The Great Unknown

Global Leaders…...Really

A subject I may have hit upon before is the fact that no matter how hard you stare at a chart it isn't going to tell you when a snap election is going to be called in the U.K. or Donald Trump is going to do something un-Presidential and possibly illegal.

Politics have been the major driver for markets in the first half of 2017 first half of 2017 and no matter that the elections in The Netherlands, France and the U.K. will be over, there will still be political distractions to drive the market. We still have Brexit and the German election to look forward to (?).

Is Brexit political? Well It seems so. The ruling Conservative Party have become the Party of leave and the opposition Labour and Liberal Democrats have become the parties of remain. The media have driven an interesting game of intellectual will versus the will of the people.

Remain is an intellectually sound argument if you only look at the social side of the E.U. It is noble to bring all peoples together to avoid war and to help those less fortunate souls in the East who suffered so terribly under Communism.

However, it is also a wholly sound argument to ask who is going to pay for all this social conscience towards our less fortunate neighbors. The mood of the British people was clearly more radical than had been imagined.

With the election in the U.K. imminent, political stability is being bandied around as the watchword of the Conservatives. I would have said that whoever wins will provide stability as they will be in power for the next five years at least. A famous Labour Prime Minister once remarked that a week is a long time in politics. Five years must therefore be an eternity. Many commentators are predicting it will be an actual eternity before Labour get elected again.

But what of The Netherlands and France and the political machinations that were supposed to cause mayhem. Well the Dutch election was won by a man so interesting that the most fascinating fact the press could conjure was his height. He is apparently very tall.

In France, in the end, it was all a bit of an anti-climax. Emmanuel Macron, married to his high school teacher (so what?) won hands down as France became a good European again.

They must be cock-a-hoop in Brussels If the E.U. can survive the Global Meltdown, the Refugee Crisis, and Brexit then it must be a very strong union.

And that is the political point! Socially a wonderful idea. Financially and Economically? Not so good. There is no question that Mario Draghi has managed to steer the Eurozone through a major calamity but he remains a politician first and an economist second.

The task of bringing together nineteen diverse economies under a single monetary policy is ludicrous. The extremes of Athens and Frankfurt are the starkest. Greece slipped into recession last week while Germany is worrying about overheating. Eurozone growth was 1.7% in the first quarter so was Germany’s. Since 2008, Germany has grown at by 9.5%, Greece has contracted by 29.5%! That may be an anomaly but makes the point very clearly; One Size Does not fit all.

Growth rates throughout the United States vary too but they have a Federal Government which has a fiscal responsibility to every state unlike the EU (for now). For example, in 2013 (latest data available), discounting clear anomalies (North Dakota grew at 9.7%, oil related) California grew at 2% and Nevada by 1%. There are a few outliers but most states grew between one and two percent.

Finally, politics and the markets. It is assumed that the FX market is driven by short term events and that is true to a large extent but the “real money” players; pension funds, money managers and insurers are in it for the long haul.

There is a school of thought that such long-term investors are insulated against the FX market as it ebbs and flows. That is not strictly true and in any case, they still must act in the spot market driving currency movements.

Politics drives monetary policy. Monetary policy drives interest rates. Interest rates drive currencies and economic performance. Economic performance drives politics.

As Disney would say, “It’s the Circle of Life”