by Brunello Rosa
15 April 2019
The IMF has just published its April edition of the World Economic Outlook (WEO) entitled “Growth Slowdown, Precarious Recovery”. The WEO notes that after a synchronised expansion in 2017 and the first half of 2018, the world has entered a synchronised slowdown, with all three of the world’s major markets are now facing economic headwinds. In the US, the effects of the fiscal stimulus that was approved at the end of 2017 are fading, and the fist fight between Democrats and President Trump over the budget, which led to the longest government shutdown on record earlier this year, are having a negative impact on the economy. So too are trade tensions and the tightening financial conditions deriving from the Fed’s policy normalisation.
China meanwhile has been affected by its trade tensions with the US, as well as by what the IMF calls “regulatory tightening to rein in shadow banking.” And the Eurozone has lost momentum as two of the largest economies, Germany and Italy, have significantly slowed down. Germany’s economy, which narrowly avoided a recession in Q4, has slowed because of the impact of new emission standards on car manufacturing. Italy’s , which did in fact enter a technical recession in Q4, has slowed because of the higher sovereign spread’s impact on business investment and consumer confidence, and the impact of Germany’s slowdown. Elsewhere in the world, Japan’s economy too has been affected by global trade tensions, as well as by natural disasters, and emerging markets have been affected by capital outflows deriving from Fed tightening and USD strength.
The current narrative from the IMF and the World Bank is that these headwinds will be transitory, and that the economic outlook will improve in H2 2019. This improvement is also expected to occur because of the important contribution of central banks, almost all of which have turned dovish since the Fed’s U-Turn in January, and because of the use of some of the fiscal space that is available in certain countries.
The mood prevailing among market participants and policy makers attending the IMF and World Bank Spring Meetings also seems to be aligned with this narrative. Nevertheless, some of the risks we have identified in our recent research are still present, putting the recovery in danger and making it “precarious”.
First is the US trade dispute with China: while it seems that a deal is at hand, it has not been reached yet. Press reports suggest that China might be waiting to see if the US will launch another offensive on Europe over trade in the auto sector before signing anything. China knows that Trump cannot afford to open multiple fronts on trade, and so might be strategically delaying any deal to make it harder for Trump to lunch another offensive against it.
Second, even the new USMCA trade deal has not been ratified yet, and the threat of the US unilaterally withdrawing from NAFTA still exists.
Third, the Chinese economy is stabilising thanks to policy stimulus, but new episodes of slowing activity are always possible if this stimulus proves insufficient. In Europe, Germany’s recovery is not fully secured yet, and Italy seems on the verge of starting a new fight with Europe over the introduction of further measures of fiscal easing (such as the introduction of the flat tax) it cannot afford. In the UK, Brexit has been postponed, but lingering uncertainty continues to weigh on business investment and consumer spending.
Thus far central banks have come to the rescue, making markets happy. There might be further room for this rally in risky asset prices to continue if the headwinds cited above dissipate over time. However investors should be aware that, if any of the risks mentioned above were to materialise, new risk-off episodes would be likely to occur in the months ahead.
by Alex Waters and Nouriel Roubini
19 April 2019
by Nouriel Roubini and Brunello Rosa
19 April 2019
by Alex Waters and Brunello Rosa
19 April 2019
1 February 2019
“You cannot make a revolution with silk gloves.”- Joseph Stalin
Introduction: The Old Monster’s Wisdom
In December 2014, my good friend and colleague Teun Van Dongen and I wrote a piece in which, we systematized what crucial factors determined whether a revolution succeeded or failed. This current piece will draw heavily on our ground-breaking work*, in assessing the chances for successful revolution in Venezuela.
We wrote, “We began with a story about Joseph Stalin at the height of World War II. In December 1942, the Red Army was finally turning the tables on the Wehrmacht. After a seemingly endless series of debilitating defeats, the Soviets brought the German war machine to a halt at Stalingrad, where the Wehrmacht’s notorious Sixth Army found itself surrounded, outnumbered and outgunned. Back in the Kremlin, Stalin was planning the offensive that would put an end to the battle in his namesake city and seal the fate of the German army. He decided that General Konstantin Rokossovsky should lead the operation rather than General Andrey Yeremenko, who had been responsible for the defense of Stalingrad until then.”
“The Soviet dictator could tell, however, that Marshall Georgi Zhukov had his reservations. “Why don’t you say anything?” he asked, to which Zhukov replied: “Yeremenko will be very hurt.” Understandably nonplussed by this sudden display of concern for other people’s emotions from a commander who had never had any qualms about using his men as mere cannon fodder, Stalin shot back: “It’s not a time for feeling hurt. We’re not schoolgirls, we’re Bolsheviks!””
“In the early, heady, irrational days of the Arab Spring, for our sins both of us were forced to attend foreign policy events where we were breathlessly told in no uncertain terms that the political rules of the road had been entirely upended; history no longer mattered. The telecommunications revolution allowed people to organize so quickly, efficiently, and differently--to share information at the speed of the click of a computer key--that the days of tyrants everywhere were surely numbered. Twitter, Facebook, You Tube and the rest had definitively changed the world beyond all recognition. Power was out, communicating was in.”
“Just a few years on, surveying the ruins of the Arab Spring in Egypt, Bahrain, Libya, and especially Syria, these callow utopian claims look more than a little silly. But beneath this colossal analytical failure a far more important point needs making. There are iron laws governing revolutionary outcomes, outputs that have been tested and proven by history. The place to start is with Stalin’s quotation—people living alone in their basements with their parents are unlikely to be latter day Robespierres, Castros, Lenins, or Maos. But if it is easy (and necessary) to mock the ridiculous pretensions to world-historical change CNN and the others made in the first flush of the Arab Spring, it is far more important to look at what actually makes for successful revolutions, in order to underline the real reasons for the failure of Revolution 2.0.”
The First Law: Organize (And not online)
We wrote, “A gloomy but almost infallible rule of revolutions is that the most organized group almost always wins. The pro-independence American colonists may (just) have amounted to a plurality—and never more than that--but they were far better organized than the pro-English colonists ever were. Likewise, the Bolsheviks in Russia never had anything close to majority popular support, any more than the French Jacobins did. What all three revolutionary groups did possess however was a relatively disciplined, centralized leadership, capable of quickly and decisively taking decisions, that crucially would be followed by their supporters in the field.
“In other words, there was praxis, a Greek notion meaning the unity of thought and action. This decisive advantage allowed all three to overcome vast popular opposition to their revolutionary goals, as despite the impressive numbers opposing them, the enemies of all three were ultimately unable to coherently turn numerical superiority to their advantage, given their disorganized nature.”
For a long while, this has been the Venezuelan opposition’s besetting sin. Despite having an opponent in President Nicolas Maduro who is as deeply uncharismatic and he is an economic illiterate—Chavez without the charisma—has has managed to rather easily maintain power as the opposition has been deeply fragmented, bickering constantly. A major reason for this is that its putative head, Leopoldo Lopez, is as divisive as he is popular, as envied as he is admired.
Lopez, in promoting the claims of his protégée Juan Guaido, the Head of the National Assembly and now declared interim president, appears to be cleverly turning attention away from himself and toward a fresh face unscarred by years of internecine battles. This clever approach has made it quite possible that at long last the Venezuelan opposition has sufficiently organized to challenge the Maduro regime for supremacy.
The Second Law: Have a winning narrative
We wrote, “Revolutions, for all the giddy slogans and millennial promises, are very practical things when it comes to assuming power…In revolutions it is never enough to state the obvious—that the entrenched leadership is corrupt, incompetent, and unfeeling. Better to have a goal and then revolt, rather than to rise up and then try to figure out the reasons why…Something better must be offered as a governing program (however unrealistic) that binds revolutionary supporters together as it energizes them, an ultimate reward for the revolutionary risks being taken that is fervently believed in.”
“The best two single revolutionary examples regarding controlling the narrative come from the two extremes of the American and Russian Revolutions. Indeed, the whole point of Jefferson’s magisterial Declaration of Independence was to lay before mankind the reasons for the colonists’ revolt—what their ill-treatment at the hands of the English Crown amounted to—and then to offer a very attractive way forward, based on the principles of life, liberty, and property, individual freedoms leading to democratic self-governance. Even today, it is hard to think of a more persuasive and seductive document for advertising a cause than Jefferson’s masterpiece.”
“Ironically, about the only other narrative in contention would have to be Lenin’s invocation of ‘Peace, Bread, and Land’ at the start of the Bolshevik Revolution of 1917. Peace was shorthand for ending the Tsar’s hated and calamitous entry into World War I, a folly the weak Kerensky government perpetuated to its great cost. Bread meant a focus on the internal chaotic conditions within the Russian Empire itself would be the new priority. And Land signified that at last the deeply unpopular nobility would be forced to share the bounties of the country with the vast majority of its citizens. Incredibly timely, the slogan was startlingly on point as to an articulated revolutionary program, one that secured wide popularity. It is a prime example of the fundamental benefit of working out the reasons for revolution, ahead of having one.”
Here again, the Venezuelan opposition has had time to do some real thinking. Refusing to be drawn into the great power machinations buffeting their proposed revolt—with the US, and regional powers Brazil and Argentina on their side, even as long-term Maduro backers Cuba, China and Russia oppose them—Guaido has consistently seen events in terms of the nationalistic hopes of native Venezuelans; that to stand tall again, the country must not only displace the thuggish, corrupt, crooks now running it, but install Social Democratic nationalists who have the country, and not either their selfish interests or foreign bakers, at the center of their thinking. Such an old-fashioned nationalist revolution as a narrative ought to play well with both the people in the street, as well as the crucial armed forces.
The Third Law: Shoot
We wrote, “Revolutions may be carried out in the name of hopes, dreams and ideals, but their outcomes are decided by force. In revolutions, much like in love and war, everything is fair, and revolutions are often literally matters of life and death for the parties involved. Consequently, rules, rights and institutional norms mean little to nothing in revolutionary situations. This being the case, it is unsurprising that many successful revolutionary organizations and movements put much effort into building or gaining control over the armed forces.”
“For instance, even in the days preceding the October Revolution, Leon Trotsky, at the time the Bolsheviks’ second in command after Lenin, was already bringing the Russian army under Bolshevik control, aware of the need to protect the revolution against its many enemies. In the same vein, Trotsky later played a major role in the build-up of the Red Army, which was instrumental in saving the Bolshevik regime from being crushed by a group of rogue counter-revolutionary generals from the Imperial Russian Army.”
“Other obvious examples of the importance of military clout for the survival of a revolution include China, Cuba and the US. In Cuba and China, the revolution marked the end of a protracted military struggle, and the American Revolution was only saved from defeat by a military force that was hastily cobbled together to fend off the attempts of the British Crown to restore order in the colonies.”
“If these examples tell us anything, it’s that revolutions are often the beginning (Russia, America) or the end (Cuba, China) of a fierce armed struggle for control. Revolutions are challenges against very powerful groups and institutions, which are highly unlikely to abandon their position without a fight.”
While Guaido is to be lauded for immediately offering an amnesty to the armed forces—long in thrall at the senior levels to both Chavez and now Maduro—if they come over to his side, this has yet to happen in a meaningful way. While the army has not yet crushed the Venezuelan opposition’s bid for power, neither has it turned against the clueless Maduro regime.
At a senior level it may be too much to hope this will happen. The Maduro government has long had a military hue, where senior officers have shared in plundering the state; it is hard to see them easily betraying a president who has allowed their corruption to flourish. However, mid-level officers--the Majors and Colonels who have not been enriched and who may well have family members amongst the demonstrators--may just be able to be reached. For at present, despite his best efforts, Guaido has been unable to swing the army around to his cause. Without it, it is impossible to see how the opposition can ultimately win.
The Fourth Law: Find Your Useful Idiots
We wrote, “It is true that revolutionaries are often driven by a fanatical belief in the correctness and righteousness of their own view and display an equally vehement hostility towards the views of others, but that has not kept them from building coalitions to achieve their political goals. Short-lived as such alliances may be they are crucial to the fulfillment of the revolutionary project.”
“One of the most dramatic demonstrations of the importance of building coalitions in revolutionary campaigns concerns the Chinese Communist Party (CCP) under Mao Tse-tung, one of the most cold-blooded, calculating practitioners of realpolitik on the radical left. In 1927, the CCP was suddenly attacked by the Guomindang, a nationalist movement that had joined forces with the communists to fight the warlords who ruled China at the time.”
“The Guomindang killed thousands of communists in this surprise attack, but for Mao this was no reason not to restore the alliance a decade later, when he needed more manpower to rid China of the colonial reign of the Japanese emperor. Afterwards, of course, the communists turned against the nationalists again, and defeated them in a guerrilla war that would end with the Chinese revolution of 1949.”
“Another revolutionary leader who displayed tactical acumen in dealing with other parties in the revolutionary struggle is Fidel Castro, who managed to draw on very different sources of support for his guerrilla campaign against the Cuban dictator Fulgencio Batista.
When it served his purposes, Castro explicitly sought to unite the anti-Batista opposition around a common strategy, knowing full well that his guerrilla forces would stand a better chance if they wouldn’t have to go it alone. The Bolsheviks and the Shia firebrand Ayatollah Ruhollah Khomeini, who became Iran’s head of state after the toppling of the Persian shah in 1979, found their useful idiots as well, making and breaking all the coalitions they needed to in order to achieve their goals.”
“In order to be a credible partner to other parties in a conflict, an organization must have someone who can speak on its behalf. One of the main disadvantages of the decentralized, networked organizational structure of the protest movements in the Arab Spring is that they lacked this ability to act as an interlocutor that other parties can count on.”
“Few revolutionary movements and organizations achieve success entirely on their own, and especially since in the Arab Spring the protest movements found themselves in a situation where other players were holding the guns, they made a grave error by not putting more effort into winning over some useful idiots.”
The Venezuelan opposition has tried to encourage this coalition-building process, both with the military and by encouraging disaffected segments of the Venezuelan elite to join it. So far, despite being analytically on target in seeing the value of such (temporary) alliance building, this necessary coalition has yet to form.
We wrote, “there are these fundamental lessons to be learned from successful revolutions, iron laws that apply from Castro’s Cuba to Adams’s America. Just as they applied in the past, these iron laws can be an invaluable analytical guide for the future, pointing out the likely success of future insurrections…As Stalin terribly but accurately observed, ruthless men who understand the cold but enduring lessons of power win revolutions, not those involved in a Children’s Crusade.”
By looking in detail at the iron laws of revolution, it is clear that the efforts to unseat the Maduro regime have come a good way, but are not there yet in terms of ultimate success. While the opposition is now more united than ever before, and while a coherent nationalist narrative for why demonstrators must take the risk of rebelling has been put forward, without force behind their project and without alliances with mid-ranking officers in the Venezuelan army and disaffected members of Maduro’s elite, at present the revolt amounts to a tantalizing near miss.
However, the analytical metric ahead is clear. If Guaido and his supporters can ally with the men with the guns, his success is almost certain, just as a failure to do so will lead to his demise. The iron laws of revolution tell us everything in Venezuela now sits on a knife’s edge.
This article was originally published on the Author's LinkedIn Page. John Hulsman's new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April 2018.'
Week 15 - 21 April 2019
The IMF Expects Further Growth Deceleration
In the US, the trade deficit is expected to widen (c: USD -53.7bn; p: USD-51.1bn).
In China, growth is likely to soften further (China GDP Q1, c: 6.3% y-o-y; p: 6.4).
In the EZ, inflation is expected to remain subdued (CPI Mar., c: 1.4%; p: 1.4).
Global Economy Will Continue To Decelerate, Trade Tensions To Remain High, While Geopolitical Tensions Rise
The IMF cut its 2019 global growth forecast from 3.5 to 3.3%—the weakest since 2009—driven by downwards revision in the US (a: 2.3%; p: 2.5%), EZ (a: 1.3%; p: 1.6%), and MENA (a: 1.3%; p: 2.2%). Globally, fiscal policy is unlikely to support growth: the IMF warned most governments about the “need to reduce debt, to create fiscal space to tackle the next downturn”.
While US-China officials signaled progress on an enforcement mechanism for the deal, trade tensions will continue to weigh on growth, as President Trump threatens to impose tariffs on USD 11bn of EU imports, as retaliation over the Airbus-Boeing dispute.
In the US, the Fed stated that policy rates “could shift in either direction, depending on the growth outlook”. The market-probability of a rate cut has decreased to 39% (p: 53%).
In the UK, the EU has extended the Brexit’s deadline until October 31. PM May’s position will likely come under further pressure as members of her party see the risk of “no Brexit” increasing.
In China, PBoC’s monetary policy will remain supportive despite the recent CPI rise, due to higher pork prices (March CPI inflation: a: 2.3%; c: 2.4%; p: 1.5%).
Real Economy: Slower Growth Ahead, Declining Inflation, And Political Uncertainty
In the US, core inflation declined (Core CPI Mar., a: 2.0% y-o-y; c: 2.1; p: 2.1) while headline inflation rose driven by rising oil prices (CPI Mar., a: 1.9% y-o-y; c: 1.8 p: 1.5).
In Germany, inflation remained below target (CPI Mar., a: 1.4% y-o-y; c: 1.4; p: 1.4).
The ECB left interest rates unchanged (p: 0%) and reiterated its commitment to keep monetary stimulus in place as long as risks remain tilted to the downside.
In China, the PBoC injected liquidity into the system, to support economic activity: in March, credit growth and money supply beat expectations (aggregate financing Mar., a: CNY2.86tn; c: 1.85tn; p: 0.7tn; M2 money supply Mar., a: 8.6%; c: 8.2; p: 8.0).
In Turkey, AKP—President Erdogan’s party—requested a new vote in Istanbul after a partial ballots recount confirmed CHP’s victory. If the request is approved, new elections will take place on June 2nd.
In Algeria, the appointment of A. Bensaleh as interim president fueled unrest, as protestors oppose a transition headed by insiders.
In India, the RBI cut its policy rate—by 25bps to 6%—for the second time in three months as a response to decelerating domestic and global activity.
Financial Markets: Stock Supported By US Bank Earnings And China’s Credit Data
Investor sentiment is being affected by macro risks, arising from: i) deteriorating growth; ii) difficult-to-read monetary policies; and iii) geopolitical uncertainties. DM stocks rose thanks to better-than-expected earnings in US banks and China’s credit growth.
Global stocks w-o-w rose (MSCI ACWI, +0.4%) led by the US (S&P 500, +0.5). Volatility fell (VIX S&P 500, -0.8 points to 12.0, 52w avg.: 16.2; 10y avg.: 17.6). In the US, after positive initial readings, Q1-2019 earnings are expected to decline for the first time since 2016, due to: a) base effect from the 2018 tax cuts; and b) a slowdown in activity.
Fixed-income indices: w-o-w, globally, indices registered moderate declines (BAML Global bond index, -0.1%), mostly in EMs (BAML EMs index, -0.8%). In one of the most oversubscribed debt offerings in history, Aramco issued USD12bn of bonds, with a bid-to-cover ratio above eight (~USD100bn in orders).
Currencies: the USD depreciated w-o-w (DXY, -0.4%) against DM (EUR/USD, +0.8% at 1.130; GBP/USD, +0.3% to 1.308) and EM currencies (MSCI EM currency index, +0.2%).
Commodities: Crude prices rose to a 5-month high, as supply is threatened by: i) outage risks in Libya; ii) OPEC production discipline; iii) lower US shale production growth; and iv) stronger demand prospects (Brent, +1.7% to 71.6 USD/b).
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