I recently attended Kilkenomics, in Kilkenny Ireland, and was incredibly privileged to hear from some of the greatest minds of our time. What, may you ask, is Kilkenomics? Well, simply put, it’s the world’s first festival of economics and comedy. Your next question surely has to be “How is that even possible?”. Well, the sessions are chaired by comedians, but the subject matter is serious – what made it unique is that by poking fun at the panellists, one got to hear some genuine insights into the issues facing the world today.
Some of the bigger picture topics debated, included: China, Brexit, rising income inequality and the Trump presidency a year on. To be fair, as much I learnt, the information gleaned probably led to more questions than answers. I cannot say that I agree with some of the points raised either, but such is the nature of markets, and a lot of the comments will be healthily debated at our next Strategic Asset Allocation meeting in January 2018.
Starting with China, some felt that it is on the verge of economic collapse, due to the rapid expansion of money, and some commentators were predicting this to happen as early as the end of this year. Year-on-year change in social financing credit is larger than the entire world’s credit growth; this is unprecedented. With the vast bulk of Chinese debt in domestic hands, when growth slows and the money supply tightens, expectations are that the fallout will not be as severe as the Lehman’s crisis, for example. Many did concede that they have been predicting this for a while, although they may have been too early.
China’s housing market is severally overvalued, with one speaker referring to it as “the grandmother of all bubbles”. The Renminbi needs to depreciate, as capital flight is still occurring – evidenced by the fact reserves are growing slower than the current and trade account surpluses. The ‘One Belt One Road Initiative’ is really all about selling infrastructure, with the Chinese planning to compete head-on with Japan and Germany. China is forging ahead in the world, while the US is in retreat. China can’t believe how lucky it is in becoming the global peace force, while the US gives up on that role. It is supposedly no coincidence that the Chinese have built a six-lane highway to North Korea, on which tanks can travel: will they sort out North Korea, in exchange for infrastructure projects in the US?
As Germany loses market share to China, the long-term future for Europe is grim, given the fact that China has longer financing terms. Global corporations can’t compete with China, as whatever vendor financing terms they agree to, China just ups the ante.
In most panel discussions, the topic of global income inequality was hotly debated. Some argued that the world is better now than it has ever been, with a considerable portion of the global population no longer in poverty. However, the majority of participants felt that while the poor might be better off, the gap between the rich and the poor is more significant than it has ever been. This is leading to rising nationalism and populism, which is a major reason behind the Trump presidency and Brexit. One Argentinian economist argued that not only has populism led to the current batch of political leaders, but our attention spans aren’t what they used to be, thanks to an overdose of social media and TV (with 140 channels etc.). Politicians now have to be entertainers, and it is leading to poor planning, as everything is about the here and now. China is the one exception, given that its populace has practically no say in the running of the country.
Given that the festival was held in Ireland, the topic of Brexit was talked about at length and in most of the panel discussions. In the words of one of the speaker, Brexit was about economic inefficiencies wrapped up as nationalism. The growing gap between the “haves” and “have-nots” led to Brexit. One possible solution to the prospective border problem between Ireland and Northern Ireland is for there to be ONE Ireland and Northern Ireland to leave the UK! The growing consensus from most was that Jeremy Corbyn is going to be the next Prime Minister of Britain and he supports a united Ireland.
If Brexit happens, the UK will fall apart. Scotland will call another referendum, and this time the leave vote will win. Northern Ireland could leave too. Jeremy Corbyn won’t want to win the battle but lose the war, i.e. Scotland and Northern Ireland leave the Union because of Brexit. There is a good chance he could call another referendum to vote remain.
The prevailing view from almost all the panellists is that the Eurozone nations are not interested in negotiating with the UK and that the UK must do what the Eurozone tells them to do – this is not a conversation, but a list of demands from Europe. This view of Europe being run by technocrats and not having a clue how to run an economy was also shared by the former Greek Finance Minister, Yanis Varoufakis, who felt that Britain would have a tough time negotiating any sort of settlement with the EU. The reaction to Brexit in Europe has been to teach the UK a lesson, and instead of asking why it happened, it has made them more autocratic.
Views on the US and Trump were surprisingly upbeat. One of the reasons given for why the US is doing so well under Trump is that he stands for small government and less interference with private enterprise. Others felt he has got lucky and that the US economy was already on the mend before he even arrived, thanks to Obama and Yellen. As far as calls for Trump’s impeachment, this won’t happen and it is far more likely that he will leave at the end of his four-year term because he has had enough of Washington and allegedly wishes to launch Trump media. His incessant twittering is all about building the Trump brand; there is no such thing as bad press in the media.
On a more negative note for the markets in the short term, one of the panellists who has served under four US presidents, from Nixon upwards ( he was about 80-something), in the role of “fixer” in the Senate, believes that the tax bill will not pass in its current form. He sees it being redrafted and debated again in January.
So what did I learn at Kilkenomics? This was an economics forum, so the views were more about the very big picture impacting the world economy, but some views on markets were shared. “The big risk is not that the markets fall, but that they melt up…” – from one of the American speakers. “If you are stupid enough to buy these markets, you deserve to lose money…”- from one of the British speakers (Note: she was a journalist at the FT, and they have a bias towards negativity) “China is going to crash, and it’s going to crash soon…” – Israeli speaker.
Clear as mud, right?