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Trump

Trump’s Latest Escapade

 1 min read / 

Despite sparking anger and disbelief at every turn, Donald Trump is on something of a winning streak.

Editor’s Remarks: After entering office, Trump was quick to lambast California as “out of control”; now, the western state is fighting back. The latest demonstrators have been prompted by the Trump administration’s sweeping tax cuts, stance on immigration, its crackdown on net neutrality and most recently the expectation that Jeff Sessions will roll back marijuana legalisation laws. Californians are also annoyed that Florida, which supported Trump in the 2016 election, recently received a waiver for an unpopular drilling plan. Pro-Democrat California, however, did not. Abroad, however, South Korea’s president – albeit with a smile on his face – said that the US president was instrumental in bringing his country closer to its northern neighbour.

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America

Trump’s Presidency and Russian Relationship: The Future

 4 min read / 

Trump Russia

Much has been contested about Donald J. Trump’s love affair with Russia. Questions deserve a thorough and honest investigation. As distasteful and risky it may be, the best outcome of the enquiry is accusations continue to swirl, Trump limps through three more years, and in 2020, he is crushed at the ballot box. The world moves on. If removed from office, odds are Trump whips his base into a frenzy. Only the height and duration of civil unrest is in question. A worse case is that Trump emerges emboldened, eager to settle Putin’s longstanding challenge.

Putin Mocks Trump

The competition is real. Putin’s economic and political dominance gnaws Trump. Putin knows this. So, he taunts the President and dares Trump to employ the same ruthless tactics he exploited to consolidate power and possibly become the world’s richest man. Since Trump only sees green, he took the bait. The race is on to be the world’s first trillionaire.

Russia’s population is 142 million. Its $3.86trn translates into a measly $26,900 per capita GDP. In contrast, the 326 million people of the United States generate $18.62trn in GDP, nearly five times Russia’s total. The US per capita GDP of $57,600 more than doubles Russia’s. Despite Russia’s meek economy and reports  that Putin has embezzled up to $200bn in assets, Putin remains incredibly popular in Russia.

The apathy regarding this unparalleled heist makes Trump and Putin salivate over what they could jointly pilfer from the world economy. To advance their contest, the pair will identify a common threat. US-Russia relations will warm. Under the guise of “Peace through strength,” Russian sanctions will be lifted, and the Magnitsky Act repealed.

The administrative state in retreat, animal spirits will run wild. Trump’s name will be emblazoned across the globe. Countries desperate for jobs will be compelled to forge deals sponsored by Putin and Trump. Ethics be damned, the race to the bottom of the $120trn global economy will prompt a wave of corruption never seen before. Every facet of human decency will be compromised: environmental regulations, free and fair-trade by-laws, intellectual property, and human rights protections. The collusion is real.

In time, complicity will turn to double-crossing. It’s the Trump-Putin way. Makeshift “me-first” trade deals will collapse. Boycotts, divestitures and sanctions will be commonplace. Cooperation will evaporate. New political boundaries will be drawn with little world condemnation.

It doesn’t have to happen this way. Patience is a virtue. The checks and balances of the three branches of government are powerful mechanisms to thwart overt corruption.

Yet, for the impatient who seek Trump’s impeachment or removal via the 25th Amendment, be careful what you wish for. Only Trump can tame his army. To assume Trump will plead mercy at the feet of the administrative state contradicts Trump’s lifelong persona. He will relentlessly counterpunch and encourage his followers to do likewise. The short and long-term political and social risks are astronomical.

If Trump stems the tide, consolidates power and aggressively partakes in Putin’s race for two terms, the risks outstrip his forced removal. The consequences will be multi-generational.

Rope-a-Dope is the Key to Containing Trump

The only path that possibly prevents extensive collateral damage is to check Trump into policy oblivion. Legislators must play rope-a-dope for as long as it takes, even three years if necessary. If Democrats take back both houses in 2018, the tactic will not set up Trump and his base for a final knock-out punch in 2020. For that to occur, numerous members of the GOP must join the effort. They too must throw periodic jabs at Trump then absorb a barrage Trump’s counterpunches.

With foes in every corner, even Trump – the self-proclaimed greatest counterpuncher in history—and his base will wear themselves out well before 2020. Then the decisive knockout punch can be delivered at the ballot box—without collateral damage.

Trump is severely wounded. If he gracefully and peacefully surrenders the Presidency, great. But don’t expect it. Rope-a-dope deployed by both parties is the countries best hope for a peaceful end to the Trump Presidency. Any other scenario risks the once unthinkable; an ‘American Spring’.

Keep reading |  4 min read

Markets

The End of the US Bull Market: Are We There Yet?

 9 min read / 

US Bull market

The calendar year may have changed recently, but the underlying trend in global equity markets has not. The bulls are still in charge and the major indices have all continued to track higher (talk about year highs when it is only a handful of days old is simply ridiculous, although it happens!).

In terms of Wall Street, as we and almost all value-based investors have noted, from a historical perspective it is hard to argue that US large cap equities are cheap, rather the contrary – they appear richly priced.

According to one school of thought, the continued gains in US equity prices when valuations are stretched is just a classic example of “irrational exuberance”. Indeed, as we noted in our final market insight of 2017, using market-price-based proxies of investor sentiment, it is easy to see why some have arrived at such a conclusion.

Does this mean the answer to the children’s classic travel question “Are we there yet?” – ‘there’ being an end to the second-longest Wall Street bull market on record – is now a ‘yes’?

Our crowd-sourced sentiment data suggests not. In fact, there is strong evidence supporting an alternative, diametrically opposed, market scenario.

One of the recurring themes in our market commentaries over the past several quarters has been that when one examines the collective tone of millions of online financial comments posted every day – encompassing both traditional and social media – extreme bullishness has been (and remains) largely absent. In fact, scanning across the major indices, we observe extremely high crowd-sourced sentiment in only two equity markets – India’s Nifty 50 and the Swiss SMI (see exhibit below).

Exhibit 1: Crowd-Sourced Sentiment – Major Equity Indices

Source: Amareos

Hence, a top-down look at our crowd-sourced sentiment indicators directly contradicts the irrational exuberance bubble scenario, not just in the US, which is the primary focus of this market insight, but globally.

What our indicators appear to be picking up – something that may not be fully captured in market prices – is that there has been a high degree of scepticism about the ongoing rally in US equity prices.

After all, consider the slew of articles in the financial press over the past year warning about the overvalued equities and the possibility of a stock market crash. If it subsequently transpires that we are on the precipice of a major decline in US equities (probably global given contagion risks), then this will be one of the most predicted “bubble bursts” we have ever encountered.

Markets tend not to operate that way.

Our perception of how markets operate is more masochistic. We see prices tending to move in a manner that inflicts the most pain, to the most number of people, in the shortest space of time.

A touch cynical perhaps, but based on our many years on the buy-side, it is true nonetheless.

At present, we judge the most pain to be on a move higher in US stocks, not lower. To explain why, we need to take a look at how our US equity sentiment indicators evolved over the past year.

As mentioned, crowd sentiment towards US equities is marginally above the long-run average suggesting only mild optimism. This is the case – and has been for much of the past 12 months – because of an absence of positivity in traditional financial media. Indeed, we commented on the unusual divergence between the tone of the two media types, with social (which we consider to be more reflective of a retail investor mindset) being considerably more positive than traditional media (which we consider to be more reflective of a professional investor mindset) in an earlier market insight.

While we cannot know this with absolute certainty – we convert millions of online articles posted every day from text into data for a reason (it being impossible to read everything that is published) – our strong belief is that this scepticism amongst professional investors comes from a sense that the bull market has been a “central-bank-induced-fake” whose foundations are in the process of being undermined by the removal of monetary stimulus.

Exhibit 2: Crowd-Sourced Sentiment By Media Type – S&P500

Source: Amareos

The economic logic that underpins such scepticism is sound, given that monetary policy can only generate intertemporal redistributions of aggregate demand ie. bring future demand forward, it can’t create it out of thin air. However, asset markets do not always act in accordance with economic logic and for those investors who have been underweight equities based on such logic the continued ascent in equity prices has been painful.

The financial pain is rather obvious. Underperformance is never good for an active manager but especially so at the present time given the increasing popularity of lower-cost passive investments.

Less obviously, but potentially just as powerful, is the emotional pain.

The Emotional Impacts

FOMO, or the Fear Of Missing Out, (the acronym only came to prominence in the past few years as a result of its social media usage but its long-hand version has been known for much longer) triggers a response in the amygdala area of the brain as social exclusion is perceived as a threat. Like many other traits, evolution endowed us to help us pass on our genes successfully to the next generation, it has unexpected side-effects in terms of how we perform as investors.

Given the relative lack of enthusiasm for US equities amongst professional investors compared with their retail counterparts, a perspective challenged by the ongoing rise in equity prices (so much for “smart” versus “dumb” money labels), the FOMO effect is likely to be most potent with the former.

Indeed, glancing at the right-hand side of the above exhibit, shows the two series have converged over the past several weeks, with social media becoming less positive, whereas traditional media has become more constructive in tone.

This recoupling is important.

Unlike the irrational exuberance view, which implicitly implies that the next major move in equity prices is downward, if the FOMO effect is at play the implications are markedly different. Not only would it suggest that the second-longest bull market on record has longevity, but as investors buy US stocks to avoid “missing out”, it could trigger a “melt-up” in equities – a scenario recently outlined by GMO’s Jeremy Grantham.

It is the same (overvalued) starting point – two very different market outcomes.

The recent uptick in mainstream media sentiment, is not the only evidence supporting the FOMO-driven “melt-up” scenario. The algorithms underlying our sentiment indicators are calibrated so as to be able to identify individual emotions, such as joy, anger, disgust etc, contained in online financial media posts.

Of the eight individual emotions we identify, our previous research indicates that fear is the most useful as it is strongly correlated with equity market corrections (and periods of rising volatility). Even though fear and FOMO share a common word – fear, rather obviously! – the two have very different connotations and linguistic fingerprints. Indeed, fear can be considered the exact opposite of FOMO. The former reflects worries that the stock market will decline whereas the latter stems from investors’ concerns about missing a continued price rally.

Exhibit 3: Crowd-Sourced Fear Sentiment – US equities

Source: Amareos

Hence, to be consistent with the FOMO hypothesis, one should expect crowd-sourced fear sentiments towards US equities to be on the low side, and indeed this is what we observe – as displayed in the exhibit above. In fact, over the past week or so, fear sentiment towards US equities has fallen to record lows – a trend that is by no means exclusive to the US. Scanning across the major equity indices, one can readily observe that the fear sentiment is either low or extremely low with the exception of the Brazilian BOVESPA – see exhibit below.

Exhibit 4: Crowd-Sourced Equity Fear Sentiment – Global Heatmap

Source: Amareos

The final, and in our judgement the most compelling, piece of evidence for the FOMO effect comes from the rise in our crowd-sourced stress indicator for US equities. As shown in the exhibit below, stress has risen sharply over the past several weeks.

Exhibit 5: Crowd-Sourced Stress Indicator – US & S&P500

Source: www.amareos.com

Given the jump in the US equity stress indicator, one would expect there to be some readily identifiable catalyst. Typically, a rise in equity stress would correlate with developments such as a slump in asset prices (as occurred in early 2016), increased worries about US economic prospects and/or other non-economic events, such as geopolitical tensions that would also show up in the country level indicator – see exhibit above.

But, US economic prospects remain constructive and Stress at the country-level, although it has been elevated previously, has begun to fall. (At the country level, the US presently is the top of the leaderboard when it comes to anger and disgust – something we strongly suspect is related to feelings about President Trump more than anything else).

Ruling out these two possibilities, and obviously, in the absence of a market correction, the natural candidates for rising stress in US equities are missing. However, one would expect to see stress pick-up as equity markets continue to march higher if the FOMO effect was at play as this would be consistent with the emotional pain described previously.

Assuming this to be the case, then not only should US (and global) equity markets continue to defy “valuation gravity” but price momentum could very easily become even more positively skewed, consistent with an unfolding of the “melt-up” scenario.

This is because the intensity of the FOMO effect becomes greater the more equity markets rise, which in turn encourages more former sceptics to convert (a temporary positive feedback loop is created). In much the same way as commuters who scramble to make the last train home feel great when they finally jump on board, the conversion would boost sentiment and contribute to lowering stress levels.

However, and not without some irony, a FOMO-induced “melt-up”, marked by rising crowd sentiment and declining stress would, when combined with stretched valuations, bear the hallmarks of a classic “irrational exuberance” bubble top.

That would be the point at which to worry, but we are not there yet!

Keep reading |  9 min read

Africa

Standing Defiant: African Countries Respond to Trump’s Comments

 5 min read / 

Africa Trump

Trump’s recent bout of racism has given African states the opportunity to exert considerable agency on the world stage and also take the moral high ground of dignity and respect. Though Trump’s comments are of a vulgar and vile nature, they represent nothing new: African countries are severely misunderstood and misrepresented in mindsets and media, in particular by those of some western publics.

This is to everyone’s detriment, as African countries are strategic partners in trade and security and will only grow more vital to the state of global, economic and political affairs – it is estimated that the majority of the world’s population growth will take place on the African continent.

The African Union’s Response

Trump’s comments are an opportunity for the African Union, or AU, and for individual African states to exert agency and also strengthen their moral standing. Trump’s outright racism and the ensuing African diplomatic response and the strong voices on social media represent a key moment in recognising Africa’s all too often under-appreciated importance to global affairs. The African Union condemned Trump’s comments in the strongest of terms, and issued a statement declaring that:

“The African Union Mission wishes to express its infuriation, disappointment and outrage over the unfortunate comment made by Mr. Donald Trump, President of the United States of America, which remarks dishonor the celebrated American creed and respect for diversity and human dignity.” The comments were further characterized by African envoys as “outrageous, racist, and xenophobic.”

Botswana has been a major voice in this response, describing the comments as “irresponsible, reprehensible, and racist.” Among the larger African states, Nigeria has not issued an official response, though South Africa is issuing a diplomatic protest over the comments, stressing that “relations between South Africa and the United States, and between the rest of Africa and the United States, must be based on mutual respect and understanding.” US diplomats were summoned in Ghana, Botswana, and Senegal – more African countries are expected to follow suit.

American Views on Africa

The racism and ethnocentrism inherent in labelling “distant” countries (such as Haiti and nations in Africa) pejoratively is nothing new. Though most Americans would not express their worldviews in such crass and vulgar terms, there is widespread ignorance about African countries, with little recognition that African countries represent strategic trade and security partners, not to mention their vast cultural wealth. This problem lies in all facets of American society, from predominantly negative and homogenising news coverage about the African continent to the Eurocentric focus of the education system.

These comments were made in a larger context of domestic demographic change within the US, in which white people will enter minority status by 2044, in addition to the global power shifts of the wider world. Not only are Trump’s comments steeped in racism and ignorance, but they represent the uncertainty and deep discomfort many white Americans feel in the midst of the changing domestic demographics and a world order in which the US is no longer the lone superpower.

Africa is the Future

The African continent is the future, as African population growth will account for the majority of the world’s global population with half of the world being African by 2100. African countries are already strategic partners in trade and security, and will only become stronger players in global political and economic affairs.

Though it is certainly a desired goal for public opinion – the worldviews of western publics in particular – to recognise and appreciate the importance of African countries in their right and their integral significance to international relations, in some respects it doesn’t matter what Americans might think about a massive continent of 54 countries. As John and Jean Comaroff have written in ‘Theory from the South‘, “Lagos is not catching up to us. Rather, we are the ones catching up to Lagos.” African countries are not waiting on Western publics’ enlightenment.

Due to the rise of emerging powers changing the global landscape of power relations, African countries have more opportunity than ever to exert agency in selecting their partners and leveraging relations for national gain. Though the US is a key economic partner for much of the continent, African countries have many other options and it is well known that the approach of China and other emerging powers are, in many respects, regarded more positively than traditional western approaches. Relations between the US and African countries have been marked by longstanding goodwill, but Trump’s comments may complicate relations, ranging from security cooperation to trade ties.

Most important is African ownership of African development, in which the harmonisation of external partners aligns with domestically articulated goals and aims in respect to the continent’s nations. African countries, and all of the diversity within them, must be appreciated in their own right and understood on their own terms.

Conclusion

African countries have their own visions and national development plans and are charting a course marked by innovation and holistic strategies aimed at meeting both human and environmental needs. It is time African countries are recognised and respected for the leaders they are on the world stage and that western publics realise that society’s global future is very much an African one.

Trump’s comments are of course vulgar and crude, but should make people think very seriously about society’s own failings in how people portray – and learn about – Africa, an incredibly diverse continent of 54 countries, from our media to our classrooms. Africa is the future, and – following Trump’s comments – African countries have taken the opportunity to exert agency on the world stage and take the moral high ground.

Keep reading |  5 min read

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