by Brunello Rosa
18 March 2019
With US-China trade negotiations being granted a deadline extension by President Trump on March 1st, it seems that an agreement between China and the US on their long-lasting trade disputes could finally be at hand. What might the elements of the deal include? In brief, the deal could include a commitment by China to increase its import from the US, while the US is granted increased access to the Chinese market, more protection for its intellectual property, reduced technology transfer via obligatory joint ventures, and other similar guarantees. If we only focus on the quantitative aspects of such an agreement, we could brutally summarise it as follows: China would commit to buy more stuff from the US and the US will be able to sell more stuff to China. (That is, after all, the way to reduce the US’ trade deficit with China, which recently reached an all-time high).
Now, would this be a good deal for the world economy? On the one hand, reduced trade tensions would mean less volatility in markets, which could be beneficial for developed economies and emerging markets (EMs) both. Less protectionism would also imply a reduced drag on global growth, which in turn might also imply higher prices for certain commodities, another factor that could be beneficial for commodity-exporting Ems. (Moreover, so long as commodity prices do not increase too much, this would not necessarily impact DMs too negatively). As part of the trade deal China might also commit to stabilizing its trade-weighted exchange rate and allowing more transparency regarding its reserves and reserve policy. Trade-weighted currency stabilization would be better for Europe than China pegging to the US dollar alone, which tends to hurt the Eurozone at times when the dollar is weak.
On the other hand, not all that shines is gold. Even if a temporary agreement were to be agreed on between China and the US, the cold war between the two global geopolitical superpowers will continue. The sub-components of this wider rivalry, such as the technological competition between them and the balkanisation of the global supply chains, will also continue, and, as the recent row around Italy’s memorandum with China on the Belt and Road Initiative may show, other countries and regions will be forced to choose sides between either the US or China.
In addition, there might be direct losers from a US-China deal of this sort. If China commits to buying more goods from the US, other countries’ exports to China might suffer, especially countries or regions which have economies that are export-led, such as Japan and the Eurozone. If China also commits to buying more US goods such as soybeans, fossil fuels, and other commodities, exporting EMs may suffer as well. Thirdly, as we discussed in a recent column, if the US and China come to an agreement , Trump will then be able to devote his full attention to an attack on Germany and its car industry (another popular bipartisan subject in the US), threatening to slap tariffs on US car imports in order to strongarm the Germans into taking a deal that is advantageous to the US.
As we discussed in recent reports, both Japan and Europe are now undergoing a severe economic slowdown, which is having important political repercussions. Germany’s slowdown means that other countries in its supply chain, such as Italy, are already in a recession. EMs are stabilising after a difficult 2018 thanks to the Fed’s more dovish stance. If those economies were to suffer again, possibly falling into a recession, the world economy as a whole would be affected, being then able to rely only on the US and China, both of which are also slowing down economically.
Germany could seize the opportunity to rethink its business model and become less dependent on foreign demand. But that would mean revitalising its domestic demand and promoting the transformation of the EU and the Eurozone into full-fledged transfer unions (perhaps organised in concentric circles), with a vibrant internal market like the US. However, as we discussed in our recent Europe Update this seems very unlikely to happen in the near future. This will leave Europe, Japan, EMs and the world vulnerable to the volatile mood of the US president.
by Brunello Rosa and Alex Waters
21 March 2019
by Brunello Rosa and Alex Waters
20 March 2019
by Brunello Rosa
15 March 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 18 - 24 March 2019
Policy Uncertainties Will Remain High
In the UK, the parliament will vote for the third time on PM May’s “revised Brexit deal”. Were the parliament to reject the deal, the UK could request the EU for either a: i) a “short” delay, i.e. until June 30; or, ii) a “long” delay, beyond June 30, which would require the UK to participate in the EU Parliament elections on May 23-26.
In the UK and Japan, CPI figures are expected to remain below 2%, at 1.8% (p: 1.8% y-o-y) and 0.3% (p: 0.2% y-o-y), respectively.
The Fed and BoE are likely to maintain interest rates unchanged at 2.5% and 0.75%, respectively.
Norges Bank is widely expected to increase its policy rate from 0.75% to 1%.
US-China Tensions Will Remain Unaddressed
A US-China deal is yet to be achieved, with many relevant political and economic issues still unresolved.
Globally, monetary and fiscal policies are becoming supportive. In the G3, monetary policy will likely be eased: 1) in the US, the probability of: i) no Fed hikes in 2019 remains at 100%; and ii) a rate cut rose to 28% (p: 20%); 2) in the EZ, the ECB will to ensure liquidity remains abundant, via TLTROs; and 3) in Japan, a deterioration of the growth outlook could justify a shift from tightening to easing.
In China, were the ongoing liquidity shortage to worsen, the PBoC could deliver a 50bp RRR cut.
In Turkey, the CBT is likely to start easing in H2-2019. Going forward, the combination of less stringent monetary and fiscal policy could: i) help soften the deceleration of global growth; and ii) support the markets.
Real Economy: Political Tensions Weigh On The Outlook
In the US consumption showed resilience (retail sales Jan., a: 0.2% m-o-m; c: 0.0; p: -1.6); yet, a weaker-than-expected industrial production (Feb., a: 0.1% m-o-m; c: 0.4; p: -0.4) points to trade-war related headwinds. President Trump vetoed the Congress’s measure revoking his declaration of a national emergency at the US-Mexico border. February’s headline (CPI, a: 1.5% y-o-y; c: 1.6; p: 1.6), and core inflation (CPI ex. food & energy, a: 2.1% y-o-y; c: 2.2; p: 2.2) fell slightly, and were below consensus.
In the EU, industrial production showed signs of stabilization (a: 1.4% m-o-m; c: 1.0; p: -0.9), helped by a rebound in France, Italy and Spain. However, Germany—the largest EU member—suffered a contraction (a: -0.8% m-o-m, c: 0.4, p: 0.8). The EU parliament voted to suspend Turkey’s accession bid, citing “failures to uphold the rule of law”.
In the EZ, inflation remains muted (CPI Feb., a: 1.5% y-o-y; c: 1.5; p: 1.4).
In the UK, lawmakers voted against: i) PM May’s “revised Brexit deal” (391-242); and ii) a “no-deal Brexit” (312-308); and iii) backed the motion to seek a Brexit delay.
In China, industrial output grew at the slowest pace in 17 years (industrial production Jan., a: 5.3% y-o-y; c: 5.5; p: 5.7) but investment spending rose (fixed asset investment Feb., a: 6.1% y-o-y; c: 6.0; p: 5.9), driven by the government’s injection of USD 169bn into the financial system.
In Japan, the BoJ held interest rates (a: -0.1%; p: -0.1) and downgraded its assessment of the economy, due to upcoming declines in exports and factory output.
Financial Markets: Increase In Demand For Riskier Assets
As fears over monetary tightening subsided, core-to-periphery flows supported global stocks and EM bonds.
Global stocks w-o-w rose (MSCI ACWI, 2.8%) driven by the US (S&P 500, 2.9%), EZ (Euro Stoxx 50, 3.1%) and EMs (MSCI EMs, 2.6%). Volatility fell (VIX S&P 500, 3.2 points to 12.9, 52w avg.: 16.7; 10y avg.: 17.8).
Fixed-income indices: while global bonds were flat w-o-w, (BAML Global index, 0.1%), EM bonds performed positively (BAML, 1.4%) and issuance picked up: w-o-w USD22.9bn and EUR0.8bn were raised (last week: USD9.0bn and EUR3.0bn).
Currencies: the USD fell w-o-w (DXY, 0.7%), while the EUR and GBP appreciated (EUR/USD, 0.8% to 1.133; GBP/USD, 2.1% to 1.329).
Commodities: Brent crude hit a 2019-high (Brent, +2.2% to 67.2 USD/b) on OPEC supply cuts and US sanctions on Venezuela and Iran.
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