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R&R Weekly Column

History is On the Move in the Anglosphere

by Brunello Rosa

12 November 2018


Important events occurred both in the US and the UK last week, events which deserve plenty of attention from investors. In the US, President Trump’s Republican Party managed to increase its majority in the Senate and win the majority of gubernatorial races, but lost its control of the House of Representatives. As we will discuss at length in our upcoming report on the results of this election, the Democrats managed to elect to Congress a number of high-profile first time politicians (including Alexandria Ocasio-Cortez), but the “blue wave” many had expected did not materialise. The Democrats will now be able to scrutinise the Trump administration’s actions more closely (and possibly even launch an impeachment process), and choose whether or not to block legislation initiatives the Republicans might put forth, such as a new round of tax cuts or a serious infrastructure spending program. Nevertheless, if the Democrats want to win the presidential race in 2020, they need to start trying to identify a suitable candidate soon. In fact, in spite of losing control of the House, Trump felt emboldened by the election results. Following the election, he pushed attorney general Jeff Session to resign, thus putting the future of the Mueller’s investigation in doubt. With Trump's domestic agenda perhaps likely to be blocked by the Democratic majority in the House, will Trump focus on foreign policy instead, as most presidents tend to do during the second half of their terms in office?  As we discussed in a recent report, there is a risk of there being a wag-the-dog moment in 2020, if Trump is tempted to embark upon military adventures in order to secure a second term. 

Meanwhile, the new round of sanctions on Iran has indirectly led to a fall in oil prices, as other countries increased their production. Oil prices have now entered a bear market, after having recently touched their 2018 highs. In forthcoming research, we will update our outlook for oil in coming years

Click here to read previous columns

If a new round of US tax as cuts becomes less likely, the risk of inflation surprises would be reduced, and the likelihood that the Fed will need to speed up its pace of tightening will be lower as a result. This has helped the bull flattening of the US Treasury curve, with the long end of the curve remaining in check in spite of the near certainty of there being a fourth 25-bps increase in the Fed funds rate in December, after this week’s FOMC meeting. The long end of the yield curve also remains anchored by persistently low Japanese long-term yields. (In our recent BOJ report we discuss why we believe this is likely to continue well into 2019.)   

On the other side of the Atlantic, as we discussed in our recent UK trip report, Brexit negotiations are now entering crunch time. The days ahead will be crucial; an agreement between the EU and the UK ideally needs to be reached in time for EU President Tusk to call a special EU summit by the end of November and pass the “deal” through the British parliament before Christmas, leaving enough time for other European parliaments to ratify this “divorce deal.” This schedule might prove to be too optimistic, however. There is a risk that a political and economic crisis might first be needed in order to break the impasse that exists between the UK and the EU. 

As a proof of this, on Friday the British government lost another key member: Transport Secretary Jo Johnson (brother to former foreign secretary Boris) resigned, while calling for a second referendum in which three choices should be available to voters: accept a deal potentially brought back by Theresa May, leave the EU without a deal, or remain in the EU. This week might prove essential to see whether the government and the EU might at least agree on a withdrawal deal. (Whether the British government's cabinet and, more importantly, Britain's parliament will accept such a deal, is of course a different matter). It will be some time yet before all this uncertainty is dissipated. 

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The Geopolitical Corner by John Hulsman

The Damage Merkel Has Wrought

9 November 2018 

Après nous le déluge”  - Louis XIV

Introduction: The false metrics of Merkel’s ‘success’

So rightly discredited is the western foreign policy commentariat that it reminds me of nothing so much as the former cheerleaders for Yasser Arafat. In my Washington days, I remember ruefully telling a colleague that if the PLO leader’s apologists told me to go up I’d go down, to go north I’d go south, and to turn I’d go straight, so predictably awful was their analysis of the world. But in lionising Chancellor Angela Merkel, who has announced her all-too-slow retirement from German politics this week (she intends to relinquish the CDU party presidency this December, while remaining chancellor until the end of her fourth term in 2021), the commentariat has joined the dubious Arafat pantheon of lauding one of the most overrated leaders of the modern era.

So addled has the commentariat become that the Merkel ‘success story’ makes it plain they have forgotten what genuine success actually looks like. A simple thought experiment makes this glaringly clear. Imagine what the embattled chancellor’s valedictory would look like if she had actually accomplished anything. “Today, Chancellor Angela Merkel, the long-time colossus of European politics and the leader who transformed a crisis-plagued EU into the world power it is today, announced her gradual retirement from the world stage. Merkel, the policy giant who mastered the three-headed monster of the euro, migration, and EU crises, also successfully stood down the malign forces of populism, transforming a then-stagnant European Union into the forward-looking economic, social, and political success story that it is today. She leaves the scene with her historical reputation for policy and political success secure.” Of course, anyone actually believing this lives in a parallel universe. For in the real world, policy success means actually doing something that works.

The commentariat make two lame arguments as to why, all appearances to the contrary, the hapless German chancellor was successful. First, they note her long tenure at the epicentre of power, having been German CDU leader since 2000 and chancellor since 2005. This is similar to the wan efforts of Hillary Clinton supporters, who when pressed for a concrete policy example of her ‘successes’ of Secretary of State, note how many miles she logged on the job.

It is a fact that signifies nothing in terms of the policy matter at hand, only pitifully attempting the change the subject. Mediocre French King Louis XV sat for generations on the French throne, without accomplishing much of anything, other than (as the epigram which begins this piece makes clear) to know that given his policy ineptitude, the Bourbon monarchy was not long for this world. No, time serving is not the same thing as policy success. In fact, it is often just the contrary, amounting to time wasted that tips great powers into structural and irredeemable crisis.

The second lame argument put forward in Merkel’s defence is that, while she didn’t ‘solve’ crises, she did ‘manage’ them. The best that can be made of this apologist’s position is that while Merkel never mastered the policy challenges in front of her, neither did she allow them to absolutely destroy either the German or European polities. In other words, while Merkel kept throwing policy plates in the air that she never caught, she also saw that they didn’t hit the ground. 

If that is the best that can be said for any leader, it is not much. For it leaves out the factors of time and policy gravity from the equation. As was true for Louis XV (not often seen now as a roaring success by historians), a failure to master problems means that they often fester, become infected, and grow irredeemably worse. And policy gravity means that they simply do not go away, either. To put it mildly, if the best you can say in lionising the German chancellor is that she is a pocket Louis XV, pardon me if I don’t break into hosannas. 

Four policy strikes and you are out

For beyond the smoke and mirrors, the simple fact remains Merkel failed at all four major policy challenges that confronted her (the Eurozone crisis, the migration crisis, the EU crisis, and the rise of populism), leaving the European continent in absolute decline. The chancellor’s characteristically middling line over the euro crisis was the worst of all worlds. It was neither stringent enough to structurally eradicate the economic problems in the southern European periphery Thatcher-style, nor accommodative enough to lessen the serious social and economic costs there.

Read Previous Geopolitical Comments by John Hulsman

While her position played well with German voters at the time, it also surely fuelled support for populist movements in southern Europe, from the far-right Golden Dawn in Greece, to the League and Five Star governing parties in Italy, to the far-left Podemos in Spain. Populism surged, and worse the chancellor gave the new parties a powerful narrative to politically sell, that German bungling had directly caused them great social and political pain, and all without ‘solving’ the euro crisis, as the present looming storm over Italy makes crystal clear.

Likewise, the surprise election of French president Emmanuel Macron called the German bluff on wide-ranging EU reform. For fully a decade, the Merkel regime made the sensible enough argument that root-and-branch EU reform was impossible until the French were actually serious about structural economic reform. That is, there could be no significant deepening of European institutions without a corresponding assurance to the German people that ‘EU reform’ was not simply a way for France and the rest of the feckless continent to pick Germany’s pockets.

But then Macron did the unthinkable; he actually managed to pass labour market reform in France, the policy holy grail thought impossible by many. Following just on from his arrestingly successful presidential campaign, and with his enemies of both the left and the right in disarray, Macron pitched the reform as France fulfilling its end of the EU bargain, assuring voters that with the heavy lifting done, Merkel was sure to at last follow through on her pledge to support significant EU reform. And the 

German response? (Cue the sound of crickets). Merkel’s embarrassed silence in the face of President Macron’s entirely justified pleas that she honour her end of the policy bargain have had significant and deleterious consequences for the French president in particular, and the European reform programme in general. His grand EU plans exposed as a fantasy without real German buy-in, Macron now (as of October 2018) has a miserable approval rating of only 21%, the lowest ebb since his election in 2017. In making it clear she never truly meant to countenance serious EU reform, Merkel has unwittingly destabilised Macron, her most promising ally. Hardly the stuff of world statesmanship, is it?

Crucially, her warm-hearted and bone-headed decision to leave Germany’s borders open at the height of the migration crisis in 2015 was her major undoing. Rather pathetically saying that Germany ‘can do this’ in the end did not make up for the glaring lack of a policy plan for actually assimilating 1.1 million people all at once. ‘We can do this’ worked alright as a bumper sticker and for a few weeks after the decision was made. But, predictably, over the longer term as the lack of planning and infrastructure for making such an ambitious policy a success became all-too clear, the chancellor’s authority was fatally sapped.

Merkel’s failed policy fundamentally divided her country, leading directly to the resurrection of the far-right AfD, which has incredibly ridden the migration crisis to become the official opposition party in the German parliament. After Germany’s failure to deal with the migration crisis, the chancellor’s authority also waned at the European level as well.

The anti-immigrant right, on the rise in Hungary, Poland, and Italy, contemptuously faced down German-inspired EU demands for a show of solidarity over Merkel’s hasty pledge: They flatly rejected the EU-wide immigration resettlement quotas that were imposed by majority voting at the European level. Quickly vanishing was any talk of fining or punishing the populist rebels, as even Merkel realised that doing so would only lead to a spike in their popularity in facing down Brussels and Germany, a vote-winner if ever there was one.

Conclusion: An utterly abysmal record

In order for political risk analysis to be useful, above all analysts must see what they are analysing as it actually is, and not as they wish it to be. At one level, it is not surprising that the western foreign policy commentariat, majority Wilsonian to its core, should have affection for a long-serving Wilsonian leader, whatever the nature of her real record. It is very human, but also very disastrous, for businesses, investors, and governments, alike.

For after any cursory glance at the actual, factual record of Angela Merkel, only one overarching conclusion is possible. This is a failed leader, who mastered not a single major policy challenge during her seemingly endless reign as the most powerful leader in Europe. The Europe of today—economically weak, politically divided, and militarily almost non-existent—is indeed her legacy.

And what a disastrous legacy it is. Apres nous, le deluge, indeed.

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. 

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Looking Ahead

The Week Ahead

Week  12 - 18 November 2018


In the US and the EZ, inflation is expected to remain slightly above the CB’s targets. Inflation data in the US (October y-o-y, c: 2.4%; p: 2.3%) and the EZ (October y-o-y, c: 2.2%; p: 2.2%) are anticipated to come in above the Fed and ECB’s target of 2%. 

The Quarter Ahead


In the US, the result of the mid-term elections is unlikely to influence the monetary policy outlook. Last week, the Democrats took control of the House of Representatives while Republicans increased their majority in the Senate. The risk of legislative stasis is rising: while infrastructure spending could become an area of bipartisan collaboration, it is unlikely that the Democrats will wont to make such a huge political favour to the President. In the FOMC November meeting, the Fed confirmed its intention to hike rates in December, based on a bullish outlook for the US economy. The market-implied likelihood of a hike in December fell marginally to 75.8% (pw: 79.0%). Until year-end, the USD is expected to strengthen.

In the EU, growth is likely to decelerate… The EZ composite PMI fell to 53.1 in October (c: 52.7; p: 54.1), the lowest level since September 2016, while the Sentix index, a gauge of business expectations, fell to its weakest level since 2014. Italy’s composite PMI dropped to 49.3, suggesting an upcoming contraction 

and political tension will remain high. Last week, Italian bonds came under pressure—the 10y bond rose by 9 bps to 3.40%—after the EC published updated economic projections in which Italy is expected to breach the 3% fiscal deficit target. In the UK, the GBP slipped back below USD1.30, after the abrupt resignation of the transport minister raised doubts about PM Theresa May reaching a Brexit deal with the EU by end-November. 


In Turkey, policy normalization is likely to negatively impact growth. The anti-inflation program has yet to succeed: last week, prices reached a 15-year high (CPI October, a: 25.2% y-o-y; c: 24.5%; p: 24.5%). Eventually, lower fiscal spending will have a negative impact on consumption: last week, Moody’s and the EC revised down 2019 growth forecasts (to -3.0 and -1.5% respectively). The TRY weakened by -0.6%% w-o-w to USD/TRY 5.460.

Demand for GCC fixed income is likely to remain strong. Last week, Bahrain’s state-owned oil company Nogaholding (BB- by Fitch) raised USD1bn (a USD500m 6y bond at 7.625% and a USD500m 10y bond at 8.375%). The issuance—the first by a Bahraini entity since the country’s GCC allies delivered a financial aid package last month—was 2.5 times oversubscribed.

In the GCC, oil output will rise. Last week: a) Abu Dhabi unveiled a USD132bn investment plan to boost oil output from the current 3mb/d to 4 by 2020 and 5mb/d by 2030; and b) Kuwait announced plans to increase its output capacity for light crude oil to 250,000 b/d (from 175,000 now) and initiated exports of this new oil grade. 

Oil prices will continue to decline because of a higher-than-expected supply. WTI prices entered a bear market (a 20% decline since their peak in October), due to: a) the exemptions granted by the US last week to eight importers of Iranian oil; b) pledges by the KSA to rise output; and c) an increase in US stockpiles. Opec and Russia met in Abu Dhabi to discuss output cuts for next year of about 1 million b/d. Analysts are revising down (to less than USD80/b) their end-2018 forecasts to take into account the higher-than-expected supply.    

Last week's Summary (5- 11 November 2018)

DM stocks reacted positively to news from the US

The Fed’s bullish assessment of the economy and the decline in uncertainty after the midterm elections lifted US equities (S&P 500, +2.1%; Eurostoxx 50, +0.5%). In EMs, concerns about rising interest rates led to price declines (MSCI EMs, -2.1%). Global stocks remained stable (MSCI ACWI, +0.9%) and volatility fell below its 10y average (VIX, -2.1 points to 17.4; 52w avg.: 14.9; 10y avg.: 18.9). In the fixed income space, bonds returns were flat (BAML Global bond index +0.1% w-o-w) across most markets (S&P Global DMs, -0.1%; BAML EMs, 0.0%); the yields of bonds perceived as “safe” remained stable (UST 10y, -3bps to 3.19%; Germany -3bps to 0.41%).

The USD strengthened w-o-w against: 1) a currency basket (DXY, +0.4%); and 2) the EUR (EUR/USD -0.4%, to 1.133), while EMs currencies remained flat (MSCI EM Currency index, +0.0%). 

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