Graham Macdonald, MBE
MBMG International Ltd.
Nominated for the Lorenzo Natali Prize
Crisis or Opportunity?
Last week the US Government had to ‘shutter’ some of its ‘non-essential’
operations because the Senate, the Representatives and the President, all of
whom need to agree, could not reach consensus on spending plans. In most
countries this would be somewhere between humiliating and unthinkable -
although it should be noted that US ‘non-essential’ does not do anything to
rid us of intolerable politicians, they’re still operating [I use the term
loosely] as normal [I use the term ironically] even though they should be
the first people not to get paid.
But in American politics this is quite normal - admittedly it has not
happened since 1995 but this is something like the 18th time since 1982 so
it is not exactly uncharted territory. In fact it is actually one of the
system’s checks and balances. When I tried to explain this recently, I was
asked. “But why do the checks and balances have to be so stupid?”
I couldn’t answer.
But maybe the answer is that they are not stupid; it is just the politicians
that are. We already found that out (if we had any lingering doubts) earlier
in the year when we went over the fiscal cliff. The sequester was a
programme of budget cuts that were designed to be too stupid to actually
pass but existed merely as a threat to both sides that if they could not
agree something sensible then ‘silly’ season would prevail. Guess what, they
couldn’t agree something sensible.
But the sequester/cliff was no big deal - except for the failed attempt by
the government to make some kind of point by messing up flight arrivals and
departures, which ‘they the people’ quickly revolted against and Congress
suddenly found a miracle cure for.
Similarly, the shutdown is no great deal per se - not in global economics
terms at any rate. I am acutely aware that some 800,000 people will go
salary-less until this is resolved but the economic cost seems to have been
determined at just 0.1% of Q4 GDP for each week of shutdown.
It is not, by itself, likely to cause any lasting damage unless…the
politicians do something really, really stupid.
We have to see this as a prelude to the debt-ceiling debate - if the
shutdown drags on until then and if positions have become so intransigent
that the debt ceiling increase cannot be agreed then we are starting to get
into more worrying territory. Long tail risks, such as downgrades (remember
that the US downgrade previously came as a direct result of debt-ceiling
political intransigence), and maybe even ‘default’ start to creep in.
Schroder’s Greg Taljard recently made the point at the Singapore Expert
Investor Forum that by mid-October Apple Inc. is projected to have 5 times
as much cash in its bank account as USG will have. I think that Greg was
talking up AAPL’s corporate bonds in that statement but I would have used
the point to talk down USG.
That said, T-Bills continue to rally from their oversold levels which maybe
highlights the madness of the politico-economic outlook right now. One
interesting aside right now being that Australian developer, Deal Corp, is
converting a Melbourne lunatic asylum into an up-market residential
development - if ever we needed a metaphor for Australia’s property market,
the Deal Corp guys have gift wrapped that one for us!
The tail risks to the US and global economy of downgrade or even default are
starting to make headlines everywhere but most commentators are missing the
point - if the underlying US recovery was healthy then this would just be a
short term piece of news froth - a buying opportunity for good quality
assets temporarily mispriced by a storm in a congressional coffee cup. All
would quickly get back on track.
If the underlying economy, as remains my thesis, is not recovering, then the
process will aid price discovery - the retreating tide will help us to see
to what extent the US and global economies have been swimming naked.
Either outcome would be a form of resolution although the latter will be the
more painful, although we would argue ultimately necessary, transition.
After four years of capital market recovery but real economy stagnation, it
would be healthy for valuations to retrace back to levels more connected
with fundamental factors (some 90% of that capital market performance can be
traced directly to stimulus and we would argue that the remainder can be
traced there indirectly). As long as you are not swimming naked (too high
exposure to US equity markets) you may get badly buffeted but the coming
transition could be the greatest investment opportunity for decades.
Either way, the key for all investors is to have the right risk focus going
into this. Therefore, if it is possible, people should embrace the
volatility as an opportunity - a difficult challenge that, if planned
properly, can be overcome.
In fact our earnest hope is that if the underlying economy is in as bad a
shape as we believe, then the shutdown ÓceilingÓFOMC meeting will bring on
the reset that policies have prevented. Unfortunately though, the reality is
that we may get dragged through a lot more policy-making before that.
A great many adjustments, although they may hurt the unprepared in the short
term, are badly needed but require a trigger to make them happen.
Policymakers want to avoid that as long as possible, even though the future
consequences would be more and more dire each day they fail to address the
underlying issues, because they want to get re-elected.
It is still most likely that the current issues will get resolved and the
can gets kicked further down the road and the present problems are just
another chapter in this ongoing saga. If this is the case then we will have
spent a lot of time fretting over nothing. But there is a chance that all
the intransigence leads to loss of control which leads to a forced re-set,
with a huge global crisis preceding a genuine recovery.
People can only watch the political posturing in full readiness and respond
accordingly. If you can, get liquid as soon as possible so you can get out
or get in dependent on what your own particular strategy requires. As many
people know, the Chinese word for crisis is the same as it is for
The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Graham Macdonald on [email protected]