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Michael O'Sullivan on Markets and Politics
Inflation Looms, Debt Too High, Bitcoin a Tulip, China Mature, Europe-US Tensions, and the End of "The Age of Condescension"
I recently spoke with my friend Michael O’Sullivan, one of the smartest people I know on the intersection of markets and macro geopolitical trends. Michael is the author of The Levelling: What’s Next After Globalization. Mike is also the former chief strategist of Credit Suisse Private Wealth Management. He has moderated several panels that I participated in, from London to Athens to Hong Kong, and I often walked away saying an odd thing: “I wish we could have heard more from the moderator!”
Today, Mike is a regular commentator and speaker. Check out his Ted Talk here on the End of Globalization. It already has nearly 1.5 million views.
We talked major markets, inflation, debt, China, the dollar, Bitcoin, and emerging markets. In major markets, he sees a cyclical recovery through about June. He also described Bitcoin as a tulip, and warned of dangerously high debt levels and creeping inflation. EM investors take note: he also sees the possibility of the dollar strengthening, a worrying prospect. He also talks Europe and the U.S and financial innovation. In EM, he declares that the “age of condescension is over” and many emerging markets no longer take their cues from the West, but from each other.
Some excerpts from our conversation below:
Major Markets - 2021
“The year 2021 should bring us a classical cyclical recovery until about June. U.S households are cash-rich and the Chinese economy has benefited from controlling Covid early on. There will be pent-up demand and spending will pick up. Markets will move, but the big question is this: will we see inflation?”
Inflation Looming (Watch Lumber Prices)
This question will dominate markets for the next year - fiscal and monetary policy are coming together, unemployment should fall and money supply is already very, very high - so the conditions are set. In my view we already have massive asset price inflation in markets, and it’s just a question of when we see it in consumer prices. Commodities like lumber - which has rallied strongly - provide a pointer.
Dangerously High Debt Levels
Debt levels are very, very high. As high as the Napoleonic war era. This has huge strategic implications as much of this debt acts as a sort of handbrake on companies and countries - it will slow growth and clog financial systems. Debt is also very important from a strategic point of view - the USA, China and the EU are all very indebted, but the first one to reduce its debt load will have a huge strategic advantage in the race to lead the 21st century.
We are on the cusp of a big wave of financial innovation and the building out of new financial eco-systems - different payment systems, SPACS as well as cryptocurrencies. The quick evolution of these ecosystems is both lurid and exciting, bitcoin is the best example. I think these new technologies reinforce a generational divide where older people - especially those who run banks - are much more resistant to change than younger ones.
China: A Mature Market
More people are looking at China as if it is a very mature financial market. China government bonds are seen more favorably now. China doesn’t have a Central Bank propping everything up. Companies are going bust. That’s a good thing.
The dollar has gone through a period of weakness, and easy monetary policy may keep it weak. My worry is that financial policy in the US begins to lose credibility - as I noted earlier on debt, so that the dollar, even at the margins, begins to see its exorbitant privilege eroded. Then investors might price it lower, and this I think would see EM economies suffer.
The Rise of Emerging Economies and the End of the “Age of Condescension”
But now, globalization is on its deathbed. It has run into the limitations of its own success. That is well established now but the point I want to make is that we spend far too much time talking about the US, Europe and China – especially when there is a huge amount of exciting things going on in fast growing emerging economies – Nigeria, Ethiopia, Bangladesh, Indonesia, Mexico and Brazil for example. The question for them in the new world order is what model do they follow and what alliances do they build?
Most of these countries – during the age of globalization – were used to being told what to do, by the likes of the IMF – but the age of condescension is over now.
The tangible opportunity in a less uniform, more values driven world is that countries have a greater choice in the path to follow. Arguably, they also face greater pressure to get it right.
It may also be that in the post globalized world, countries like Kenya, Indonesia and Egypt decide to go their own way, and build out their own value systems and economic infrastructure.
In this way, the arrangements, institutions of the future won’t be crafted in Washington or Beijing, but rather by countries like Tunisia, Cambodia and Brazil swapping notes on how to curb corruption, build healthcare and education systems for exploding demographics and ensure that their voices are represented on the world stage.
As globalization ends, and chaos seems to reign, these countries and their young populations, the scope they have to grow and shape their societies, are the future and the promise of the next world order.
Europe Remains Wary of US
Whenever there is a crisis, people say Europe will fall apart. Europe remains coherent. America has become a bit more like Europe. Individual states acting differently, and individual governors are like prime ministers in the European sense.
From a European point of view, recent events in Capitol Hill will spoil the prospect of a full reconciliation between European and American diplomacy granted the fear that the underbelly of American society is now isolationist and nationalist. In general, European leaders will be more wary of the US, and at home will take steps to ensure that extreme political groups are marginalized.
The daunting challenge and opportunity for Europe is to frame itself as the cradle of modern democracy and the beacon of liberal values. The EU has already stated as much through its ‘European Values’ policy thread, but predictably failed to follow through during recent budget negotiations involving Poland and Hungary. The stakes are much higher now, and Europe’s political center needs to take a big risk and aggressively defend liberal democracy.
Bitcoin is a Tulip (From Mike’s column in his blog, The Levelling)
Bitcoin was intended to serve as a means of facilitating the transfer of money in a decentralized way (beyond the influence of governments and central banks) – and that in time it would spread as a means of retail payment. In a world where trust in institutions has been challenged since the global financial crisis, bitcoin has appealed to some as an alternative system of exchange (indeed part of the coding of bitcoin contains a reference to the global financial crisis).
Bitcoin is far away from meeting these objectives, and in my view is a ‘tulip’, a speculative, trading asset. It also seems to me that many people are increasingly happy with bitcoin being assigned this role, and much of the interest and eco-system that is developing around it underpins the role of bitcoin as a speculative asset rather than as a bona fide currency.
In particular, more banks and payment systems – notably PayPal – are allowing bitcoin onto their platforms, either in the sense that it can be used to buy other assets or that it can be traded. It is likely that in coming months regulators will permit cryptocurrency ETF’s to be launched, and other products such as derivatives will spring up around this…
If the role of bitcoin (and crypto-currencies) as a trading asset eco-system is growing, its place as a currency or means of exchange is being curtailed – indeed the price moves of the past three months would make it very difficult to operate as a reliable means of payment (in addition the verifiability of payments may be harder to complete than some think according to the Bank for International Settlements)…
In particular central banks, many of whom are close to launching their own digital currencies (conceptually at least) have an interest in the failure of cryptocurrencies to catch on. Notably Christine Lagarde this week called for bitcoin and its associated ‘funny business’ to be more closely regulated.
As such, this points to crypto currencies being ushered into the corner of eclectic trading assets – though less of an experience than horse racing, with none of the aesthetic bonus of art and not quite the fun of collecting wine.