August is normally the start of the quiet period in western markets with many investment managers working from home for a few weeks while the families enjoy a break from school. This year of course that is the norm rather than the exception making August just another in a series of strange months. The short term uncertainties remain focused on Covid-19, or more specifically the government policies surrounding it, while the medium term risks remain more tied into the US Presidential Election, now only 85 days away.
Having said that, the Democrat Convention is scheduled to start next week in Wisconsin. In a recent blog post we questioned whether or not Kanye West was the most powerful man in America on account of his declared standing for President. While this was largely tongue in cheek, as this article from Rolling Stone magazine highlights, the nature of the US political system is such that Kanye could definitely act as a disruptor – one that the Republicans see as likely being in their favour. The reality is that the US is not a Democracy, it is a Republic and the Electoral College decides the President, not the simple majority. The Democrats may not like it, but, as in 2016, those are the rules the Election is held under. As an aside, like many non-insiders, our understanding of US politics is as much rooted in TV shows like the West Wing, House of Cards and Designated Survivor as in learned historical tomes on Government. As such, when watching the latest series of Designated Survivor, with its running thread of a Presidential Election, it was interesting to note the story-line of how President Kirkman, up for Re-election, appoints his Chief of Staff Aaron Shore as his running mate for Vice President in what is seen by some as a deliberate attempt to capture the Latino vote, which is around 18% of the population. There are already some attack ads out there ( you can check out The Committee to Defend the President) asking why Joe Biden who has basically (though not officially) declared his running mate will be an African American woman doesn’t think Latinos are ‘good enough to be Vice President’. This could be yet another divide opening up within the US over the next three months.
Meanwhile, the tit-for-tat continues in the US/China New Cold War, with US sanctions on Chinese politicians, including Hong Kong CEO Carrie Lam, being matched by Chinese sanctions on US senators like Mario Rubio, Ted Cruz and Tom Cotton, who were all very active in getting the HK Freedom and Democracy Bill passed last autumn. As previously discussed, it was their revisiting of the 2014 Yellow Umbrella protestors and adding their ‘cause’ on to the back of the anti-extradition treaty protests in Hong Kong a year ago that was seen by the Chinese as foreign interference, ultimately leading to the National Security Law being brought in for Hong Kong. Senator Rubio and others had tried three times previously to get this bill passed and failed on the basis that most US representatives neither knew nor cared much about Hong Kong. However, last November, on the back of violent, Antifa style, ‘riots’ involving masked, black clad, protesters, petrol bombs, tear gas and 24 hour rolling news portrayal of a dystopian Hunger Games type world of fascist authoritarians repressing telegenic teenagers with bows and arrows, the bill passed almost unanimously. Fortunately for the ordinary people of Hong Kong, but rather suspiciously for those protesting their innocence of any involvement, the protests stopped pretty much the next day. The fact that media mogul Jimmy Lai, who along with Joshua Wong and others from the 2014 Yellow Umbrella movement was very active in talking with the US and in calling for ‘freedom and democracy’ for Hong Kong, has just been arrested merely confirms that the Chinese authorities are convinced that the US were behind the protests.
Note, as we have said on many occasions, it doesn’t matter what any one else believes at this point. The US, in the person(s) of Mike Pompeo, the CIA, Mike Pence and others may be entirely innocent of any incitement, what matters is that the Chinese believe that they are guilty and Chinese actions need to be understood in that context.
Elsewhere the row over Tik Tok also looks to have further to run. The rationale given is, as with Huawei, one of National Security, but the reality looks like a combination of Politics and Economics. Politics in that ‘China Bad’ is now the bi-partisan approach running into the Presidential Election and Economics in that, for all the rhetoric on China stealing US IP, the reality is that for a variety of reasons, the US seems incapable of coming up with a competitive product. Microsoft looks like it is being pushed into an arranged marriage for a Tik Tok product to operate in the US, Canada, New Zealand and Australia (4 of the 5 eyes) and that this is also part of Mike Pompeo’s new ‘Clean’ Network In effect, if one reads the (suitably aggressive from Mike Pompeo) statement, it looks like the US is building itself its own ‘Great Firewall’. This is another step towards policing the internet and another example of simultaneously calling China repressive while copying much of what it is allegedly doing.
Beirut, Belarus and Bolivia…
Elsewhere, the terrible explosion in Beirut came on the back of already terrible conditions caused (as discussed previously) by the collapse of a form of Ponzi scheme to all intents backed by the state itself and threatens yet more violence and upheaval in the middle east. Meanwhile there are talks of coups and revolutions from places as far spread as Belarus and Bolivia. From a direct investment point of view this may seem relatively unimportant, but we see them as signs of increased instability generally as the world moves towards a multi-polar set-up.
Long term Trends – the Dollar is Key
For markets though we need to recognise that the world we currently operate in that has arisen over the last 70 years as US power and finance dominated, is in a state of flux and that regardless of who wins in November, things are going to change. Last week, we noted that, in July, the big story behind all the now usual Covid-19 noise was the weakness of the US Dollar and the longer term implications for that and suggested that the narrative in FX has a habit of chasing the market pricing. This week we notice some commentary from Jeff Currie and the team at Goldman Sachs on an end to Dollar Hegemony. Now, given that these were the guys that brought us the $200 oil forecast right at the top, we are highlighting this more for their narrative than their predictive skills, but it is also interesting to note that the arch Globalists, the Council for Foreign Relations are saying something similar.
This naturally brings to mind the quote from US Treasury Secretary to Richard Nixon, John Connally in the wake of the US actions to close the Gold Window in 1971 and as the currency dropped over 20%.
The Dollar is our currency, but it’s your problem’
John Connally, Treasury Secretary to President Nixon 1971
In a year where the previously unthinkable has become somehow regarded as ‘normal’, we should be considering the notion that the US might move to deliberately collapse its currency. This would be very good for some, dollar debtors and commodity plays for example, but really painful for others. Something to consider for holiday reading perhaps….
