Bedrock’s Newsletter for Friday 1st of February, 2019
1 February 2019


 Friday, 1st of February 2019

“Life can only be understood backwards; but must be lived forwards”

– Kierkegaard




The last trading day of January is over, and the wall of green figures on exchanges around the world is a welcome respite from the tortuous final months of 2018. BlackRock CEO Larry Fink has suggested that the fourth quarter sell-off could be seen as a “mini 2008-2009” given the “huge deleveraging of hedge funds”, and it certainly was a rollercoaster ride. However, so far this year, even the coming of a polar vortex has failed to cool the rally, with the Fed and ECB giving markets a helping hand in the form of dovish comments on rate hikes and stimulus withdrawal.


Nevertheless, in the wake of such a brutal correction, the advent of a ‘synchronised global slowdown’ is the new consensus mantra, at least as measured by the frequency with which it forms the conclusion of ‘Outlook 2019’ investor conferences. This gives us a good understanding of what is ‘in the price’ today, and there is undoubtedly a kernel of truth in the analysis. However, we believe that markets strayed far from fundamentals in Q4, particularly given US strength, while any slowdown in China or Europe did not warrant a wholesale equity dump. Indeed, Apple CEO Tim Cook’s dire warning about Chinese growth, since rolled out by Nvidia and Caterpillar, sounds more like an excuse for poor expectations management rather than a genuine forecast. The Middle Kingdom is, after all, a difficult market to crack, particularly when low cost smartphones are available in every Shanghai shopping mall.


Perhaps the most important piece of China news today is that US and Chinese officials are meeting in Washington to try to thrash out some sort of trade compromise. If no deal is reached by 1 March, the US will raise tariffs from 10% to 25% on $200bn of Chinese goods: another volley in the ongoing US-China Trade War. There is plenty of upside for both countries if they do reach an agreement. However, the US is demanding major structural changes to the Chinese economic model alongside increased protection for IP and lower tariffs. A wholesale transformation would be staggeringly complicated for China to implement, and Xi would never cave into US demands on such an important issue. Nevertheless, some modest concessions may be forthcoming in order to avoid a damaging escalation in the trade dispute.


With all that’s happened in 2019 already, it is incredible to think that only two years ago Donald Trump stood on the steps of the US Capital Building to deliver his dystopian Kentucky-is-Kabul inaugural address. The crowds that day may have been smaller than those who turned out for Obama, but the whole world has been watching him ever since. The initial flurry of inaction soon gave way to radical change across the full gamut of US policy, both foreign and domestic, assisted by a Republican sweep of both Houses of Congress. And in those rust belt towns and cities in ‘flyover country’, the economic boom times (which began, incidentally, in the dying days of the Obama Presidency) have confirmed to many that New York celebrity-billionaires from TV do, in fact, know best. However, with the longest Federal shutdown in history having ended with a decidedly un-Trumpian whimper last month – and with no funding for his ‘big, beautiful’ wall – has the dealmaker-in-chief finally come unstuck? With Democrats now the majority in the lower House, the President’s scorched earth politics is likely to have burnt any bridges necessary to cross for growth-supportive legislation in the new Congressional session. Perhaps Trump’s winning streak is coming to an end, at least when it comes to legislation.


Luckily for the Donald, one area where no President needs Congressional approval is foreign policy. And if there is a single task for which you would be unlikely to draft in a short-tempered real estate mogul with limited knowledge and experience, it would surely be the de-nuclearisation of North Korea. Still, we are where we are, and Trump’s big-stick Twitter diplomacy may have more success in coaxing Kim to give up his rockets, than the hand-wringing ‘strategic patience’ of President Obama. Unfortunately, a report published earlier this week suggests that US intelligence agencies see little sign that the People’s Korea is doing anything other than buying itself more time to develop weapons, while securing aid and concessions from the US government with its charm offensive. Sad!


Another geopolitical flashpoint this past month has been Venezuela where former bus driver, turned Leninist strongman Nicholas Maduro was recently sworn in for a second Presidential term, having won disputed elections last year. This victory came despite his having presided over an economic collapse that has forced three million people to flee the country for neighbouring states. Opposition leader Juan Guaidó has since declared himself President, igniting violent protests and a fierce power struggle within Venezuela as both leaders attempt to woo the security services to join their cause. The crisis has also assumed international dimensions as countries line up to recognise their preferred candidate. Unsurprisingly, Russia, China, Iran and Cuba are all backing the socialist incumbent, while the US, Brazil, Columbia, Japan and several European countries have recognised the liberal newcomer. The US is pushing hardest for regime change, having sanctioned Venezuela’s state oil company and employed an ultra-hawk and veteran anti-communist, Elliot Abrams, as Special Envoy for the Venezuelan Crisis. After all, this is America backyard, and the Trump administration is comprised of card-carrying realists who will prioritise national security in all matters relating to the Western hemisphere. If Maduro does lose army support then he may well finish his days in exile, sipping cocktails at a Havana beach club.


Let’s be honest, Europe is a disappointment. It has fantastic people, food, art and history, but remains a low-growth zone mired by an increasingly toxic politics. That Germany just dodged a technical recession in Q4, while Italy has not grown on a per capita basis since it joined the euro in 1999 hardly inspires confidence. Meanwhile the UK and EU continue to hurtle towards a no-deal Brexit, apparently against the wishes of both parties. With this backdrop, it is no surprise that on Monday the ECB hinted that it may be forced to reintroduce its asset purchase programme, shelved with much fanfare only at the end of last year. It looks like Groundhog Day in Europe, again.