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by Brunello Rosa
18 January 2021
In our recent column, we noted how political risk was on the rise at the beginning of the year. This week will prove particularly challenging in this regard.
In the US, the inauguration of the 46th president in US history on January 20th, rather than merely featuring a speech by the new “leader of the free world”, as usually takes place, will instead be a highly risky event, with the state of emergency still in place after the “insurrection” that occurred on January 6th, when Donald Trump supporters entered the US Congress to stop the parliamentary ratification of the electoral college vote. The FBI warned that there may be armed protests in 50 states planned on the day of the inauguration, organised by far-right movements. To make things worse, the incumbent president said he will not attend the inauguration ceremony, thus opening a wound in the transition of power in the world’s leading democracy.
In Europe, Italy is staging yet another government crisis. As is typical when centre-left governments are in power, a component of the majority detached itself in a sign of disapproval over the management of the pandemic and the process followed by the government in drafting the recovery and resilience national plan. Similar episodes occurred in 1998 when Rifondazione Comunista left Prodi’s first government, and in 2008, when UDEUR left the second Prodi government. The centre-right found itself in a similar situation in 2010 when Fini’s component of the Popolo della Liberta’ left Berlusconi’s fourth government. On that occasion, the government managed to survive a confidence vote by parliament thanks to a group of MPs (the so-called “Responsabili”) coming from opposition parties which joined the majority.
As we discuss in our in-depth scenario analysis, we believe that Giuseppe Conte is tempted to follow this example of the centre-right, by trying to find support in a group of MPs coming from the current opposition (or, from Italia Viva, Matteo Renzi’s party that has been part of Conte’s governing coalition until now).
But this is proving harder than anticipated. At this stage, a new government with “Responsabili” coming from opposition parties, or a new pact with Italia Viva, seem the likeliest scenarios. Elections seem the least likely outcome, yet cannot be completely ruled out.
In Germany, Armin Laschet, currently the president of North-Rhine Westphalia, Germany’s most populous state, was elected to succeed Annegret Kramp-Karrenbauer as Chair of the CDU and, therefore, become the frontrunner to be the next Chancellor when general elections are held in September 2021. We anticipated the potential election of Laschet in May 2018, when he was totally out of the political radar screen. Laschet is a continuity candidate, so very reassuring in this respect, and he could easily lead a new centre-right coalition, or a new grand coalition with the SPD or the Greens after the elections.
He may yet be challenged in his race to the become CDU/CSU candidate for the Chancellorship by Jens Spahn, the health minister whose effective management during Covid has boosted his profile at the national level, or by Markus Söder, the popular leader of the CDU’s Bavarian sister-party. In our view, as we discussed in an in-depth analysis of German politics, the main political weakness of Laschet is that he might leave the right flank of the party uncovered, as compared to Fredrik Merz. That political space on the right that may then be occupied by the AfD, thus posing risks to the Germany’s leadership in the European integration process.
Last but not least, in the Netherlands, PM Mark Rutte and his cabinet resigned last weekin response to a child welfare fraud scandal. Rutte will, however, remain in office until the March 2021 general election, in which he hopes to be confirmed as party leader and Prime Minister. The election in the Netherlands has been one of the main reasons behind the slow ratification process by national parliaments of the Next Generation EU recovery plan. This delay poses a serious threat to the actual implementation of the plan.
by Brunello Rosa and Karmen Meneses
21 January 2021
by Brunello Rosa
21 January 2021
by Brunello Rosa
14 January 2021
by Mirko Giordani
13 January 2021
by Brunello Rosa
20 January 2021
by Nouriel Roubini, Brunello Rosa, Alessandro Magnoli Bocchi
23 December 2020
by John Hulsman
12 January 2021
Introduction: Evaluating The Blackest Day
Before evaluating what is to come in the most powerful country in the world, it is imperative that we lay out what as just passed in a nation which—since at least 1865—has served as the yardstick by which global political stability has been measured. For the insurrection of the past week is simply without parallel in modern American history.
It is a tautology, but it is no less true for this; the problem with narcissists is that they are not like other people. Whereas most of us psychologically rebound from traumas with the passage of time, acquiring perspective as we go, narcissists stew in their own juices, brooding over supposed wrongs and slights, not reconciling themselves to the setbacks that are an inevitable part of life. Outgoing President Donald Trump, whose narcissism is his outstanding characteristic, has tragically proven this truism to be right once again, with America itself as the victim of his pathology.
Refusing to accept his close but clean defeat in the 2020 election, the president—far from reconciling himself to the inevitable in the weeks following his November 2020 defeat – has withdrawn from rational thought, focusing instead on the unjust wrongs he feels (all evidence to the contrary) led to the election being criminally stolen from him. Worse, beyond deluding himself, Trump has managed to convince a small but violent core of his supporters of the justness of his own delusion, facts be damned.
On January 6th, the Congress met to certify the election results, a process that has until now been merely a formality throughout all of American history. But not on that day. Instead, hundreds of the president’s supporters managed to break through the (inept) cordon put in place by the hapless Capitol Hill police. Their only vaguely articulated desire seems to have been to intimidate Congressmen and Senators into reversing the electoral results in key battleground states, such as Arizona and Pennsylvania, defying the will of the voters. President-elect Biden rightly called this action an ‘insurrection’—more politically focused than a riot but less organized (and critically without a whisper of military or police support) than a coup.
Nevertheless, what happened shattered America’s 150-year record of political stability, causing untold reputational damage around the world as the invaluable global perception of American exceptionalism—based on its blessed record of being an island of stability in what has often been a global sea of chaos—was jarringly knocked from its pedestal. The insurrection made the United States simply another country, rather than as Abraham Lincoln – our greatest Republican President—put it, ‘the last, best hope of earth.’
Anger spilled over on the day after it became clear that outgoing Vice President, Mike Pence, long the most loyal of Trump allies, announced he would not follow Trump’s extra-constitutional lead in opposing the election results, which was critical as he was presiding over the joint session to certify the 2020 campaign.
Earlier in the day, the President had given a fire-breathing speech to his supporters at the Ellipse, just outside the White House, inciting them to action in saying, “You will never take back our country with weakness, you have to show strength.” Trump went on, saying the mob should “fight like hell.” Promising to march with them to the Capitol (which he did not do), this is as close to incitement to sedition as any president has ever come.
Scenes occurred which seemed almost impossible to fathom, and cannot now be unseen. Police were unable to prevent an invasion by protestors onto the floor of the Senate. The US Capitol was breached by armed forces carrying weapons for the first time since British soldiers ransacked it in 1814. Secret Service agents drew their weapons to protect the Congressmen still in the building. The protestors held thrall over much of the Capitol for up to four hours. According to the New York Times, Trump initially rebuffed frantic requests to mobilize the Washington, DC National Guard to break up the insurrection. Police finally cleared the mob from the Capitol rotunda using tear gas. Five people died, including an on-duty policeman.
But if scenes of a man insanely dressed as a Bison howling as he sat in the President of the Senate’s chair, thugs swinging down onto the Senate floor, and a gleeful nihilist arrogantly leering with his feet propped up on Speaker Nancy Pelosi’s desk, cannot be forgotten, it should also be remembered how quickly the righteous backlash to all this developed. Pence took charge of restoring order, liaising with the acting Defense Secretary, Christopher Miller, to order the calling out of the DC National Guard, sidestepping Trump. Once order was restored, the joint session of Congress immediately went back to work, ratifying Biden’s victory.
Once seemingly politically fire-proof, Trump’s personal political career, still very much alive even after his recent electoral defeat, now seems to be definitively over. There were strong calls for Pence to invoke the 25thAmendment – which allows for the removal of the president if he is deemed unfit to serve — which can be upheld if half the cabinet support the move. While Pence seems highly unlikely to do so, such a move has never been seriously entertained before, a sign of the president’s fall from grace.
More likely, and while there are only days left in his term, the Democratic-controlled House is likely to push another impeachment article against Trump — incitement to sedition — which is likely to pass the full House. While it is unlikely there is time to convene a trial in the Senate, let alone to convict him, such is the fury at Trump’s extra-constitutional temper tantrum that the House seems inclined to move ahead nonetheless. The Wall Street Journal, The New York Times, The Washington Post, and USA Today all called on the president to resign. The insurrection is likely to serve as the President’s primary legacy, and it is a toxic one that is unlikely to fade with time.
But if Trump is now – as former Secretary of Defense James Mattis memorably put it, “a man without a country,” Trumpism as an ideology is far from over. Arrestingly, even after the shocking insurrection was quelled, fully six Republican Senators voted to overturn the Arizona election results (they were verified by a vote of 93-6), while incredibly over half of Republican Congressmen voted to annul the people’s verdict, with the measure only passing the full House by a vote of 303-121. While a YouGov poll, put in the field right after the insurrection, found that half of all voters said it was appropriate to remove Trump from office after he egged on the crowd to march on Congress, arrestingly fully 45% of Republicans surveyed supported the storming of the Capitol.
Suddenly, with startling clarity, the calling animating Joe Biden’s term of office is starkly clear. In the manner of Lincoln, if he is able to bind up the nation’s wounds and divisions, he will be deemed a historical success; if he fails to do so, he will be seen as a failure.
The good news is, now that all the doom and gloom has been weighed into this introduction, a series of major forces — ranging from the new post-election political configuration to the backlash against Trumpian divisiveness – give Democrats an unexpected chance to take political advantage of the Republican Party’s toxicity in the wake of the insurrection, portending moderate policies that are likely to be successfully implemented by the new Biden team over the next two years. Counter-intuitively, the immediate horrible news of the insurrection may well lead to an almost immediate re-birth of American moderation .
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week 18 - 24 January 2021
US And EZ Manufacturing PMI To Slow While Central Banks To Remain Accommodative
In the US: i) manufacturing PMI is expected to slow to 56.5 (p: 57.1); while ii) services PMI is likely to remain unchanged at 54.0.
In the EZ: i) manufacturing PMI is expected to decline to 54.6 (p: 55.2); while ii) services are likely to remain subdued, at 45.0 (p: 46.4).
Central banks to remain accommodative this week, i) ECB at 0.0%; ii) BoJ at -0.1%; and iii) Norges Bank at 0.0%.
US Stimulus Remains Uncertain; Vaccine Rollouts Face Difficulties; Central Banks To Remain Dovish
Over 2021-22, the global economy will continue to recover as vaccine roll-outs will help containing the coronavirus.
Monetary policy will remain accommodative, preventing DM sovereign bond yields from rising significantly, across the curve.
US Fed Chairman Powell noted that “the US economy could return to pre-coronavirus pandemic level fairly soon” thanks to “a torrent of monetary and fiscal aid over the past year”, referring to the nearly USD 4tn (USD 2.2tn in the ‘March CARES Act’, and USD 900bn in the ‘relief bill’) in direct fiscal stimulus approved by the Trump administration and Congress.
In the US, the ‘Center for Disease Control and Prevention’ (CDC) warned about an infectious COVID-19 variant, known as B117; at the moment, 76 cases were detected in 12 states, but “it could dominate the US by March”. US President-elect Joe Biden’s USD 1.9tn ‘economic stimulus plan’ is likely to face Republican resistance in Congress, highlighting challenges in securing bipartisan-backing for a sizeable relief package, despite Mr. Biden’s appeal for: 1) “unity, before and after the January 20 inauguration”; and 2)“a speedy approval of the stimulus plan, our top legislative priority”.
In the EZ, most governments will struggle with slow vaccine roll-outs, as Pfizer announced it: i)will delay deliveries to European countries; and ii) was required “extra regulatory approvals”, hence “estimated volumes of vaccine distribution may need to be adjusted”, as part of “efforts to deliver more doses than originally planned in total in 2021”.
In Hong Kong, the government is likely to delay the distribution of mainland ‘Sinovac’s COVID-19 vaccine’ because of “a lack of trial data” – raising concerns over a vaccine Beijing intends to distribute across most emerging markets.
Real Economy: Vaccine Distribution Pace Remains Subdued; US Stimulus Faces Disputes
In the US, in the week ending on January 9 the ‘filings for unemployment benefits’ increased to 965k (c: 795k; p: 784k), the highest number since mid-August - amid record increases in COVID-19 cases, deaths, hospitalizations, and new restrictive measures across the country. In December: i) retail sales fell to 2.9% y-o-y (p: 3.7%); while ii) IP eased to -3.6% y-o-y (c: -4.6%; p: -5.5%) – the smallest decline since February 2020. December’s CPI inflation increased to 1.4% y-o-y (c: 1.3%; p:1.2%), while core inflation remained mute at 1.6% y-o-y.
In the EZ, November’s IP eased by -0.6% y-o-y (c: -3.3%; p: -3.8%) – recording the seventh month of improvement.
In Kuwait, S&P affirmed the State’ ratings at 'AA-', with negative outlook.
Financial Markets: Global Equities Fall; Bonds Flat; A Stronger USD Weighs On Commodities
Market drivers: equity markets suffered a tense political situation in the US, due to ongoing efforts to remove President Trump from the White House, such as: i) the Democrats’ call to invoke the ‘25th Amendment’; and ii) the House of Representatives’ unprecedented ‘second impeachment’ of the president.
Global equities closed lower w-o-w (MSCI ACWI, -1.2%, to 656). In the US, the S&P 500 Index fell (-1.5%, to 3,768), dragged by: 1)poor retail sales data; 2) the communication services sector; and 3)the IT sector after social media companies Twitter and Facebook announced bans of President Trump and others from their platforms. In the EZ, Europe’s shares fell (Eurostoxx 50, -1.2%, to 3,600) as the resurgence in COVID-19 infections dented optimism about: i) a steady economic recovery; and ii)plans for further fiscal stimulus in the US.
Fixed income: w-o-w global bonds remained flat (BAML Global, +0.1% to 298.2), as well as USTs (-1 bp, to 1.10%).
FX: w-o-w, the USD traded higher against other currencies (DXY, +0.7%, to 90.772), while the EUR/USD fell (1.1%, to 1.208). Going forward, an improving risk appetite and lower real yields in the US are likely to weigh on the USD.
Commodities: Oil prices fell (Brent, -1.6% to 55.1 USD/b), as expanding lockdowns in China weighed on market sentiment, making an immediate global oil-demand pick up more unlikely, while a stronger USD dragged crude futures down. Gold prices fell (-1.2% to 1,827 USD/Oz.) as rising US bond yields increased the opportunity cost of the ‘safe heaven’ asset.
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