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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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A slapdown for Mrs Merkel, Trump puts his foot in it, and a whole list of crises .... well, it is Monday morning, after all.

September 25, 2017

ref :- "Time spent thinking about the next financial crisis is not wasted" , by John Authers in the Financial Times 22/9/17, and "Merkel's fourth-term victory marred by rise of rightwing AfD" , the Financial Times

 

It may have been a fourth election win for Angela Merkel but a resounding victory it certainly wasn't. A reduced share of the vote (around 32.7%) for her Christian Democrats and a strong showing for the nationalist Alternative for Germany party (AfD) were probably both manifestations of the same thing  --  widespread residual discontent at the Chancellor's "open door" immigration policy in 2015/16. Capturing an estimated 13.4% of the vote means that the anti-immigration AfD will have a significant representation in the Bundestag, the first time an overtly right-wing party has been in such a position since WW2.

 

With her erstwhile coalition partners the Social Democrats suffering a very poor night (just 20.2% of the vote) and opting out of maintaining the coalition, Mrs Merkel will probably cobble together a deal with the Free Democrats (10.5%) and the Greens (9.4%). Such an alliance is known in Germany as the "Jamaica Coalition" due to the colours of the three parties being black, yellow and green  --  which of course are the three colours that make up the Jamaican flag.

 

The outcome of the election represents a fragmentation in German politics that mirrors electoral developments elsewhere, with established (establishment ?) parties losing support to protest movements  --  very often of the populist variety. In their heyday in the 1970s, the CDU and the SPD had 90% of the vote between them and this time could only muster 53%. Some will welcome that fact as evidence of democracy in action, while others might be too uncomfortable with the strong showing of a nationalist right-wing party (particularly in Germany) to get any pleasure from a shaking-up of the old order.

 

Anyway, what have the markets made of it all ? In short, not too much. The Euro has been marked lower as an understandable reaction to a disappointing result for the EU's most powerful leader in its most powerful nation. And for sure the increased influence of the Right is not good news for France's Emmanuel Macron as he seeks key German support for further financial and political integration in the EU.

 

But Mrs Merkel was never likely to go more than a short way along the lines proposed by Mr Macron anyway  -- Germany's fiscal conservatism would preclude it. In truth, the comparatively minor market reaction so far suggests that that the market effects of the election result will be short-lived. You could even make a case for suggesting that in order to win back some of her lost support amongst those not feeling the benefits of Germany's economic strength, Mrs Merkel might consider spending some of the massive current account surplus on infrastructure initiatives  --  generally accepted to be much needed. Such a growth-friendly move could in fact strengthen the Euro.

 

It's just possible that in the future this election result and the substantial vote for the AfD will be seen as a seminal moment in German, and therefore EU, politics. It's not however a possibility likely to bother the markets ..... not yet, anyway.

 

And so what's the Don been up to now ? First of all, some context :

 

The repeal of Obamacare was the first policy objective taken on by the Trump administration, and by anybody's reckoning they made quite a mess of it. Their second attempt now looks likely to fail too, which would be another embarrassing setback. The Republicans have a 52 - 48 majority in the Senate and although John McCain and Rand Paul have made it plain that they will vote against the bill, under the process known as "reconciliation" 50 votes would be enough to get it passed rather than the usual 60 so long as they get it done by Sept. 30th. Sadly for the Administration, Ted Cruz and probably Susan Collins have joined the list of Republican rebels, which looks to have put paid to the bill's chances.

 

Against that kind of background, the importance of a good reception for the Trump Administration's proposals for tax reform, due to be laid out this week, is hugely magnified. Perhaps as much as anything else, the record-breaking stock market rally has been founded on Mr Trump's plans to slash corporation tax and on the multi-billion dollar boost it would give to US companies. Furthermore, those companies' plans for investment and expansion are based on those promised cuts. So it's vital that the message this week is delivered clearly and without unwanted distractions.

 

Not a good time therefore for the President to be grabbing all the headlines with an unseemly slanging match with NFL players "taking a knee" during the playing of the national anthem. Among other things, Mr Trump is urging team owners to sack those players for their lack of respect, but since many of those players are black and are taking the action in protest against racism, there are obvious dangers for a president already struggling with accusations of racial prejudice. Privately, and increasingly publicly, there's much gnashing of teeth among officials at the president getting involved in such an unnecessary and ill-judged spat  --  particularly at this precise time.

 

Will it affect the course of the tax reform bill ? Probably not. Will another divisive intervention by Mr Trump undermine the support he will need to get other plans through in the future ? Almost certainly .....

 

Lastly, those crises ..... and we're just going to point you in the direction of John Authers' article penned on Friday, which in turn is a commentary on a report from Deutsche Bank's market research team. 

 

Commentators spend an awful amount of time waving red flags about some imminent crisis or other  --  too much, probably. After all, if you're so scared of the perceived potential for disaster that you miss all the upside moves then you're not doing a very good job. But it's as well to be aware of the dangers even if you don't subscribe to the Doomsday scenario and Deutsche Bank, who think that the chances of a future crisis are overwhelming, are good enough to list the possible causes. They can't all happen at once, indeed some are contradictory, but they include :

 

Economic recession, which would find central banks "out of ammunition" and powerless to address

 

A central bank unwind, as they reverse extreme stimulus to push up rates and cause a collapse

 

Deflation, which would require more monetary stimulus leading to negative rates and a banking collapse

 

Overblown asset prices, with overpriced equities and bonds finally collapsing amid investor panic

 

Lack of market liquidity meaning huge moves to the downside can be triggered by small volumes

 

If you're in need of more possible trigger points, Deutsche include Italy (banking), China (debt), Japan (BoJ balance sheet) and Brexit, but frankly that's enough to be going on with. The advice for investors is pretty conventional  --  effectively, diversify and increase cash holdings  -- but if you want to get the week off to a cheery start, you should catch up on Mr Authers' (and Deutsche Bank's) rumination on meltdown.

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