April 15, 2024: Andrew Hilton’s (last-minute) thoughts from the US – alternative title, Springtime in the Hamptons.
Back to Blighty tomorrow.., FWIW, I went to see Civil War last night, a ‘dystopian’ movie by Alex Garland,a well-connected-Brit, son of Nick the cartoonist and grandson of polymath Peter Medawar. It is #1 at the BO here, though there were only half a dozen others in the theatre, and (I gather) it opened a couple of days ago in the UK. Interesting… Although Garland is superficially careful not to take sides, in that both the federales and the secessionists are (as Hollywood demands these days) ethnically and gender-diverse, the authoritarian (but cowardly) President is distinctly Trumpish, and it ends with him whimpering as he is shot (by a black woman from the so-called Western Forces). With the exception of Kirsten Dunst, the acting is crap and the dialogue is execrable. But there is no doubt that there are plenty of otherwise sane Americans (particularly on the left, among the NYT-reading classes) who find something plausible in the idea of the November election unleashing a bloodbath. That it would be triggered by the secession of Texas and California (two states with little in common) is obviously ludicrous – as Garland acknowledges. But there are plenty of people (on both sides) who believe the cleavages within American society are now unbridgeable – and, worse, that they are tending to reinforce one another. It is a scary movie, with just enough plausibility to lift it out of run-of-the-mill schlock-dom.
Fortunately (at least, for the good liberals of the East End), the political winds seem to have shifted. The latest NYT/Siena national poll has Trump up by just one point – which means the election is now too close to call. This week is going to be dominated by the so-called ‘hush money’ case in Manhattan - with Trump having to appear day-after-day in front of a hostile judge, jury pool and prosecutor, with zero chance of eventual acquittal. I don’t suppose that will change many votes. Those (like me) who believe he is being railroaded by an ambitious prosecutor will feel vindicated; ditto those who feel he is a scumbag who should already have been banged up on Riker’s Island. But, IMO, that is going to be less important than a cynical (but predictable) shift in the Democrats’ electoral strategy that, it is hoped, will deflect attention away from tricky issues like Gaza, China and inflation.
First is Biden’s decision to double down on his student loan relief plan – which has now expanded to $153 billion in potential forgiveness. The unfairness of this is obvious; it discriminates against those who never went to college (mostly Trump voters), black men (who either don’t vote or who have been defecting to Trump anyway) and those who kept up their payments (mostly Republicans). But it rewards younger college-educated voters and the feckless – two groups the Democrats need to be able to count on. Net/net, I think it works – albeit it is a very expensive way to buy votes.
The second is even more cynical. It is to focus on the Arizona abortion decision – and to portray Trump as opposed to any form of abortion, even in cases of rape, incest etc. In fact, Trump’s position is simply that abortion should be a matter for individual states, not the Federal government - which is defensible. And the Arizona Court’s decision isn’t as crazy as the liberal media makes it sound; it merely points out that, as a result of the Dobbs decision, there is no Federal law mandating a right to abortion, which means that the law has to revert to earlier statutes – and the only relevant one is a law dating from 1864 (when Arizona wasn’t even a state). The Court was actually very clear: it did not endorse that law, and indeed it urged a referendum. But, for now, that’s what is on the books; courts enforce the law, they don’t make it. Still, if the Democrats can make the case that what has happened in Arizona would happen nation-wide under a Republican Presidency, they will win big among women voters – and, indeed, among a majority of parents. This is a huge issue – and it breaks hard for the Democrats.
Of course, there is wild hypocrisy involved. After all, Biden is a ‘good’ Catholic. Fortunately, he has Kamala Harris who is going to lead on this – which will undoubtedly build up her profile in the liberal media (which has never warmed to her). So, a double win. Or even a triple win – if the controversy means a higher profile for widely-despised Evangelical Christians (who are the only group likely to defend even tougher abortion laws).
Enough of that. I think it shifts the Presidential vote in favour of Biden. But it probably doesn’t do much for Congress – where I still expect both Houses to flip.
A few words on geopolitics.
First, Gaza… I think (or hope) there is some reason to believe Iran’s attack on Israel was essentially pre-approved – a measured response to Israel’s attack on its Embassy in Damascus that saved Teheran’s face, but stopped just short of provoking a regional conflict. Let’s hope so, at any rate. But much depends on Netanyahu – and whether he feels his own interests would best be served by further escalation. I hope not. After all, the Iranian attack demonstrated that Washington will still back him in extremis – and lean on its allies in the region on his behalf. Moreover, it has given Israel’s most committed Congressional supporters an excuse to ram through yet another emergency military aid package.
Still, I don’t see a happy ending. In Gaza itself, the only ones who seem to have a vision are those Israeli settlers who want to seize the land for themselves – and Jared Kushner, who sees it as a massive real estate project in which he and his friends can make a buck. In both cases, getting rid of the Palestinians is key – and I, therefore, find it dispiriting to read mainstream criticism of Egypt in particular for not opening its border to Gazans. After all, that is what Israel and its ‘friends’ in the US donor community want.
As for Ukraine, there are a couple of points worth noting.
First, the US is apparently going to propose this week a little bit of financial engineering that would permit the use of sequestered Russian CB reserves as collateral for Ukrainian fund-raising, either through loans or bond issues. The idea would apparently be to use the NPV of future interest streams over anything up to 30 years – hereby (it is hoped) avoiding the issue of exactly who owns the reserves themselves. We’ll see if it flies; Kyiv certainly needs the cash, and, so far, neither the US Congress nor the EU seems minded to help. In the former case, Israel takes priority; in the latter, it is proving very difficult to hammer out a common position – particularly with the Courts involved. The Presidential elections in Slovakia, in which an allegedly pro-Russian candidate won handily, won’t make that any easier either.
In the meantime, it does seem that the war itself has entered a new phase, in which both sides use drones to attack the other’s power infrastructure. Making the lights go out in Moscow or Kyiv is obviously preferable to continued mass slaughter, but I fear it won’t bring the conflict to an end. As for sanctions, watch the forthcoming Swiss referendum on ‘neutrality’. If it passes (which is very likely), Switzerland will be forbidden from participating in any financial sanctions against Russia – or China, for that matter. Hmmm.
As for US involvement, I would urge you to take a look at an op-ed piece that JD Vance (Hillbilly author, but also the junior Senator from Ohio, and on Trump’s long-list for VP) had in the NYT this week, defending the Republicans’ reluctance to go on funding Zelenskiy.
As he puts it, ‘it’s the math’. Ukraine needs more soldiers and materiel than the US (or Europe) can provide. As an example, he points out that Zelenskiy is demanding seven million 155 mmm shells; unfortunately, the US only produces 360,000 of these a year – just enough for its own perceived needs. As for manpower, he notes that ‘hundreds of thousands’ of young Ukrainian men have already fled to avoid the draft, and the latest lowering of the conscription age is going to make crossing the border even more popular. As for Zelenskiy’s stated goal of a return to the pre-1991 border (ie including Crimea), it is, Vance says, ‘fantastical’. Hear hear.
One other thing on the geopol front…
Biden met last week with the leaders of both Japan and the Philippines (Kishida and Marcos Jr), upgrading the US alliance with the former (and potentially opening the way for Japan to join AUKUS) and providing the same ‘ironclad’ guarantee to Manila as he had previously given to Jerusalem, that Washington would stand by its mutual defence treaty. If he is serious, that means the US would go to war to defend, not just Metro Manila, but also Philippine claims to the so-called Senkaku Islands, claimed by China as inside its ‘nine-dash line’, These pledges are awfully easy to make during an election campaign – particularly when the press doesn’t seem keen to explore the implications.
OK. What about the global economy?
Well, the Spring Meetings of the IMF and World Bank essentially start today in DC (I jumped the gun a bit last week) – with the key World Economic Outlook to be released on Wednesday. The likelihood is that the WEO will upgrade is 2024 GDP forecast for the US, 3.1% in January, while downgrading the Eurozone from 2.1%. Its most recent forecast for China was just 4.6% - and that may be boosted a bit, largely because of the latest export push.
That, itself, is going to be a major issue for the Meetings (which also include the G20). Indeed, it already has a name - ‘China Shock 2.0’, and US Treasury Secretary Yellen has been banging on about the unfairness of China using massive subsidies to under-price its exports. I think she is on dodgy grounds in terms of economics (she is an academic economist, married to a Nobel prize-winner), but she did get some support last week from China’s latest trade figures, which were a bit of a surprise. Despite a sharp rise in the volume of exports in March, the dollar value actually fell 7.5% year-on-year, meaning the trade surplus for the month shrank from $125 billion (outrageous) to just $59 billion (slightly less outrageous). China’s leaders have already protested that Yellen’s warnings of US retaliation are nothing more than ‘protectionism and a pretext to suppress China’s rise’. That may be true, but it will be a big issue in Washington – particularly in the G20, where other EMs may decide to back China against what they see as Biden’s abandonment of free trade and against the ‘fragmentation’ of the global economy.
Other than that, look for warnings in Washington about the commercial real estate market. Lots of people seem to feel it is on the cusp of a major collapse, particularly in the US, that has eerie similarities to the sub-prime crisis twenty years ago.
What else should one have noticed from economic developments over the last week?
Well, the big issue continues to be the divergence of interest rate policy – particularly between the Fed (where the question now is not so much when US interest rates will come down as if) and the ECB. Last week, the ECB surprised me (if no one else) when it left its key interest rate unchanged at 4.5% – but it made it very clear that Eurozone rates are coming down, and there seems to be a consensus that it might even cut as much as half a point in June. That seems a bit much to me, but there is no doubt that Lagarde et al feel that the Eurozone economy needs goosing – and, given that inflation is falling in both Germany (from 2.7% to 2.3% last month) and France (from 3.2% to 2.4%), it has the room to do something. (The fact that inflation actually picked up in Spain from 2.9% to 3.3% is a mild embarrassment, but it is the Big two who count.)
As for the US, the news was very different. The CPI (the most ‘popular’ measure of US inflation, if not the one to which the Fed attaches most credence) notched up unexpectedly last month from 3.2% to 3.5%, wth ‘core’ inflation unchanged at 3.8%. That prompted JPM’s Jamie Dimon (the world’s most famous Greek, and the third most powerful man in America) to tell his shareholders that inflation will stay ‘higher forever’ – which reminds me of Gillian Tett’s prediction that ‘three is the new two’. The NY Fed’s John Williams still insists that the Fed is on track to hit its 2% inflation target, but even he admits that there will be ‘bumps along the way’. Maybe it would be better all round if we just accepted 3% as a new, and realistic, target.
Other than that, what was probably most interesting last week was that economic releases in the US (which is supposedly going great guns) were actually a bit weaker than in the Eurozone (where things are said to be much trickier). Thus, while it while it was reported that, in the US, the ‘flash’ Michigan confidence index for March fell from 79.4 to 77.9 (with both the expectations and current sub-indices down), and that both the NFIB and TIPPP optimism indices were down, industrial production in Germany was up 2.1% in February, while retail sales picked up in Italy.
It is all a bit confusing, but one swallow does not make a Summer, and the safer bet is that the US is set to out-perform the EU at least for the next couple of years.
What about the UK? Well, seen from here, it seems sadly irrelevant – just the butt of rather sad Saturday Night jokes. Still, it is obviously good(ish) news that the ‘recession’ (if that is what it was) is over – though 0.1% GDP growth in February is nothing to write home about. Perhaps the National Institute’s forecast of a 0.4% jump in March is better news, though that seems a bit steep. But what interests me more is the set of expectations that is coalescing around the next Labour government. It will be faced with a dangerous combination – an empty kitty, an independent OBR (which means it will have difficulty hiding that fact), a need for higher defence spending, and a set of radical social and economic plans (including more political decentralisation and new employment rights) that it simply cannot afford. Plus, of course, it will almost certainly have a massive Parliamentary majority, which means Party discipline, will be weak from Day 1. If ever there was a politically poisoned chalice, that might be it.
What about markets?
Well, although most equity indices are still up year-to-date (indeed, the S&P is up 7.3%, the Nikkei is up 18%, the Dax is up 7.0% and our own FTSE100 is up 3.4%), last week was generally a tough one. Just about the only major index that was up week-on-week was the FTSE (though it still lags the CAC); almost all the others were down – with the Dow off 2.5% and the Dax off 1.4%. A couple of bad weeks don’t make a bear market, but I note that Ruffer (the favourite fund manager for some of the more knowledgeable folk at the FT) is now heavily into cash. It may be a smart move.
What puzzles/worries me a bit is the very sharp pick up of the dollar – which was up 1.6% on a trade-weighted basis last week, and almost 5% year-to-date. Those are very big moves. Coupled with a rise in the gold price to a record near $2,400/oz, they are a worrying sign of much greater nervousness than we have seen for a long time. It’s that damn geopolitical outlook again. I close with that thought – and with a review I read in the Sunday (NY) Times of a new book by Annie Jacobsen, entitled Nuclear War: A scenario. In it, she (apparently) describes how it will take just 72 minutes for the world to come to an end if our leaders make just one mistake. Hardly time to read the review, let alone the book.
Happy thoughts, but thanks for reading.
Andrew Hilton
Andrew@economic-evaluation.com