David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Moodys Warns Scotland Exit Could Leave Country Facing Junk Rating

    Here is a brief section of this story from Investment Week:

    Commenting on the potential for Scotland to become independent, Colin Ellis, chief credit officer for EMEA at Moody's, has warned the country would face "downward pressure" on its finances in the event of independence, according to The Times.

    The warning comes as lower oil price, currently sitting at around $55 a barrel, have left Scotland facing a large budget deficit and worse off financially than before the previous referendum in September 2014. 

    Back in 2014, when the oil price was above $100, an independent Scotland could have received a rating between A and Baa, placing it within the investment grade bracket.

    However, Moody's Ellis said current circumstances could see Scotland's rating drop to Ba, a junk status (also known as sub-investment grade), which would place it on a par with Azerbaijan and Guatemala.

    This section continues in the Subscriber's Area.

    GOP Health-Care Bill: House Republican Leaders Abruptly Pull Their Rewrite of the Health-Care Law

    House Republican leaders abruptly pulled a Republican rewrite of the nation’s health-care system from consideration on Friday, a dramatic acknowledgment that they are so far unable to repeal the Affordable Care Act.

    “We just pulled it,” President Trump told the Washington Post in a telephone interview.

    The decision came a day after Trump delivered an ultimatum to lawmakers — and represented multiple failures for the new president and House Speaker Paul D. Ryan (R-Wis.).

    The decision means the Affordable Care Act remains in place, at least for now, and a major GOP campaign promise goes unfulfilled. It also casts doubt on the GOP’s ability to govern and to advance other high-stakes agenda items, including tax reform and infrastructure spending. Ryan is still without a signature achievement as speaker — and the defeat undermines Trump’s image as a skilled dealmaker willing to strike compromises to push his agenda forward.

    “I don’t blame Paul,” Trump said, referring to Ryan.

    Rep. Bradley Byrne (R-Ala.), who planned to vote for the legislation, said that Friday would have been the “first big vote in the presidency of Donald Trump. I think it’s a statement, not just about him and the administration, but about the Republican Party and where we’re headed.”

    “So much about political power is about perception. And if the perception is that you can’t get your first big initiative done, then that hurts the perceptions down the road about your ability to get other big things done,” Byrne said in an interview before the decision.

    The decision came hours after Ryan visited the White House to warn Trump that despite days of intense negotiations and sales pitches to skeptical members, the legislation lacked the votes to pass.

    Trump had personally lobbied 120 lawmakers, either in person or on the phone, White House press secretary Sean Spicer reminded reporters on Friday. The president had “left everything on the field,” Spicer said.

    This section continues in the Subscriber's Area.

    Populism: The Phenomenon

    Thanks to a subscriber for this report by Ray Dalio for Bridgewater which expounds on a number of examples of populism over the last century. Here is a section:

    Populism is a political and social phenomenon that arises from the common man, typically not well-educated, being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them. These sentiments lead that constituency to put strong leaders in power. Populist leaders are typically confrontational rather than collaborative and exclusive rather than inclusive. As a result, conflicts typically occur between opposing factions (usually the economic and socially left versus the right), both within the country and between countries. These conflicts typically become progressively more forceful in selfreinforcing ways.

    Within countries, conflicts often lead to disorder (e.g., strikes and protests) that prompt stronger reactions and the growing pressure to more forcefully regain order by suppressing the other side. Influencing and, in some cases, controlling the media typically becomes an important aspect of engaging in the conflicts. In some cases, these conflicts have led to civil wars. Such conflicts have led a number of democracies to become dictatorships to bring order to the disorder that results from these conflicts. Between countries, conflicts typically occur because populist leaders’ natures are more confrontational than cooperative and because conflicts with other countries help to unify support for the leadership within their countries. 

    In other words, populism is a rebellion of the common man against the elites and, to some extent, against the system. The rebellion and the conflict that comes with it occur in varying degrees. Sometimes the system bends with it and sometimes the system breaks. Whether it bends or breaks in response to this rebellion and conflict depends on how flexible and well established the system is. It also seems to depend on how reasonable and respectful of the system the populists who gain power are. 

    In monitoring the early-stage development of populist regimes, the most important thing to watch is how conflict is handled—whether the opposing forces can coexist to make progress or whether they increasingly “go to war” to block and hurt each other and cause gridlock.

    Classic populist economic policies include protectionism, nationalism, increased infrastructure building, increased military spending, greater budget deficits, and, quite often, capital controls.
    In the period between the two great wars (i.e., the 1920s-30s), most major countries were swept away by populism, and it drove world history more than any other force. The previously mentioned sentiments by the common man put into power populist leaders in all major countries except the United States and the UK (though we’d consider Franklin D. Roosevelt to be a quasi-populist, for reasons described below). Disorder and conflict between the left and the right (e.g., strikes that shut down operations, policies meant to undermine the opposition and the press, etc.) prompted democracies in Italy, Germany, Spain, and Japan to choose dictatorships because collective/inclusive decision making was perceived as tolerance for behaviors that undermined order, so autocratic leaders were given dictatorial powers to gain control. In some cases (like Spain), strife between those of conflicting ideologies led to civil war. In the US and UK, prominent populist leaders emerged as national figures (Oswald Mosley, Father Charles Coughlin, Huey Long), though they didn’t take control from mainstream parties. 


    This section continues in the Subscriber's Area.

    Juncker Puts Price on Brexit as Italy Offers Early Trade Talks

    This article by Tim Ross for Bloomberg may be of interest to subscribers. Here is a section:

    “We have to calculate scientifically what the British commitments were and then the bill has to be paid,” he said.

    Asked if the bill will be 50 billion pounds, which is about 58 billion euros, Juncker replied: “It’s around that.”

    May plans to launch Britain on a two-year process of negotiations to quit the EU on March 29, by triggering Article 50 of the bloc’s Lisbon Treaty. The size of Britain’s exit bill will be among the first -- and most contentious -- topics for discussion, with British ministers indicating they do not believe the U.K. is liable for such a large sum.

    Juncker’s statement is the clearest indication from the commission of the size of the bill, and is in line with an estimate cited by Austrian Chancellor Christian Kern last month.

    So far, the EU’s chief Brexit negotiator, Michel Barnier, has argued that the terms of the divorce, including the size of the bill, must be settled first, before any negotiations over the new trading relationship between the U.K. and the EU can begin.

    Britain wants talks on the exit and a new free trade deal to run simultaneously -- and its argument received a boost on Friday when the Italian government said the two sets of talks could “overlap” to some extent.

    “We will be at the end of the exit negotiation and at the same time we can start the new deals on trade, and we hope also for example on security,” Italian junior minister for European Affairs Sandro Gozi said in a Bloomberg TV interview.


    This section continues in the Subscriber's Area.

    Email of the day on lengthy bond market top formations

    We may not be done with the bull market in bonds, or at least a very extended period of ranging if this article has merit. It is publicly available so ok to post. Would appreciate your comments 

    This section continues in the Subscriber's Area.

    Mubarak, Egypt's toppled Pharaoh, is free after final charges dropped

    This article by Lin Noueihed may be of interest to subscribers. Here is a section:

    The overthrow of Mubarak, one of a series of military men to rule Egypt since the 1952 abolition of the monarchy, embodied the hopes of the Arab Spring uprisings that shook autocrats from Tunisia to the Gulf and briefly raised hopes of a new era of democracy and social justice.

    His release takes that journey full circle, marking what his critics say is the return of the old order to Egypt, where authorities have crushed Mubarak's enemies in the Muslim Brotherhood, killing hundreds and jailing thousands, while his allies regain influence.

    Another military man, Abdel Fattah al-Sisi, stepped into Mubarak's shoes in 2013 when he overthrew Mohamed Mursi, the Brotherhood official who won Egypt's first free election after the uprising.

    A year later, Sisi won a presidential election in which the Brotherhood, now banned, could not participate. The liberal and leftist opposition, at the forefront of the 2011 protests in Cairo's Tahrir Square, is under pressure and in disarray.

    Years of political tumult and worsening security have hit the economy, just as Mubarak always warned. Egyptians complain of empty pockets and rumbling bellies as inflation exceeds 30 percent and the government tightens its belt in return for loans from the International Monetary Fund.


    This section continues in the Subscriber's Area.

    American Strategic Decline Is a Myth Donald Trump Continues to Peddle

    Contrary to widespread belief, the US is not facing economic and strategic decline in any foreseeable future.

    It had already reclaimed its superpower lead before Donald Trump swept into office vowing to make America great again. With hindsight we can see ever more clearly that the Lehman crisis was a false alarm.

    Loss of dominance has long been a staple of US discourse. John Kennedy decried the ballistic "missile gap" with the Soviet Union before the 1960 election, when Russia had just four missiles and the US had thousands with explosive power equal to 1.3 million Hiroshima-sized bombs.

    Ever since I began covering the US as a journalist in the early Reagan years, there have been bouts of soul-searching.  Paul Kennedy's theory of imperial over-stretch in Rise and Fall of the Great Powers was all the rage in the late 1980s, when the Washington clerisy thought Japan destined for economic leadership.

    Edward Luttwack upped the ante in 1994 with Endangered American Dream, warning that the US was turning into a third world nation. This was just as the US was about establish its undisputed hegemony over the digital age.

    US decline was a myth then, and remains a myth today. Putative rivals have all run into trouble or face structural limits that will be obvious within a decade. India's time has not yet come.


    A decade ago the US was preparing to import liquefied natural gas (LNG) on a large scale. The terminals have since switched into export hubs. American shale gas is being shipped to Europe.

    The effect is to force down the market price of gas in EU, depriving Russia's Gazprom of its lockhold on prices. Lithuania's "Independence" terminal can now import LNG, eliminating dependence on the Kremlin. Poland is following suit. That strategic implications are profound.

    As Goldman Sachs said this week, US shale oil can go from zero to peak output within six to nine months. It can do so on a big enough scale to hold down global crude prices, and for long enough to bleed OPEC and the Kremlin almost white.

    The Permian Basin in West Texas alone could match Saudi Arabia's Ghawar field within five years, topping 5m barrels a day. Fracking technology has cut break-even costs so fast that old "super-basins" are poised for stunning revivals. It is no longer a question of whether the US will become a net oil exporter, but how soon.

    While the US "manufacturing renaissance" has been patchy, cheap gas has restored the fortunes of the plastics, chemical, and glass industries. The American Chemistry Council is tracking $130bn of new investment along the Gulf Coast, expected to create 460,000 jobs by 2022. The US unemployment rate is 4.7pc, near a  half-century low

    This is the recovery that Donald Trump managed to turn into a landscape of “rusted-out factories scattered like tombstones” in his dystopian inaugural address.

    It is of course standard fare for opposition candidates to decry the decline of America during campaigns. What is different about President Trump is that he continues to push this line after taking office, presumably because he believes his own wild claims.

    We all have to reach our own conclusions about Donald Trump. My view is that he matters less than we now think. His presidency may prove no more than a four-year embarrassment, leaving few traces.

    His plans to slash science and technology funding by 20pc would indeed risk the sort of decline he rails against. But his budget is dead on arrival in Congress.

    His contempt for allies and the multilateral bodies that vastly lever America's strategic power is folly but the US Senate is likely to take charge and run foreign policy on traditional lines. Grown-ups at the helm of the State, Defence, and Treasury departments will navigate the reefs. America's institutions and courts will contain Mr Trump.

    This section continues in the Subscriber's Area.

    Europe Has Forgotten What It Means for a Nation to Govern Itself. Article 50 Will Remind Them

    So it begins. This is either going to be the most tedious two years of argy-bargy, mind-numbing detail, procrastination, futile grandstanding, and empty threats ending with something that looks remarkably like the present arrangements... or it isn’t.

    What could and should happen is that the UK creates not just a stunning precedent in the modern European era of a country leaving what was supposed to be an everlasting relationship, but an entirely new model of the nation state fit for the 21st century.

    Europe has almost forgotten – sometimes with good historical reasons – what pride in nationality might mean, and how democratically responsive governments in touch with their populations might have something valuable to offer the world.

    Ironically, the idea of the self-governing state directly answerable to its own people was lost in the terrible shame of the twentieth century’s nationalist crimes.

    But the EU now finds itself harbouring a return to just the kind of populist nativism which it was designed to prevent. Will this generation of British politicians have the vision and the strength of character to re-invent nationhood? Who knows?

    Until this moment, I suspect that at least some of the EU establishment doubted that Theresa May would go through with it. Presumably this is why Donald Tusk has to be given forty-eight hours to make a formal response to the announcement of the actual date: he and his colleagues must be allowed to come to terms with the reality that some political leaders mean what they say.

    Yes, this is really happening. March 29th will be the first day of the rest of our lives.

    This section continues in the Subscriber's Area.