January 6th and so much has happened already… Stock markets hit a new record high on the opening day, Australia’s wildfires became very serious, and Donald Trump pressed the start button on World War Three. An exuberant market, a natural disaster, and unfathomable geopolitical calculations are the kind of stuff market strategists should be hitting for six every day.
Each of these seemingly unrelated events will trigger immediate impacts across their zone of effect. But, it’s as a collective of events they really matter. Squint your eyes hard enough and stare at them – hard. They are likely to prove thematic. They are all trending in the same direction; towards further instability, unpredictability, and unsustainability.
Excellent! That will keep me busy! The first six days of the new decade are already challenging us to think past the headlines – it’s consequences that are going to matter.
Let’s look at all three events in more detail…
There is literally nothing to stop markets going higher – and that is unnatural and deeply disturbing. Get used to it, and live with it.
At the Macro Level downside risks are limited by the reality central banks and the authorities will do literally anything to avoid a financial meltdown. Although the apparent issue is too much money chasing too few financial assets – secular stagnation across the Occident means there is no real inflationary threat to worry about. The consequence is continued financial asset inflation until either that confidence in Central Banks breaks down, (see sentence 1 of this paragraph to understand why that is unlikely to happen), real inflation accelerates, or the strength of markets is justified by fundamentals. Watch out for all three.
This year we were expecting 2019’s recession fears to recede, and economies to be supported by positive consumption as consumers stop worrying about recession and bring forward planned spending (boosted by the good vibe engendered by the strong markets!). Instead we now have concerns about oil prices, a Middle East War and the risks of geopolitical contagion to worry about. Nothing ever really changes…..
What’s the right investment call when faced by yet more Middle East worry? In the absence of other drivers, let others panic, and look to buy assets cheap!
The corollary of the underlying upside Macro dynamic for markets is negatives at the micro level will tend to get greater attention. It’s human nature to want to see things fail – really! Who was actually sad that Adam Neumann of We-Work got justly gubbed last year? Folk remain suspicious, and despite the fact it should literally be impossible to lose money in markets because of central banks, fund managers will want to be seen earning their money by been seen to be doing the right thing – which is why anything that looks in breach of ESG guidelines, like coal (witness LatAm countries pleading with coal players not to pull out), corporate governance, or underperformance will likely be spanked hard.
Wildfires in Australia
The footage from Oz has been shocking. Australia has never been so dry, suffered such high temperatures, and still faces months more of the burning season before there will be any respite. There is no dispute its largely due to changing weather patterns. Whether these changes are due to carbon emissions, solar cycles, or wobbly orbits is utterly immaterial. It’s happening on the screens in front of us. It demands action.
The question is what? Blame the government because it supported coal exports to keep the economy stable? Spend more on forest and bush management and fire prevention? Horse and stable door moment. Look at long-term projections and figure where the ecosystem heads next? It’s tough to take policy decisions when unpredictability reigns.
More to the point, what Australia faces today in terms of climate challenge, other countries will face in coming years – perhaps months – in term of extreme weather events or sea levels. The consequences will be fiscal and political.
Trump and the Middle East
Of course, the major immediate concern for markets is the distraction caused by Trump’s assassination of Iranian General Soleimani. The markets are unlikely to let it trouble them for long. The reality is Trump lashed out, and surprised the Iranians. He’s followed up with aggressive Tweet-plomacy warning of further pain if they react. Trump has surprised the analyst-intelligentsia community even more. Assassinating a senior figure from a rival government isn’t what 21st Century world leaders are supposed to do – but it’s pure Trump. It’s likely to change to game completely. While it has utterly wrong-footed the Iranians, it should also leave analysts wondering what else is now possible.
The Saudis will be delighted. The Iranians face an asymmetric fight they can’t win, but have to take on. They have very limited real resources to fight the US with. They can bluster about their nuclear vengeance, expend waves of proxy militias against entrenched American embassies, or they might try to pick off targets in the Straits of Hormuz with limited upside. Their cyber-capabilities might have some effect, but any terrorist successes will be limited. Anything they do will be punished – dramatically. Film of airstrikes will play well during a US election year.
The threat posed by the Iranians might be very real in terms of effects in the Middle East – but does Trump care? As long as it’s contained, then not really. If Iran continues to bluster but does nothing, then its economy will continue its slide into collapse. If they act, and Trump retaliates, then that collapse comes so much sooner.
It was the first fracture of Islamic history that left Iran on the wrong side of the Arab Conquests as the successor of the Prophet slew the Prophet’s grandson Hussein Ibn Ali at the battle of Karbala. The Iranian’s want their brand of Shiite (The party of Ali) Islam imposed across their region, which is the antithesis of what the Saudi Sunnis’ want. Nothing is complex as religious disagreement.
There may even be a pay-off. The Iranians don’t consider themselves Arabs, and have ambition and skills in abundance. They are a proud race with 5000 years of trading history. They have a burning desire to get rich – which is what ultimately brought down and forced change in Russia, so why not Iran also?
A few years ago, myself and a senior manager from my previous firm went to meet an Iranian delegation in Paris looking for finance for transport infrastructure projects. The French had already picked off what looked to be lucrative aviation finance opportunities, while I was interested in financing rail and shipping assets. However, it was quickly made clear to my colleague and I that if we wanted to be involved in financing these assets we’d need to make a number of “facilitation” payments first – as the smiling Iranian’s around the table made clear. They were all sporting expensive watches, new shoes and the greed was shining in their eyes.
I can’t but wonder how much truth there is in Iran’s latest threat to reveal the European politicians who took backhanders on the last Iran deal.
These three events characterise the market thus far into 2020 – uncertainty, instability and questions of sustainability. There is, of course, other stuff to consider. Let’s applaud Carlos Ghosn’s escape from Japan, but equally can we support such a breach of law and order?
Bill Blain is a well-known City of London commentator, and has 35 years’ market experience as an investment banker. He currently is Strategist at Shard Capital, a London-based boutique.