than normal, i.e. politics/politicians/bureaucrats/etc); while immigration got all the attention (especially from the press and Remain campaign), sovereignty was much more important.  On the other hand, the Remain campaign’s strategy was primarily driven by the economic cost of leaving the EU (with a nod to apparent strategic benefits of being a member, which were never fully articulated).  The largest flaw in this being that using economic fear (even if justified) has a diminished impact, when the same population (if not electorate) have been exposed to it as the primary weapon in votes in 2014 (in the Scottish referendum) and 2015 (in the General Election).  People don’t have to be economic experts to figure out either (i) the world can only end so many times, or (ii) if the economy is so fragile that Scotland leaving/Labour getting into power/Brexit can each individually crash it, then there will be something else soon enough is Brexit is avoided.  Finally, on a tactical basis “Leave” had better leadership (say what you want about Boris/Gove and their behavior, but everyone knew who to listen to as opposed to Cameron/Osbourne’s the world is ending again, and Corbyn’s errr…errr…exactly) and a simple effective slogan (“Take Back Control”) that meant different things to different people (like Obama’s “Yes, We Can”, and Trump’s “Make America Great Again” – it’s hard to take the opposite side of a good slogan!).

While the campaign matters, the structural setting for a Leave vote was in place; it is readily apparent (to OM, at least) that there is the widespread popular discontent (be it in Greece, Spain, France, the UK and US) with the range of political choice offered and their policy prescriptions.  The widespread nature of this discontent is I think better understood by the population than by the political (and elite) class, and the attempts to ascribe it solely to immigration (more of a symptom) is reflective of this.   The lack of willingness to investigate and understand this discontent has helped create the opportunity for the populist characters on the left and right like Jeremy Corbyn, Nigel Farage, Bernie Saunders and Donald Trump.  Furthermore, the complacency shown by the major parties as these characters rose (due to their low quality and general incoherence), and still being shown towards Mr. Trump, reflects how badly the political class are underestimating the underlying message.  Finally, the distorting impact of QE on inequality and corporate incentives, has only added fuel to the fire of that dissatisfaction. 

That this manifested itself in a vote for Brexit, seemingly aided by stalwart Labour areas in England, should not come as a surprise.  For the last generation, as globalization and with it free trade and free movement of capital (with its negative impact on tax bases) have swept across the globe, the policy prescription has been to increase welfare to deal with the uneven impact.  Now however, the costs of welfare are becoming prohibitive both financially (on government budgets) and in terms of lost productivity.  While welfare is necessary, and one can easily understand how data and economic models suggest it is the best approach, Our Man suspects that likely reveals more about the models, and their over-valuation of the short-term than anything.  The extremes of the welfare state help foster a culture of dependency and while transfer payments help people live their lives, it constrains them to ones that are harder to develop meaning and self-respect.  Furthermore, on an economy-wide basis, it helps undermine productivity through the lost skills (and lack of development of new ones) limiting the economy’s potential.  In the fullness of time and with the repeated prescriptions of the same solution, these micro and macro factors swamp the easy fix of a cash transfer.

Finally, it is said that history rhymes, rather than repeats, and to that end Our Man has been surprised at the lack of mention of Britain’s exit from the gold standard in 1931.  After all, following 6yrs of austerity back then, Britain was the first country to come off the gold standard and its departure came after a naval mutiny (Invergordon revolt), which caused market panic and the Pound fell 25% in the aftermath!   Inevitably, it was deemed at the time to be sacrilege to leave the Gold standard, a tragic mistake from which the country would never recover and one that would doom London's financial centre.  Of course, it proved not to be in part due to the huge stimulus from that devaluation and within 2 years (1933) most other countries had followed Britain’s lead and left the Gold standard.

Now of course, we’ve just had 6yrs of austerity (Chancellor Osborne's first austerity budget was July 2010), and Britain voted to become the first country to leave the EU delivered by a different mutiny (the 2.8mn non-voters who delivered Brexit).  It too has caused market panic (albeit briefly), and (so far) the Pound has fallen 15% in the aftermath!   It’s also being called a tragic mistake, against the perceived wisdom of the day and London's financial centre is doomed.  Time will tell how different ending the UK will have this time…

Our Man, will return shortly, with some things he thinks in the aftermath of Brexit…

Things from my Google Reader: Nov-12 Edition

Well, with the Holiday Season upon us, what better time to update you some things that Our Man read over the last couple of months.  There's a special US Election-related section, at the end, since I couldn't quite hold my tongue entirely 

- America’s Slippery Slope into Britishisms!

Can I take credit for this?  Did Goldman Sachs’ (allegedly) prevalent use of the word ‘muppet’ to describe clients in London lead to this article?   Or are American’s finally accepting that Brits just do the whole colloquialism/slang thing vastly better!  (Alex Williams, New York Times) 

- The Birth of Bond

Continuing our British-theme, what could be more British than James Bond?  Well, excluding some of Daniel Craig’s dubious pronunciation in Skyfall - no doubt it was for the benefit of a US audience – didn’t they read the above NY Times article!  On that note, Our Man saw SkyFall last week, loved it and heartily recommends it if you liked Casino Royale (but somewhat less so if you preferred anything Roger Moore/Pierce Brosnan!  There’s no accounting for taste!).  (David Kamp, Vanity Fair) 

- Show Me The Money

After long being the red-headed stepchild of economics, behavioural economics is now being used more than every (especially in the US and UK) to shape policy and bend its impact.  Here, Professor Cass Sunstein’s talks about its development and impact on policy (especially consumer protection).  (Cass Sunstein, The New Republic) 

NB: You may want to try the experiment in this video, before reading the article! 

- The Hunt for “Geronimo”

Mark Bowden’s adaption from his forthcoming book, detailing the process, research, preparation and decisions behind the Administration’s decision to green-light the raid on Osama bin Laden.  (Mark Bowden, Vanity Fair) 

- When The Growth Model Changes, Abandon theCorrelations

Professor Pettis describes why he thinks a lot of the current research on China’s GDP growth over the coming decade is flawed.  He also considers why Japan in the late 80’s is a better comparable to the China of today, than the more often mooted Japan in the 70’s.

(Michael Pettis, on his website and also at Credit Writedowns) 

Election Fever

Things that amused and interested me about this year’s US Presidential election.
- That (as Mark Cuban noted, post election) the multi-millionaire CEO who was running built an organization that was technologically inept (and had no back-up plan), was inefficient in its expenditures (purchase of ads) and never tested its core assumptions.
- Sasha Issenberg being right beforehand, and Alexis Madrigal subsequently adding much more colour, about how the President’s team was creating the first truly 21^st century campaign, and utilizing data efficiently and effectively (i.e. like they do in the private sector).
- That systematically using data (whether it was 538, RCP, Pollster, or my personal favourite Votamatic) was more helpful than using your “gut” and paying little attention to the data (Karl Rove, George Will, DickMorris, etc).  And that people were then shocked by this!
- That the ‘auto bailout’ was deemed  a major factor in helping the President win re-election.  That's fair enough, but it's strange how nobody points out how universally unpopular the bailout was, even in Michigan, back in 2009 when the decision was made!  
- That Democrats think that demographics and data mean the future is theirs.  As ErickEricksson noted within a pretty thoughtful and insightful piece (especially given it was barely a couple of hours after the Republicans had lost the White House) on the election and the conservative movement, it’s yet to be proven that Obama’s coalition is a Democratic one (as opposed to just an Obama one).

Late for Halloween: The Horror.....a post on a pointless topic!

There are many things that Our Man tries to avoid talking about in this blog, mainly because they’re terribly dull.  However, some of these he does his best to avoid talking about at all (even with friends, down the pub).  These include topics as tedious as why don’t Arsenal have a good ‘keeper and why are the Mets terrible, but there’s one topic that Our Man avoids more than any other; politics!!  It’s not that Our Man doesn’t like politics (he does), it’s just that talking about it isn’t all that interesting; it’s largely ideological (on both sides), and who cares about the facts!

So why force you to read a post on politics?  Well, as a politician would say, “It’s their fault” (cue: Our Man pointing in the direction of various friends who’ve attempted to get him to discuss politics over the last 2 weeks.  You know who you are).  I can’t blame you for turning away now, but if you can stomach it, here are Our Man’s thoughts on some political topics:

Does a Republican House suit President Obama?
Firstly, I’d note that the biggest impact on Obama’s presidency (2011-2012 edition) probably won’t be the election results tonight!  It was likely Peter Rouse replacing Rahm, on at least an interim basis, as Chief of Staff.

While most, especially the market, are assuming that a Republican House means gridlock and that’s a good thing, I’d instead ask if a Republican House suits the President?  Doesn’t it allow him to do what he does well – sit above the fray, and broker consensus building agreements between the Senate and the House?  And given Republicans control the House, doesn’t it make it harder to characterize the President as a Socialist when you’re writing the bills and sending them to him?  And if you’re in power, and control the House (which writes the legislation) it’s probably somewhat harder to be the party of “No”…without taking a hit from the public for it.

The most important post-election story for the markets
Won’t be an extension of the Bush Tax Cuts (more on that below), but will be the chairmanship of a sub-committee of the US House of Representatives Financial Services Committee.   Yes, you read that right.  Why?  As among the roles of the Domestic Monetary Policy & Technology sub-committee are the Oversight of Emergency Authority and the Audit of the Federal Reserve.   Oh, and the ranking minority member (and thus presumably favourite to become Chairman of the sub-committee) is a certain Ron Paul.  Yes, the Ron Paul who published a book in the last 18months called “End the Fed”.

Bush Tax Cuts and Wealth
While there is much debate as to whether the Bush Tax Cuts will be extended, and for whom, the debate is likely moot.  In all reality, the current Congress will let them expire and the new Congress will pass something with even the President willing to extend them for those making up to $500K/$1million.  Given that, according to the IRS, less than 2% of US households make even $250/year the debate about whether the tax cuts should be extended for those over $500K or $1mn will have little impact on the majority of society.  Thus Our Man's view of how far up the tax-cuts are extended is, in Snoopy-style, to go Bleah!

Before I venture off further into contentious ground, let me end this blog post with a Rawls-ian thought experiment.  Imagine splitting the US into wealth quintiles (or fifths, as I personally like to call them) from the wealthiest (top 20%) to the least wealthy (bottom 20%), and ask yourself: i). To estimate how much wealth do each of these quintiles currently represent as a % of the total? (i.e. Top 20% currently represent A%, Second 20% represent B%, etc) and ii). To construct a distribution of wealth, that in an ideal world, you think would be fair (i.e. Top 20% should have X% of the wealth, Second 20% should have Y%, etc)

Thankfully, I’m not crowdsourcing, but a recent paper by Michael Norton (Harvard Business School) and Dan Ariely (Duke University) actually asked these kind of questions in a nationally representative sample and their results are below.  You’ll note the irony that people’s estimates were almost (identical irrespective of sub-group) and their ideals were also broadly similar, but neither was a good reflection of reality.