Rosa & Roubini Associates

118 Pall Mall London SW1Y 5ED | +44(0)207 1010 718

Rosa & Roubini Associates is a consultancy firm providing independent research and advisory services

To discuss subscribing to our services, please contact us

Independent Research and Advisory Services

Weekly Column

image77

Latest Research

image78

Geopolitical Corner

image79

Looking Ahead

image80

Last Week's Summary

image81

Latest Working Paper

image82

A More Balance Policy Mix and Helicopter Put Are Likely To Support Risky Asset Prices In 2020

If you want to activate a trial of our research and services


CALL US ON  +44 (0)207 1010 718

R&R Weekly Column

US Foes Will Take Advantage Of The 2020 Election And Impeachment Trial

image83

by Brunello Rosa


20 January 2020

   

At the end of last year, in our paper on the six Grey Swans facing the global economy, and in our 2020 Global Economic Outlook, we said that geopolitical instability was set to increase during the US election year ahead. The strategic calculus by Trump to secure his re-election, going into 2020, was to make sure that the US economy was as strong as possible (perhaps with a bit of help from the three insurance rate cuts “independently” delivered by the Fed in 2019, which came after plenty of pressure was put on the Fed by the President), while closing some of the open geopolitical fronts, in particular the trade dispute with China


In fact, Trump’s “art of the deal” consists of brutally shaking his counterpart before inviting it to the negotiation table and concluding a deal on more favourable terms for himself. Following this paradigm, Trump had a window of opportunity from the mid-term elections until 2020 to unsettle the system and shake his opponents, in order to then use 2020 as the period to reach compromises with his negotiating partners that he could “sell” as victories to the US public during the electoral campaign. But, as we mentioned in previous analysis, while this tactics might work in the corporate sector, where an aggressively confrontational approach could lead the counterpart to the brink of bankruptcy and therefore make it more willing to accept the harsh terms that Trump offers, in public affairs things are not that simple. States do not go bankrupt that easily, and opponents can react in unexpected ways. 


So, while Trump’s preferred choice could have been that of having a strong economy and some tail risks reduced (risks such Brexit; during Trump’s intrusion in the recent electoral campaign in the UK, he basically “ordered” Nigel Farage to step back and allow Johnson’s victory), his opponents saw a clear opportunity in 2020 to “mess things up” in order to jeopardise Trump’s re-election. Domestically, the Democrats have launched an impeachment trial, which is unlikely to succeed but will still keep Trump on his toes and will expose him on a number of fronts. 

image84

  

  






The delay in sending the impeachment article to the Senate, while being borderline acceptable, has prevented Trump from having the news on the impeachment obfuscated by escalating tensions with Iran that would have otherwise occurred at the same time as one another.   

  

Internationally, Iran is clearly at the forefront of the historical foes that would like to see Trump go, hoping to get a Democratic president to deal with instead. This is the reason why we believe that Iran will do much more in coming months to retaliate against the killing of Qassem Suleimani, and why we believe the market is under-pricing the risk of a further escalation down the line, closer to the election date. According to press reports, Kim Jong UN sacked its “moderate” foreign minister Ri Yong Ho, replacing him with the more hawkish Ri Son Gwon. This is seen by the intelligence community as a signal that a season of testing of ballistic missiles (launching them over key regional allies such as Japan) is about to re-start, after a period of pause


China remains the big unknown: signing the Phase-1 deal certainly gives Trump a trophy to show during the electoral campaign, and gives China the much needed break in the escalation of tariffs. At the same time, it is clear that the trade, technological and geo-strategic dispute between the two countries will continue. One possible interpretation is that China, instead of wanting to see Trump leave office, might prefer having him remain for a second term, given the damage he is doing to the US and their international relations.


All this is to say that the historical foes of the US will use the opportunity of this electoral year and Trump’s impeachment trial to take advantage of the difficulty Trump will face in providing anything other a constrained response to any moves they may make. If Trump goes from disputes to battles to open wars, he would tip the economy into recession, thus jeopardising his re-election. As such, his options this year will be relatively limited. 2020 will be most likely “a year lived dangerously” for the world.   

LATEST RESEARCH

ECB On Hold As Downside Risks Modestly Fade, While Launching The Strategic Review

image85

by Brunello Rosa and Nouriel Roubini

20 January 2020

POLICY COMPASS - Getting Ready For The Brexit “Adjustment”

image86

by Brunello Rosa and Nouriel Roubini

17 January 2020

Norges Bank To Remain On Hold In January, While Keeping Its Modest Hiking Bias

image87

by Brunello Rosa and Nouriel Roubini

17 January 2020

Flash Review: BoJ Remains on Hold With An Easing Bias, While Revising Down Its Inflation Outlook, and Up Its Growth Outlook

image88

 by Brunello Rosa and Farah Aladsani

21 January 2020

Flash Preview: As The Economy Stabilises, Bank of Canada Remains on Hold

image89

by Brunello Rosa and Farah Aladsani 

17 January 2020

Bank of England Moving Closer To Cutting Rates

image90

  by Brunello Rosa and Nouriel Roubini

16 January 2020

The Geopolitical Corner by John Hulsman

Over Impeachment, The Democrats’ Hatred Is Backfiring

image91

14 January 2020

  

  

Introduction: The Cataclysmic Damage Of Trump Derangement Syndrome


Hatred, like love, can make otherwise sane people do extraordinarily reckless things. And let there be no doubt: The base of the Democratic Party, even more than its leadership, hates Donald Trump with every fibre of its being. And it was the base, more than its leadership, that pushed the House of Representatives, controlled by the Democrats, to impeach President Trump, in a move that is presently backfiring.


There are many reasons for this, some the president’s fault and others not. His braggadocio, pride in his lack of deep-seated knowledge (relying instead on his own erratic impulses), disdain for long-established American political traditions, and impulse control of a toddler, enrage millions. But even more than this, his shocking 2016 victory upends the established, settled world view of most of the people living on both American coasts, calling into question their very understanding of how the world works. 


Dolefully, Democrats and others have jettisoned the fact of Trump’s victory, attributing it to sinister forces (i.e. poorly constructed Russian bots somehow brainwashing the state of Wisconsin while ignoring the reality that Hillary Clinton failed to set foot there) so that jarring reality can be explained away, rather than indulging in a painful reappraisal of their view of the world. 


Over these past four years I have pleaded with my Democratic friends in Washington to get over it, accept Trump’s victory and fight him on the merits of policies, rather than demonising him as a man, which will only rally his steadfastly loyal base (between 35-45% of the voting public) even more rabidly to his cause. But Trump Derangement Syndrome (TDS) is a powerful force. In the present impeachment imbroglio, it is crystal clear that the Democrats haven’t moved on. Indeed, that they seem psychologically incapable of getting over 2016. 


Of course, TDS has significant real-world political-risk consequences. To start with, over impeachment the Democrats have lost intellectual sight of the forest for the trees. Ironically, they are endangering the Constitution due to TDS in the very ways they are accusing their great hate object of doing. The results of the impeachment circus are clear; the Democrats in their emotional folly are engaging in an act of great political self-harm, ironically improving the president’s chances for victory in 2020. 


 [...]


The Political Fallout From TDS


Predictably, the poll numbers have not rewarded the Democrats for making it very clear, that in their hatred, there are merely shopping for a crime (any crime) to convict and remove the president, however tenuous. A Gallup poll released just before the impeachment votes in the House, December 18, 2019, found the president’s approval rating up, even as support for impeachment and removal has been dipping. 


According to Gallup, Trump’s approval rating has risen since the opening of the House’s formal impeachment inquiry in October 2019 from 39% to 45%, while support for impeachment and removal have declined over this period from 52-46%. An average of six recent polls illustrates that 46% favour impeachment and removal even as 49% now do not. To put it mildly, the rest of the country simply isn’t buying the Democrats’ tortured impeachment narrative. 

image92





Even more alarmingly, a December 8, 2019 quarterly Firehouse Strategy poll found Trump now ahead of all of his primary Democratic rivals for the first time in the three battleground states of Michigan, Pennsylvania, and Wisconsin, with impeachment providing the most likely answer as to the change. Whereas before the president was struggling in all three states, after the circus-like atmosphere of impeachment, voters in these pivotal states have changed their minds. 


Trump leads all his major Democratic challengers by an average of six points in all the hypothetical state contests (even Biden, his closest challenger, who has long been ahead of him in the rustbelt). Strikingly, Trump now leads Biden: 46-41% in Michigan, 46-41% in Pennsylvania, and 48-39% in Wisconsin. It seems the Democrats’ TDS, manifested in this impeachment farce, has mighty political consequences.


Conclusion: The Iran Wild Card


There is little doubt that the impeachment drama, as was true for Bill Clinton, has boomeranged against President Trump’s enemies, giving him a mighty leg up towards re-election. However, there is a final wild card that must be mentioned, if only in passing, that could alter this heretofore decisive political event, that of the near-war with Iran. 


While it is easy (and far too often mentioned) to overdo the ‘wag the dog’ analogy about US politics, the present US stance against Iran eerily mirrors the White House uneasily domestically balancing between the two large foreign policy factions within the Republican Party which both back him: realist-minded Jacksonians, and more hawkish traditional members of the GOP. 


A modified ‘wag the dog’ assessment would note that historically every American president since the hapless Jimmy Carter knows in the year prior to re-election, in order to have any chance of winning he must be seen to stand strong in the wider world. As such, any true conciliatory gestures towards Iran are highly unlikely to be forthcoming. Trump himself has tried to draw a parallel with Carter’s episode, in which 52 American diplomats and citizens were held hostage for 444 days (from November 4, 1979, to January 20, 1981) after Iran took over the US Embassy in Tehran. Trump said that there were 52 Iranian sites that were considered as possible targets of the US military, a number exactly symbolically corresponding to the number of hostages taken.


However, paradoxically and also by ideological predisposition, the last thing Trump wants is to be further enmeshed in the thankless Middle East, in agreement with his Jacksonian base. It is vital—given that the 2020 election is likely to be very close—that Trump keep both Republican camps happy, something he has just about managed to do up until now. For to lose the wholehearted support of either faction would doubtless doom him. The problem for Trump is that the enemy—in this case Iran—also gets a vote. This highly volatile crisis could still yet undo all the good impeachment has politically done the president. Stay tuned.   


(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. 

Looking Ahead

The Week Ahead

image93

Week 20 - 26 January 2020 

  

Manufacturing PMIs Expected To Recover In US, EZ and Japan, Loan Prime Rates To Fall In China 


In the US, January PMI data are expected above the 50-benchmark, and are likely to show: i) an improvement in manufacturing to 52.5 (p: 52.4); and ii) a weakening in services to 51.9 (p: 52.8).


In the EZ, manufacturing PMI data is expected to show a recovery in January (c: 47.3; p: 46.3), while the services PMI is likely to show a decline (c: 52.0; p: 52.8). The ECB is expected to keep its interest and deposit rate unchanged at 0%, and -0.5% respectively.


In Japan, November’s IP is expected to remain unchanged at -8.1% y-o-y, while January’s manufacturing PMI data is anticipated to improve to 48.7 (p: 48.4), remaining below the 50-benchmark. The BoJ is expected to leave its interest rate unchanged at -0.1%, but stated its “willingness to cut rates in order to accommodate for economic expansion”.


In China, to boost lending, support the financial sector, the PBoC is expected to cut its loan prime rate by 20bps to 3.95% (p: 4.15%). 

The Quarter Ahead

image94


 

The Quarter Ahead: Geopolitical Risks Recede, But Remain Elevated


The US and China signed the “phase one trade deal”, effective next month. The deal commits China to: 1) buy an additional USD 200bn of US goods and services during 2020-21, over “its 2017 baseline purchases”; 2) refrain from currency manipulation; 3) expedite financial sector liberalization; 4) tighten “oversight against IP theft”; and 5) refrain from “forced technology transfer”. In return, the US has agreed to halve - to 7.5% - tariffs on USD 120bn worth of Chinese imports, but kept “unchanged the 25% duties on USD 250bn worth of goods”.


In the US, the House of Representatives voted to “send the articles of impeachment against President Trump to the Senate”, taking the procedural step necessary for the trial to begin. In the third presidential impeachment in US history, President Trump is overwhelmingly expected to be acquitted and remain in office, supported by the Senate’s Republican majority. 


In the US, the Fed expressed confidence with borrowing costs being “at the right level to sustain growth, and lift inflation to healthier levels” – inducing the market-probability of a ‘one rate cut’ in 2020 to decline to 54% (p: 66%).


In the EU, the UK is set to leave the EU on January 31, but the post-Brexit arrangements remain unclear. The EU commission is likely to take a firm stance, as “Brussels has never done a ‘zero-tariff’ deal with another major economic power”. To prepare, the EU negotiating team is holding a series of seminars for diplomats from the 27-member states.


In Turkey, the MPC's cut of the one-week repo rate by 75bps to 11.25%, combined with the increase in headline inflation to 11.8% y-o-y in December, reduced Turkey's real interest rate to -0.6%; according to Fitch Ratings “the large reduction since last summer in real interest rates continues to weigh on Turkey's sovereign rating of BB-/Stable”. The negative real interest rate also increases risks of “renewed pressure on the TRY, and greater stress on bank and corporate balance sheets”. 

Last week's Summary (13 - 19 January 2020)

  

Real Economy: Global Economic Sentiment Improves, Global Trade To Reignite


In the US, retail sales remained flat (Dec., a: 0.3% m-o-m; c: 0.3; p: 0.3), while IP declined more-than-expected in December (a: -0.3% m-o-m; c: -0.2; p: 0.8). December’s CPI data strengthened in line with expectations, to 2.3% y-o-y (p: 2.1). 


In the EZ, November’s IP data strengthened less than expected, remaining in contractionary territory (a: -1.5% y-o-y; c: -1.1; p: -2.6). 


In China, Q4-2019 GDP stalled at 6%, in line with expectations (p: 6.0). 


In Turkey, the MPC cut its policy rate by 75bps to 11.25%, leaving the door open for “further measured rate cuts”.



 

Financial Markets: After The Improvement In Economic Conditions, The Risk-On Mood Is Back


Market drivers: Over the week, most markets rose across all asset classes; US and EZ equities hit record highs, and bond saw limited gains. 


Stocks: w-o-w, global indices rose to a record high (MSCI ACWI, +1.5% at 579), driven by DMs (S&P 500, +2.0% to 3,330; Eurostoxx 50, +0.5% to 3,808); EMs also rose to new highs (MSCI EMs, +1.2% to 1,147). 


Bonds: w-o-w, returns rose slightly (BAML Global, +0.1% to 285.7); across DMs the upside in yields was limited, suggesting that investors feel the current economic conditions remain supportive of fixed-income (10y UST, +1 bps to 1.84%; 10y German bund, +2 bps to -0.21%). 


FX: w-o-w, the USD strengthened against other currencies (DXY, +0.3% to 97.606), the EUR depreciated slightly (EUR/USD, -0.3% to 1.109) and the JPY fell to a seven-month lows (USD/JPY, -0.6% to 110.140). 


Commodities: w-o-w, oil prices fell slightly (Brent, -0.2% to 64.9 USD/b), as well as gold (-0.4% to 1,556 USD/Oz.) hampered by the risk-on mood.  

Read R&R's Past ViewsLetters

Contact Us

Info

For any enquiry please send an email to:


info@rosa-roubini-associates.com

Rosa & Roubini Associates

118 Pall Mall, St. James's, London SW1Y 5ED, United Kingdom

+44 (0)207 1010 718