Wednesday, 5 November 2008

An Air of Change

The world is currently faced with an environment of challenges and uncertainty, the likes of which have never been seen before. On November 4th 2008, the US public raises its voice and has a say on the future of the world's economy. Thought Economics investigates the US presidential election, Barack Obama, the global economic crisis, and who’s profiting from all of this? by speaking to two eminent world experts and getting an opinion on either side of the Atlantic. Dennis Gartman (Virginia, USA), a globally respected economist and trader, author of the "Gartman Letter" and Hugh Hendry (London, England), partner and CIO of Eclectica Asset Management, a renowned and respected fund manager with over $1bn under management.


October 28th 2008, Thought Economics, Vikas Shah
[Updated November 5th 2008]

In recent weeks”, says the Bank of England’s Financial Stability report, “…the global banking system has arguably undergone its biggest episode of instability since the start of World War I”. This quote was shrouded by a backdrop of instability and war, where the world’s monetary and political leaders have come together, injecting over USD2 Trillion into the global financial system, hoping to stave off a depression, the likes of which the world has never been seen before.

To observers, this crisis has revealed more than just systemic failures in Banking. We have seen, perhaps, the strongest representation of how interconnected the world now is, where no country is truly shielded against another’s failures. The Financial Times, in October 2008, even commented that, “…Today’s global financial crisis is unlike any other in more than three decades. Unlike the Latin American debt crisis of the 1980s, and the later Asian financial crisis, the turmoil has been exported from the US, and then western Europe, to emerging markets. Securitisation and the proliferation and global distribution of complex and opaque financial instruments mean that economies have become more interdependent.”

Regardless of recent events, the USA is, for now, the most significant global Economy, accounting (as a single country, based on World Bank Figures) for around 21.5% of global GDP (PPP) and acting as a global financial centre, and hub for foreign relations.

On November 4th, The US public will vote to decide who will become the next, “leader of the free world”. Many have cited that this election is, due to the global economic and social outlook, one of the most significant in history with “change” being at the top of both candidates’ agendas.

The US public have the right to vote, but the rest of the world watches in anticipation, and in a privileged pair of interviews, we speak to two eminent experts to get the view from either side of the Atlantic:

For the USA, Dennis Gartman (Virginia, USA), author of “The Gartman Letter” (a daily commentary on the global capital markets, subscribed to by leaders of banks, broking firms, hedge funds, mutual funds, energy and commodities traders globally). Mr. Gartman has over thirty years market experience and is a regular contributor to media outlets such as Bloomberg.

For the UK & Europe: Hugh Hendry (London, England), partner and CIO of Eclectica Asset Management, leading the investment thinking and research which manages over $1bn in assets. Hugh is one of the UK's most well known fund managers, and also a prominent media contributor on financial and economic topics.In this interview, I talk to Dennis and Hugh about Obama, War, a global depression, and who’s profiting from this crisis.

Q: Many have cited Obama as being a necessary catalyst for change, do you think "the world needs Obama?" and what impact do you think he will have on our current economic challenges?

Dennis: First of all I find his [Obama’s] economics disturbingly left of centre, and I am therefore not a great fan of Obama. I think his policies on taxes are ill advised, and he tends towards protectionist trade legislation and, on balance, is collectivist. It appears, though, that I am in a growing minority. The only thing beneficial is that equities tend to do better under democrats than republicans. The reasons are open to debate, but it could be due to a more expansive monetary and fiscal policy, or perhaps as a result of election following a ‘clear up’ of the system by the republicans. I think those with incomes under USD 100,000 have a lot of hope on Obama, but those with incomes over USD 250,000 have none. McCain has no particular vision of economics, but has a stronger military background. This leaves us with one candidate with poor economic judgement, and one with none.

Hugh: The world of economics does not need politicians, we need a ‘one term president’ as the next four years will be economically challenging and we simply cannot do justice to the magnitude of the problems we have. For him [Obama] to succeed he needs to be really honest and tell people how severe the economic contraction could be. I fear Obama completes the move to the left of centre, and is faced with a legacy of government stake-holding in financial systems. I fear Obama’s election will see the lines of finance and emotive politics blurred and will see us move into a future where political agenda is carried out through the banking system. A bank where government is a large shareholder may come under pressure to not finance hedge funds, or have a relationship with Swiss banks (due to disclosure), or may be encouraged to make more “socially desirable” loans to environmental and/or manufacturing industries. The irony is we may have experienced a social utopia, with the past five years seeing history’s biggest transfer of wealth, as money moved from ‘rich bankers’ to the poor (ie: people who were never given access to credit have been given it, and its proven disastrous).

Q: What do you think the effect of war is on recessive economies, and do you think (as some would say) that conflict is a necessary part of economics?

Dennis: I would argue that’s not true at all. History does show that war brings you out of panicked depressions, but that’s not where we’re going at all. War offers fiscal stimulus to economies, and some of this is due to the propensity of capitalists to spore a capitalist atmosphere to it. Do I think war is a necessary evil? Of course not, it’s the old theory that if we break a window it’s strong for economic circumstance as it must be replaced when, in reality, it’s a net zero gain.

Hugh: Economics tends to be framed in wave cycles like Kondratiev’s waves, and there are many indicators in the present environment to say we are seeing the emergence of a ‘winter cycle’ with savage economic conditions. I am not an expert on why society’s come into conflict, but many would argue the reason is to secure commodities. I fear that our savage economic conditions and military conflict will, though, go hand in hand. I hope I am wrong.

Q: Do you think we are heading for a global depression? Or do you think the raft of co-ordinated measures from world leaders will provide some stability?

Dennis: I do think the measures which have been put into effect will stave off “The Big D”. We’re long overdue, and in the midst of a global downturn, and it’s probably going to be a recession as severe as the early 80’s but we are unlikely to see anything worse, and certainly not as bad as ‘73/74, and that which occurred in the ‘30s is beyond all realm of likelihood. We need to be impressed with how swiftly authorities have responded. In the past they would have elected to do nothing, or would have taken months to respond. Our response would have ended up like Japan’s [citing their recent financial issues], or like the 1930’s where they avoided injecting reserves at all costs and in many instances made the idiotic move of raising taxes. Of the things we should be grateful for is Bernanke’s experience (his university dissertation was on the evolution of a depression) and his acute awareness of the fact that delay would have been a terrible mistake. The clearest way to avert disaster is to lay out liquidity and deal with it later. They have, to a great degree, done all the right things.

Hugh: I almost believe in predestination in this context. If we look at humans, I believe there is a reason they die after about eighty years (enough to kill a generation). The reason? So that future generations can repeat the mistakes of the previous. My view of history is that it’s cyclical, and this view has taken me into conflict with many investors of the past 10/15 years who have viewed history as linear. In a linear view, every day we pass from the 1930’s depression sees that event being pushed further out of our collective consciousness, and the fact that it happened in the past has no bearing on the future. Regardless of the efforts, there has been no reflective consideration, the measures have been off the hoof, and disjointed. The greatest travesty here is the one directed at Europe more than America, which is the failure of monetary policy to guide economies. A good analogy is from aviation where, if you let an aircraft break stall speed, it becomes unresponsive. We broke stall speed in the UK economy in the last 12 months, and even if we pushed our rates down to Japanese levels, we are faced with they Keynesian metaphor of “pushing string”.

Q: While the newspapers are filled with bad news, its clear that in any market, there are people making profit. Who are the ones making money from this crisis?

Dennis: This is easy! Those who have been short of ANYTHING made a lot of money, and that fact is what confused people. Anything and everything went down, the only things rising were government securities with maturities in excess of five years. Gold was down, stocks were down, every currency other than dollar and yen were down, commodities were down, corporate debt was down. If you took a dartboard and took short positions and sold anything you did ok. Those who did badly were the ones who went long. You are starting to see things change, there is now a greater wisdom in the market. Margin calls have run their course, and we’re probably at the end of the panic, and getting back to normal circumstance.

Hugh: Me! One of our funds has just made 50% in the month of October!. The paradox is that despite the doom and gloom, there are remarkable profit opportunities out there. People are taking bets on interest rates, betting that rates will fall further than consensus and betting that the economy will prove weaker than consensus. As an example, British government bond yields are currently around 4-5%, this could easily fall to 2.5% over the next two years which, if true, gives you a return north of 40%. Betting against emerging currencies, especially in Eastern Europe is also something of a no brainer. When you have crises in emerging currencies, they can move 3-400%. I would not, though, want to do injustice to the problems of countries which have taken massively short-sighted decisions (such as Hungary, where most mortgages are financed in JPY or CHF) which have resulted in profound failures, but there are market forces such as ourselves, and other funds, which simply will not allow you to beat the system.


There have been few other elections in US history where the sense of economic and social urgency in the general population has been so great. Both McCain and Obama have identified the need for competent and strong leadership, McCain citing “Country First”, and Obama aiming to be, “The Change We Need”.

2008 has also provided the first election environment where the social dynamic of a technologically mature internet has shown the powerful ways in which society spreads and disseminates information and opinion, ensuring that now, more than ever, the individual has a say, with ‘home generated’ virals (such as ‘McCain wins by one vote’) attracting the kind of audiences which paid election broadcasts could only dream of. We also, in the same vain, see the power of social-participation, where countries and publications around the world take polls of who internationally is viewed as the ‘right choice’ (the economist having been a strong proponent of this with their ‘give the world a vote’ campaign and powerful pre-election week cover citing ‘it’s time’ with a photo of Obama).

The world’s thinkers have, as expected, torn shreds from the economic policies of both parties, and pragmatism would, perhaps, show that ‘one man’ cannot provide the solution to the problems of an economic crisis, war(s), and social unrest.

Turning our minds to the wider issues here, I take a note from Anatole France (Nobel prize winning writer in 1921) who wrote, “All changes, even the most longed for, have their melancholy; for what we leave behind us is a part of ourselves; we must die to one life before we can enter another.” It is clear that commerce, politics and society will have to make many wrenching changes over the forthcoming years to build strength and stability back into the world, and what people need is competent strong leadership and, perhaps, patriarchal guidance.

In these times therefore, policy must come a close and controversial second to the vivid realisation that the ‘emotional’ choice of leader is important, providing the collective sense ownership of the “who leads us?” decision, and of governance. This collective visionary leadership is the necessary catalyst for a change in populous sentiment needed to stabilise the US and, invariably, the rest of the world.


Update: November 5th 2008

The people of America have spoken, and Barack Obama is now the president elect of the United States of America (at the time of publishing, the count is not complete, but as at 08:30 GMT the margin of victory was 338 electoral votes v. 155).

In a powerful speech to over 1250,000 supporters in Chicago, President Obama stated, “If there is anyone out there who still doubts that America is a place where all things are possible, who still wonders if the dream of our founders is alive in our time, who still questions the power of our democracy, tonight is your answer

Of the financial markets response, Tullett & Prebon commented overnight “Financial markets rally in a vote of confidence to Senator Obama’s [projected] victory, with equities, commodities, USTs and the US dollar stronger yesterday

So, “Does the world need Obama?”

While this publication aims to remain politically neutral, we must consider the viciously negative sentiment which was gripping not only the financial markets, but the population of the world in general. Regardless of the conflicts within analyst and expert views of his policies and stance, Obama’s victory was greeted with scenes of hundreds of thousands of people lining the streets of all the major cities in the USA, filling Times Square in New York, and cheering well into the early hours of the morning with people of all races and backgrounds coming together, feeling a sense of achievement and pride. President Obama himself summed up the mood saying, “…those who've been told for so long by so many to be cynical and fearful and doubtful about what we can achieve to put their hands on the arc of history and bend it once more toward the hope of a better day

November 5th 2008 is a historic day, and I, for one, am looking forward to the impact of this change on our future.



Gartman Letter:

Eclectica Asset Management:

The Economist Global Electoral College 2008:

Kondratiev Economic Wave Theory:

Barack Obama:

John McCain:

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