MARKET PERSPECTIVE

By J Mulraj

MARCH 23-29, 2024

The self destructive policies of the global polity is perplexing

It’s extremely perplexing how the global polity is governing in a way to destroy their own countries, emulating Emperor Nero who, it is said, fiddled as Rome burnt.

Take different countries.

USA has an unsustainable debt burden of $34 trillion and, unless the Fed reduces interest rates soon, debt servicing will become impossible. President Biden thinks, perhaps, that the red maple tree on the White House lawns grows money on it, the way he is spending it by increasing borrowing.

Illegal immigrants continue pouring into USA, last weak tearing down a border fence in El Paso, Texas, to do so. Looking to the feebleness of Americas response against unarmed migrants (as well as the botched Afghan withdrawal), Iranian proxies were emboldened to attack American soldiers in Jordan.

America’s energy policy has been shaped, under Biden, by its environmental policies, including a ban on further leasing of Federal land for fracking, a cancellation of the Keystone pipeline, and a stricter use of ESG (Environment, Social and Governance) norms to deny funding for further exploration of fossil fuel. But, since demand for fossil fuel rises, if it’s domestic supply drops, the gap must be procured from abroad. USA has lost its status of being energy independent, and, with it, its geopolitical clout.

Both the loss of geopolitical clout and feebleness of threat response, have allowed rag-tag groups of militants to attack US fleets and bases. Witness the disruption to sea trade through the Suez Canal by the Houthis, and the insipid response to it by America. The US has exhausted its stockpiles of artillery shells, sending so many to aid Ukraine, that it has dangerously low levels for its own defense. It won’t have enough artillery shells to fight more than a few days, should, God forbid, China escalates a conflict with Taiwan.

A big risk emanating for the American (hence to the world’s) financial system is from the crisis in the Commercial Real Estate (CRE) sector. This is the sector that builds, and rents, buildings for offices and shops. But due to increasing ‘work from home’, the need for rented office space is reduced, and small shops are reeling from the 5% interest rate hike by the Fed. So lower rental income has made CRE unviable. This will, ultimately, be borne by the community banks, several of whom will collapse. We may witness a replay of the 2008 GFC.

Biden’s stance in the Ukraine crisis has brought closer two of America’s enemies, Russia and China and, at the same time, harmed US allies like Germany which, bereft of cheap Russian energy, is in a recession, and is fast de-industrialising.

It seems Biden has out-fiddled Nero.

Also in the race is China, where President Xi is playing the guqin ,  even as China burns. He has squandered the inheritance of a predecessor, Deng Xioping, who allowed free market policies to spur economic growth. It allowed China to become the manufacturing and export hub of the world, providing jobs for millions of rural youth who migrated to urban areas. Xi, wanting to go back to communist roots, has succeeded in turning away foreign manufacturers, (his zero tolerance to Covid shut down manufacturing facilities and led to decline in exports as foreign buyers reduced dependencies on China) thereby creating unemployment for the Chinese youth. High youth unemployment and declining exports have led to a drop in Chinese GDP.

Simultaneously, the main conduit for household savings, viz realty (over 70% of household wealth is locked in real estate) has collapsed, thus destroying household wealth. The #2 conduit of household savings, the stock market, has also collapsed.

So, Xi, plucking his guqin, has badly dented, due to his policy of reversing all that Deng had achieved, both Chinese household savings and their ability to rebuild them, after alienating foreign manufacturers and creating high youth unemployment. Adding to his woes is the adverse demographic profile, thanks to the erstwhile ‘one child policy’.

Xi, plucking on his guqin, is also out- fiddling Nero.

As pointed out in my previous column, India, though currently a poster boy for economic growth, runs the risk of joining the race unless it corrects some structural weaknesses. Chief among these is the rampant corruption. Witness the mountains of cash unearthed after raids on politicians and businessmen, of which there is no further news. Itchy backs have been treated! Or witness the sequestration of MPs prior to elections, to avoid them switching sides, being unable to latch on due to greasy palms. A farce of democracy!

The slow judicial system (50 m pending cases) is another black spot which, as Lady Macbeth attempted, must be erased. The state of the primary education system, or of the healthcare system, is not commensurate with a nation on the March to become a leading global economy. The Government cares not for pollution; India has the distinct dishonor of being the #3 worst polluting nation. Readers, please don’t take a deep breath reading that!

Mr Modi would do well to set down his vina to attend to these problems, before Nero comes visiting. ‘

There are other competitors vying with Nero, including Ukraine’s Zelensky, who has destroyed his country’s young men, thus destroying the future, in a war he could not win, even as he strummed on his Bandura. Or Russia’s Putin, plucking strings of his balalaika as his economy comes under strain due to sanctions. Or Israel’s Benjamin Netanyahu, spiralling in a death dance with Hamas’ Ismael Haniyeh, in an age old conflict that has brought only sadness, even as both countries are getting destroyed.

Why can’t political leaders not join John Lennon and sing ‘Imagine’?

Why, indeed, when technology is promising solutions to the problems the global polity has created, and is painting a beautiful future for humankind? Recent examples are the successful transplant of a monkey’s kidney, saving a human life, and an implant of the Elon Musk Nuralink chip into the brain of a paraplegic, allowing him to play chess!

There are several other emerging technologies that promise a shining future. Like autonomous vehicles. Like unlimited energy from fission. Like all the benefits flowing from AI. Like remote healthcare. And others.

When humans are capable of developing such technologies why is it that humans, instead, spread hatred, fuel discord, develop WMDs, and start wars?

Investing would be such fun if geopolitical risk analysis were taken out of the equation.

Last week the BSE Sensex ended at 73635 for a weekly gain of  804 points.

In interesting news of last week, the appellate court in New York reduced the amount payable by Donald Trump in order to file the appeal, from over $ 450 m. to $ 175 m. He should be able to pay this, thus avoiding having his properties seized by DA Letitia James. Trump’s social media company merged itself with a SPAC (Special Purpose Acquisition Company). A SPAC is a company that has been listed on a stock exchange, with the purpose of raising funds to acquire a company in the future. Trump’s media company has thus become listed and his holding is worth $4 b, though it’s subject to a 6 month lock in period.

The UN passed a resolution asking for an immediate ceasefire in Gaza, and a release of all hostages. Should that happen, it would be welcome. The state of Texas has pulled out $8 b. funds given to Blackrock, for management, in protest against its ESG policies. Included in ESG are norms prohibiting funding for extraction of fossil fuels, a primary revenue earner for Texas.

Investors have factored in 3 rate cuts by the US Fed in 2024, of 25 bips each. So, should they come, they won’t impact much, as they are factored in. Should the Fed be unable to do three cuts, because the performance of a motley gang of politicians is a cacophony rather than a symphony, the markets would react adversely.

It may be advisable for investors to trust their instinct more than their politician.

Picture Source: https://www.washingtontimes.com/news/2023/aug/17/biden-fiddled-while-maui-burned-but-media-are-mad-/

Comments may be sent to: jmulraj@gmail.com