Nick O’Connor – Capital and Conflict (Great Britain) –
Good morning! Happy new year and all that. I hope your Christmas holidays passed without incident. Save a seven hour car journey yesterday, mine passed fairly smoothly.
But will 2017? (Pass smoothly, that is.)
If the back end of 2016 was anything to go by, that’s unlikely. So much of 2016 was symbolic rather than active: Donald Trump was elected but didn’t take office (and still hasn’t); Britain voted to leave the EU but is yet to actually leave, or even begin the formal legal process of leaving.
In other words the seeds that were sown last year will at least begin to be reaped this year. The only guarantee I’ll make is that things will be interesting. So today, I thought I’d explain two of the key trends I think could shape up the early part of the year.
A tale of four cities
It’s still early in the year. As I write this at 7am this morning we’re not even properly into the first working day of the year. It’s fair to say the markets will be searching for the dominant narrative or narratives of the year. That may take a little time to develop. Absent that, we can look at the back end of 2016 for a few clues.
To me, we need to look at two key relationships, between four major global cities. The relationship between Berlin and Rome is one. That between Washington and Moscow is the other.
Let’s take Rome and Berlin first. Here’s my prediction. This year the fatal flaw of the European project will really show itself – and not just economically, but socially and politically, too.
What is that flaw? Simple. The European project is, at its core, based on the idea that collectively the nations of the continent are stronger together than apart. Which, as a founding principle, isn’t exactly a bad one. The strengths of one nation can help make up for the weaknesses of another, etc.
But here’s the problem. What happens when the problems of one country can’t be contained? When there’s no way to quarantine a threat in one place, leaving it free to spread around the whole system? Are you stronger together if there’s no fail safe to stop one country’s problem becoming a threat to the entire continent?
We know how that can work on a financial level. In an interconnected banking system – and especially one that shares a common currency and monetary policy, but allows its members the freedom to independently decide fiscal policy – that means problems can quickly spread from one part of the system to another.
The banking problems of, say, Italy – which had to bail out its oldest bank Monte dei Paschi di Siena right before Christmas – can quickly spread. What if they spread to the heart of the system – to Germany, for instance?
Or what if the problems spread the other way? What if someone commits an atrocity in a German city like Berlin, promptly disappears and reappears in a completely different country seemingly without issue?
We don’t have to guess. It happened at the end of last year. The man behind the attack on the Berlin Christmas market disappeared and resurfaced in Milan days later. What we don’t know is what kind of strain that puts on the people of Europe. Standing together means you share each other’s weaknesses too.
I’m not making a value judgement there, by the way. I’m just pointing out that this is the kind of thing that can bother people in ways they may not publically express. Sharing a common market, border policy and currency in times of prosperity is easier to sell. Sharing in another nation’s banking, security or political problems is less palatable.
I think that’ll be a key theme for 2017. The relationship between Berlin and Rome could be key. With Italy leaderless and Germany facing elections before the year’s end, there’s plenty of scope for political unrest to spill from one nation to another.
And that’s to say nothing of Brexit! The relationship between London, Berlin and Rome may perhaps be even more influential in 2017, especially if we see new governments in all three cities (which is possible). But fathoming precisely how things will develop in that triumvirate is beyond the scope both of this letter and my own early January brain power. More on that another day.
Moscow, Washington (and Trump Tower)
Here’s another key relationship to watch. It’s a fascinating one. Relations between Russia and the US are at a real low. Barack Obama will leave office having accused the Russians of interfering in the US election and expelling 35 Russian diplomats as a response.
But come 20 January – less than three weeks away – the Obama White House turns to dust. Donald Trump will walk into the White House and do… well, who knows? With Trump, the only certainty is unpredictability. Which is the worst thing to be certain about.
A decent guess is he will attempt to reverse whatever Russian legacy Obama leaves him. But therein lies the problem. Are Obama’s actions legitimate responses to legitimate threats… or is he playing politics?
It’s impossible to know. The US government’s claims that Russian hackers interfered with the election is impossible to prove. It’s like the claim that Iraq had weapons of mass destruction. There’s no independent third party to adjudicate. So you’re left asking yourself whether to believe the government, or not.
(By the way, long time readers of Capital & Conflict may remember that this time last year, Dan Denning made a prediction about US geopolitical relations. In short he said the “lame duck” last year of a presidency might be a time when a geopolitical rival would challenge the US. Was Dan right? Did Vladimir Putin do exactly that – by unleashing his cyber forces to wreak havoc on the US political process? Again, it’s hard to say.)
But it’s not just a case of whether to believe the US government. It’s even more complicated than that. You have to decide whether to believe one president over another. Take your pick of Obama’s “the Russians dunnit” or The Donald’s “no one done nuffink”.
I don’t know which one of them is lying. But I know that one of them has 17 days until his view is no longer relevant. It follows that Trump’s view will become the state line. What happens between Washington and Moscow then will be fascinating.
And here’s an intriguing thought. What happens if there’s a large scale cyber-attack launched against US infrastructure in 2017? How would Trump respond then? More on that later in the week.
A piece of advice for 2017…
Before I go, a quick dip into the mailbag. I received this note yesterday. It may well be a question you’ve been pondering. If so – let me try and answer it!
The answer is… it depends. Something like Eoin Treacy’s Frontier Tech Investor isn’t the kind of product that’ll recommend lots of “ISA eligible” shares. That’s because if you want to truly invest in the “the frontier” of new technology, you need to look outside what most people consider the norm.
That’s not for everyone. You need to be a bit of a pioneer, willing to take a risk and maybe step outside your comfort zone. (Or perhaps set up a small side portfolio with 5% of your investment capital for something a little different.)
Something like The Fleet Street Letter or London Investment Alert is much more likely to recommend ISA eligible shares. But again, that’s not a guarantee. Neither product has that particular remit.
Here’s my suggestion. If something interests you, try it. Review it. Take a bit of time to see if it meets (or hopefully exceeds) your expectations. If it isn’t right for you, take advantage of the money back guarantee all our products come with. You will always have 30 days to try something out. Use that time. Neither Dan nor I are offended if you take a look at one of our products and decide it isn’t right for you.
I appreciate that may not be the simplest and easiest answer to the question. But as a principle it’s worth keeping in mind. The chance to come in and look around without commitment is exactly the deal I’d want if our roles were reversed. Take it!