Article / 06 January 2017 at 15:30 GMT

In praise of globalism

Managing Partner / Spotlight Group
United Kingdom
  • Globalisation, interconnectedness mean new world order is necessary
  • Twenty-first century realities demand reduction of national sovereignty
  • US assets continue to appear strong relative to world counterparts

Globalisation
The world is more interconnected than ever, and populist political movements
are not likely to shift this to any appreciable degree. Photo: iStock 

By Stephen Pope

A recent essay by Council on Foreign Relations president Richard Haass suggests that the old method of sovereign governance as determined by Westphalian sovereignty – i.e. a nation's right to an independent existence and autonomy within its own borders – was challenged several times in the 20th century.

This operating system, known as "World Order 1.0", or WO1, is no longer fit for purpose in the 21st.

The world has become increasingly globalised as very little can truly claim to stay local, regional, or national. This can be beneficial with regard to innovation, tourism, and trade... even if that last point is under severe scrutiny in the US and across Europe.

However, what of the threats posed by disease, pollution or, sadly, terrorism? As the world has become increasingly interconnected it is a questionable whether what happens inside the national borders of one nation can be seen as the concern of that country alone.

Thus, there is a growing call for a new global operating system called "World Order 2.0", or 'WO2'. This considers the rights of any sovereign state (WO1) plus its obligations to others, hence WO2.

Haass suggests this is an extension of a sovereign government's prime obligation, the responsibility to protect (or 'R2P') its citizens.

Let me expand that to suggest if country A is suffering and unable to contain an epidemic that could spread to its neighbour, country B, then B's government must consider its own R2P obligations and so offer assistance to the government of A. 

Provided A is not suspicious of B’s motives, both A and B can gain mutual benefit.

Lack of activity 

The world stood by when Russia annexed the Crimea from Ukraine. Sanctions imposed by western nations on the Russian Federation over its involvement in the Ukraine crisis and absorption of Crimea have hurt the country's economy, of course. However, they have not mortally wounded it.

The bigger impact on the Russian economy was seen when crude oil prices plummeted from approximately $107/barrel in June 2014 to just $25.91/b last January. The correlation of the oil price and USDRUB rate since June 2014 has been steady with 0.96 as the R-Squared level.

Nothing has been done about the bloodbath within Syria. If anything, Putin seems more determined to flex his muscles and the west has allowed Russia to become a significant regional player once again. The cosmetic withdrawal of the aircraft carrier Admiral Kuznetsov is just a token. The major military effort has been via the air force. Most of that firepower will remain.

Will this be allowed to continue when Donald Trump becomes US president on January 20? So far, he appears to tweet nothing but praise for President Putin and has dismissed almost every suggestion that Russia may be guilty of a cyber-attack to effect to result of last November’s Presidential election. 

Vladimir Putin
Many have claimed to spot Russian president Vladimir Putin 
lurking in the shadows of the US election. Photo: iStock 

Maybe Trump will change his mind later today when intelligence chiefs brief him of the evidence they have regarding Russian involvement. If he starts his term of office in two weeks’ time at odds with the leading US intelligence agencies, then Russia will have succeeded in degrading the quality of future presidential decisions.

Flash points

Perhaps the bigger area of tension will come not between the US and the Russian Federation, but rather between the US and China with three fronts developing...

  1. China's theft of intellectual property and dumping of goods.
  2. China's claims to total domination of the South China Seas.
  3. China's using North Korea as a stick to test Trumps/US resolve as Kim Jong-Un makes threats against Seoul and South Korea.

Indeed, one wonders if the recent capture of a US Navy drone was an early test of the president-elect, or an attempt to drive a wedge between the outgoing and incoming administrations.

Will Trump make the world a riskier place by not using diplomacy and sanctions as much as possible before he turns to a military option?

He said he would make America great again, but if that means dropping the "let's talk" approach of Obama/Clinton and Obama/Kerry in favour of a hard-line, "lets tangle" approach... then all our worries about a rise of populism in Europe will be considered insignificant.

Black swans or black elephants

A “Black Swan” is described as a highly undesirable event that we could not see coming... just ask the Bank of England about that.

What about a highly undesirable event that we can see coming. That is a “Black Elephant” and one issue that the world should be concerned with and yet the president-elect appears to dismiss is climate change.

This is an area where WO1 is out of date as globalisation has exposed and affected all nations to the impact on the climate stemming from globalisation regardless of how much or how little any given nation is engaged with the process. 

In 2017, all regions of the world will face climate change in one form or another. This may be in extremes of weather or the rising risk of a water crisis, the latter being a potential flash point of local/regional conflict.

A steadily rising disparity in income inequality plus a failure of national and/or corporate governance must be considered. Certainly, the squeezed middle who do not earn vast fortunes and yet do not receive much if any welfare benefits have in the UK, US, and Italy expressed their dissatisfaction with the political and bureaucratic elite.

The electorate can effect a change in government, however, the capitalist market model, which is in every way superior to any version of socialism, has also to change. But that is what capitalism has always done. Through creative destruction it continuously renews and restyles itself. 

Perhaps now is truly the time for capitalism to slowly morph into working toward the concept of the "Triple Bottom Line" (Planet/People/Profit).

Antiquated factory
It certainly has a much nicer ring to it than, say, Blake's "Satanic mills"... Photo: iStock

Managing market structure and mechanism

In 2016 we saw most equity indices press on to new highs and bond yields begin to advance, especially in the 10-year maturity as new debt issuance to fund much-needed infrastructure repairs or rebuilds will be financed by new debt dated 10 years or longer.

After the Brexit vote, the European political calendar is choc-a-bloc full of political events that could usher in a new period of difficulty within the European Union and perhaps the Eurozone as well. 

These will be led by the Netherlands in March, France in May, and Germany in October – plus the chance that Italy will face an early general election if Paolo Gentiloni is nothing more than a body to keep the chair warm for Matteo Renzi.

Has systemic fragility been overcome?

A key question is how many problematic short-term liabilities exist on a global basis and whether, when interest rates are still extremely low, the capital base of the private sector can absorb such losses as may be generated in a period of difficulty?

If the private sector alone has inadequate resources, it will look to national governments and central banks to provide cushions...if not life boats. However, one feels obliged to ask just how much more scope does the say the Federal reserve, European Central Bank, BoE, or Bank of Japan have? What about already indebted national governments?

Across Europe it seems we are just a heartbeat away from a new banking crisis... after all, Europe has never fully tackled head on the level of non-performing loans held on the books of its regions' banks.

Away from the state of any banks loan book, what of their online security? Professor Richard Benham, chairman of the National Cyber Management Centre, gives a dire warning:

"...A major bank will fail as a result of a cyber-attack in 2017 leading to a loss of confidence and a run on that bank..."

In November 2016, hackers stole £2.5 million from 9,000 Tesco Bank customers in a raid the UK's Financial Conduct Authority described as "unprecedented".

The argument might be made that with yields still relatively low there is plenty of scope for sovereign states to borrow more. On that basis, there will certainly need to be a continuation of QE in Europe and Japan...but the ECB has already distorted the bond market to such an extent that it bears no relation to the economic reality. 

Where is the sense in an investor paying a rudderless Italian government 0.13% for the dubious privilege of holding 2-year Italian debt?

Then it is beholden to enquire what powers are in play that can prevent contagion from one nation/asset class/sector from spreading across the global market?

Buy-hold-sell?

I am positive for cyclical equities as I sense there is a new focus on overhauling aged and crumbling infrastructure. The US will lead the way as the Republican congress will support president Trump and deliver a trifecta of pro-business policies. 

Looking for cyclical equities to gain 7-10% in 2017...

However, not all sectors will be in great shape as the global markets are prone to fear, panic and runs. This will be a major problem in the European banking space as the old model of "maturity transformation" has been fettered by the unadressed NPL issue.

Sector runs say on Italian banks can quickly jump to Portuguese or Spanish banks so creating a need for systemic fire sales and a debilitating contraction in the amount of credit available.
My bigger fear is that if there is one flash of panic, it will usher in – particularly in Europe and this new era of unbridled regulation – just when it is not needed. 

Politicians of all hues want to appeal to the man in street and need to be seen to be acting... even if it is after horse has bolted.

Instead it would be sensible to recognise that regulation has its limits. If mainstream banking considers a line of business so highly regulated that it cannot generate and economic profit then activity will migrate to the unregulated space – but still leave uninformed citizens at risk. Just recall the government's "R2P"...  

The pace of innovation in finance as well as in technology is accelerating exponentially, and regulators are becoming ever more behind the curve. I am no fan of breaking up institutions as they are perceived to be too big to fail, but I do think there must be greater oversight on the limits any single trader, trading team, or unit can take.

As said above, Europe is facing a year of elections. Populism may be on the rise, but I do not see the French plumping for a president Le Pen. Despite the popular uprising, I do not envisage an end to the debate over fiscal discipline or a fiscal free-for-all. 

As Europe gets stuck in an electoral quagmire, so the ECB will be obliged to undertake all the regional heavy lifting this yearn and for me that implies EURUSD at 1.0000 on the cards by June 30.

Predicting with any confidence what happens from here is more difficult than ever given the lack of detail on what Trump administration policy is really going to look like. We know the direction, but only as the details emerge will we be able to determine whether or not the current pick up in optimism is justified and sustainable.

Even with the unknown factor that is Trump, I favour US assets above all others this year.

The Golden Gate Bridge
When even Trump and his unpredictable policies do not 
represent a bridge too far. Photo: iStock 

— Edited by Michael McKenna

Stephen Pope is managing partner at Spotlight Ideas
2y
Vasiliy1 Vasiliy1
good article informative
2y
Stephen Pope Stephen Pope
Thank you Vasiliy
2y
benlouro benlouro
good pre-views for 2017
2y
BuySellBuySell BuySellBuySell
Nice one Stephen. Thanks
2y
vanita vanita
First happy new year Steve.
Good start with good analysis article.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail