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PODCAST
In their latest podcast, Brunello Rosa and Manas Chawla discuss the mini-budget presented by the UK Chancellor and its implications for the British economy and financial markets.
28 September 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the likely outcome of the upcoming Italian elections and its implications for European policymaking and financial markets.
21 September 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the implications for Britain of the death of Queen Elizabeth II and the ascension of King Charles III.
15 September 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss why central banks will continue tighten monetary policy and its impact on financial markets.
7 September 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the pros and cons of the introduction of CBDCs by governments and central banks and their impact on banks and financial markets.
22 July 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the ongoing governments crisis in Italy, how it may evolve, and its implications for ECB policymaking and the bond market.
20 July 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the UK political crisis emerged after the resignation of Boris Johnson as leader of the Tory party, and its implications for the government.
13 July 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the emergence of a G7 forum for emerging markets, in which Saudi Arabia may be playing an important role.
07 July 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the pros and cons of an embargo on Russian oil and gas versus a price cap enforced by the US and their trading partners.
3 June 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss how many leading indicators seem to point to an upcoming global recession, and how this may impact the more fragile economies, with low potential growth and high indebtedness.
26 May 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the causes and possible development of the recent volatility in financial markets, and its links with the crypto-asset environment.
18 May 2022
In their latest podcast, Brunello Rosa and Manas Chawla take stock of the recent elections in Germany, France and Italy and their implications for the European integration process.
13 May 2022
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Can Liz Truss’s Debacle Teach A Lesson To Giorgia Meloni?
Can Liz Truss’s Debacle Teach A Lesson To Giorgia Meloni?
Can Liz Truss’s Debacle Teach A Lesson To Giorgia Meloni?
by Brunello Rosa
3 October 2022
Last week the UK went through one of the most dramatic periods of its recent history. The events started with the not so-mini-budget that was presented on Friday, September 23rd by the Chancellor of the Exchequer Kwasi Kwarteng, which we discussed at length in our previous column and subsequent podcast.
As we argued in our column, the fiscal measures introduced by the Chancellor represent an economic gamble, as they consist of unfunded tax cuts worth GBP 45bn, to be added to the roughly GBP 100bn of measures that were adopted to cushion the effects of the energy crisis on households and companies. This would imply an additional GBP 150bn of borrowing by the government; i.e. gilts to be issued by the Treasury and presumably absorbed by the market. All this, without any forecast on economic growth and related fiscal deficit projections by the Office for Budget Responsibility (OBR), which generally accompany the issuance of the budget.
The results of these decisions have been disastrous. Investors have started to ask for higher yields to absorb the upcoming extra borrowing planned by the UK Treasury. Pension funds have been caught in margin calls, which forced them to sell even more gilts to get hold of cash to close these margins. This has made the price of gilts collapse and their yields rise rapidly. To stop this vicious circle, the Bank of England had to step in and launch an emergency program of GBP 65bn of purchases of gilts to be carried out over the following fortnight. Meanwhile, the GBP collapsed to its lowest level in recent history. Tory MPs threatened a no-confidence vote on Truss just weeks after having chosen her as their new party leader. Truss and Kwarteng had to meet with the OBR in order to inject confidence into the market, even though the meeting did not end with any sign of a policy U-turn by the government.
Can Liz Truss’s Debacle Teach A Lesson To Giorgia Meloni?
Can Liz Truss’s Debacle Teach A Lesson To Giorgia Meloni?
The question we are asking ourselves is the following: is there any lesson that Giorgia Meloni, likely to be appointed PM in Italy, may learn from Liz Truss? After all, Liz Truss, in spite of all her shortcomings in communicating her policy intentions to the public, is an experienced politician and member of government, who studied Philosophy, Politics and Economics, the famous PPE course of the University of Oxford attended by many prime ministers before her. And Kwasi Kwarteng, after studying at Eton, has obtained various degrees, including a PhD at Cambridge University. In spite of these prestigious pedigrees, they made a mess of their first few days at the helm of the government.
Giorgia Meloni and her closest aids lack the academic background of her UK counterparts, so she may seemingly be starting at a disadvantage. Yet she may be able to learn a few lessons from what happened to Truss and so avoid making the same mistakes. The first lesson to learn is that being a person of conviction only buys you some time and credibility: it is the test with reality that makes the difference, especially if one is extremely convinced about the wrong ideas. The second lesson is to always be surrounded by the best people you can find, not just by acolytes and minions. Finally, never challenge the markets if you have a large amount of debt to refinance. You may end up needing to ask for the intervention of the central bank. In the case of Italy, this is now mediated by the eligibility for TPI, which is subject to a high degree of discretion by the ECB.
As we said in our preview, we do not expect Giorgia Meloni to start her period of PM with bellicose intentions. However, as Liz Truss shows, a couple of wrong moves may transform the honeymoon phase into a debacle. Giorgia Meloni may end up being on a collision course with the markets and European authorities before show knows it.
LATEST RESEARCH
Saudi Arabia Re-Gains Centre Stage in a More Multipolar World
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Flash Review: BOE Raises Rates But Does Not Join The “75bps Hikes” Group on Weakening Economic Activity
Brunello Rosa and Nato Balavadze
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Flash Review: Fed Raises Rates by 75bps, But Announces Slower Hiking Pace Ahead
Brunello Rosa and Nato Balavadze
21 September 2022
Market Views: As the Fed Tightens Monetary Policy, It Needs to Balance Price Stability and Financial Stability
Filippo Ramigni
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With The Far-Right Victory, Italy is About To Do Yet Another Political Experiment
Brunello Rosa and Nouriel Roubini
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A New Reliance? A Proposed Gas Pipeline And The Complicated Picture Of European Energy Security
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The Geopolitical Corner by John Hulsman
A Man-Made Crisis: The International Technocracy Is Culpable in the Assisted Suicide of Sri Lanka
A Man-Made Crisis: The International Technocracy Is Culpable in the Assisted Suicide of Sri Lanka
A Man-Made Crisis: The International Technocracy Is Culpable in the Assisted Suicide of Sri Lanka
by John Hulsman
19 July 2022
Introduction: The Perils of Ignoring the World’s Differences
There is nothing so gut-wrenching in political risk analysis than chronicling man-made crises, which by definition could have been avoided. So much of our world revolves around grand historical forces, which can be mitigated against, but not changed. That is why when one comes upon a crisis that is utterly avoidable, it is more than a tragedy; it amounts to an immoral error.
So it is with the crisis in Sri Lanka, which came to a head last week, after three months of an economic tailspin. The Presidential Palace of Gotabaya Rajapaksa was dramatically sacked by thousands of protestors, boys with T-Shirts who swam in the opulent presidential pool. Reportedly, and in line with the Emerging Market venality that often accompanies such crises, $50,000 was found in a suitcase under the presidential bed. By the end of the week, Rajapaksa had resigned and fled the country, leaving economic chaos in his wake.
So far, on its surface, this sounds like the garden variety implosion of a once-promising Emerging Market economy, a political risk fact of life that roils the international scene at least several times every year. Indeed, there was the standard, generic signs of the chaos to come: Elite corruption and mismanagement; The pandemic crippling tourism (a staple of the Sri Lankan economy); Hyperinflation (which hit a stratospheric 55 percent in June); The hapless government defaulting on its debts; Rolling energy blackouts.
Crucially, the Rajapaska administration advanced politically popular but economically ruinous tax cuts when he came to power in 2019, funded largely by debts accrued to China. Presently, Sri Lanka owes Beijing at least $5 billion, though some estimates put its debt at double this. In addition, the country is on the hook to India for an additional $3.8 billion and Japan for $3.5 billion. As things began to fall apart, Colombo defaulted on $51 billion in international debt in May 2021, after years of heavy borrowing and tax cuts. Crucially, unlike the other major debtor countries, China has shown little inclination to help Sri Lanka restructure its debts, taking its characteristic hard line on debt relief, even as it earlier secured a 99-year lease on Hambantota, the major Sri Lankan port as debt collateral.
A Man-Made Crisis: The International Technocracy Is Culpable in the Assisted Suicide of Sri Lanka
A Man-Made Crisis: The International Technocracy Is Culpable in the Assisted Suicide of Sri Lanka
But this is only the foreground, with conditions not much different from those in Lebanon, Pakistan, and Venezuela. However, the political risk triggering event was far more pernicious and entirely avoidable; the near-psychotic self-harm the Rajapaksa clan did to their country in an effort to curry favor with the international technocracy’s delusions of living in a net (carbon) zero world. To reach the goal of becoming a net zero nation overnight, in April 2021 the Rajapaksas put in place a clumsy, arbitrary, and immediate ban on chemical fertilizers and pesticides, all to gain the coveted ‘organic farming’ sticker so beloved of Davos Man, in a wrongheaded effort to jumpstart Sri Lanka’s food exports.
The results have been as catastrophic as they are predictable. And the western globalist technocratic elite, always looking at the totality of the world, and never (as Lawrence of Arabia did) at the many historical, cultural, economic, and social differences between countries and regions, must be held at least partly to account for the man-made calamity.
The Mandates Are Global, The Price Paid Is Local
Although – due to widespread protests from the farmers who until recently formed the backbone of support for the Rajapaksa political dynasty—the abolition of chemical fertilizers and pesticides came to an end in November 2021, the practical damage had already been done. Only a trickle of fertilizers were actually used on the year’s crops.
[...]
(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. His original writing work can all be found at johnhulsman.substack.com.
Looking Ahead
The Week Ahead
The Quarter Ahead
The Quarter Ahead
Week: 3 - 9 October 2022
The Week Ahead: US Unemployment Seen To Be Unchanged; Composite PMIs To Decrease In EZ And UK, While Rising In the US
In the US, September’s unemployment is expected to stay unchanged at 3.7% and NFPs are likely to decrease to 250K (p: 315K). In September, manufacturing PMI is expected to increase to 51.8 (p: 51.5). Services and Composite PMIs are seen rising to 49.2 (p: 43.7) and to 49.3 (p: 44.6) respectively.
In the EZ, in September, manufacturing and services PMIs are expected to decrease to 48.5 (p: 49.6) and to 48.9 (p: 49.8). Composite PMI is seen decreasing to 48.2 (p: 48.9). August’s retail sales are likely to shrink by -0.5% m-o-m (p: 0.3%) and -1.7% y-o-y (p: -0.%).
In the UK, in September, manufacturing PMI is expected to increase to 48.5 (p: 47.3), whereas services PMI is expected to fall to 49.2 (p: 50.9). Composite PMI is seen decreasing to 48.4 (p: 49.6).
The Quarter Ahead
The Quarter Ahead
The Quarter Ahead
The Quarter Ahead: The EU Agreed On Energy Windfall Levies; Truss And Kwarteng Met OBR; Putin Announced Annexation
The EU countries approved energy windfall levies. Ministers agreed on the levy on fossil fuel companies’ surplus profits made this or next year, another levy on excess revenues low-cost power producers make on skyrocketing electricity costs and a mandatory 5% cut in electricity use during peak price periods. EU member states began discussing the EU-wide price cap, with many countries preferring a broader gas price cap, whereas - for example - Germany remains opposed to that.
UK PM Truss and Chancellor Kwarteng met the Office for Budget Responsibility (OBR). As OBR stated, it has been asked by Kwarteng to produce the first piece of its next economic forecasts on October 7 ahead of the planned budget statement on November 23. Following Kwarteng’s ‘mini-budget’, the pound plummeted to a record low and the market entered turmoil.
Moscow is expected to recognize four Ukrainian regions as Russia – Luhansk, Donetsk, Kherson and Zaporizhzhia. Russia’s President Putin vowed to use ‘all the means’ at Russia’s disposal to defend the territory, leading to further escalation in the war against Ukraine. Putin announced the illegal annexation of Ukrainian regions, saying people there will become Russian citizens ‘forever’.
Hurricane Ian moves across Florida, Georgia and Carolina after the Cayman Islands and Cuba. Biden warns of ‘substantial loss of life’. More than 2 million people still had no power on Friday morning.