I have always maintained that decisions are made by individuals, not committees. I know there are majority decisions, but in each case, an individual has had to make a decision, and each individual’s decision is tallied to form the majority. Our world, its progress and its current parlous state are the result of individuals’ decisions. I would submit that conflicts of interest (which mean that decisions are not being made) are causing much of our inability to get out of the hole the world is in.
I look at Europe with almost as much despair as Nigel Farage, the UKIP MEP. Do we really think that individual MEPs will promote and vote for solutions that mean they will have less income? Moreover, that they will push for less, not more, bureaucracy?
I believe in fact-based analysis of markets. If we look at the political market, what do we see? Worldwide, a relentless creep of the state, bigger and bigger. An increasing percentage of GNP is controlled by the state. It’s as true in the bastion of capitalism, USA, as in the home of the left, France. Interestingly, both seem paralysed by the inability of elected officials to agree, by the inability of government officers to make decisions, and by fundamental disagreements in terms of what to do to get out of the mess.
It’s instructive to compare these two economies, then try to put what is seen into a view of the markets. In sheer size the USA dwarfs even France: $15.8 trillion in nominal GDP versus $2.9 trillion, and first place compared to fifth in world rankings of economic power. In terms of the government’s participation in the economy, the government has a larger say in France.
Some would say this has resulted in the high cost of labour in France, running at 34.2 per hour, among the highest in Europe and higher than any other major industrialised economy. However, both economies are service economies, and in gun terms the countries rank highly – the USA the top of the world rankings with 300 million privately owned firearms, and France fifth with 19 million.
The similarities stop when one looks at the prospects for the countries. The US is growing; it has the cheapest gas in the developed world and will be self-sufficient in energy before 2020. France is shrinking, and some think it will lose its fifth place in world rankings to the UK this year. France depends on nuclear power and has few reserves. France is in the euro, unable to benefit from a weaker currency, making exports cheaper and imports relatively more expensive.
The US dollar is still the world’s most important currency. It is also the currency of the gun trade. The sheer size of the US economy means that changes in its consumption patterns can move markets. This is not true of France. The current uptick in copper prices derives from both China and the USA but it is US consumers feeding their demand, partly through China subcontract manufacturing, that adds weight to the US economy’s powerhouse stature.
Returning to my theme of decision-making, the two countries have further similarities. Both are burdened by debt. Both are run by presidents that have difficulty cutting spending or raising taxes – President Obama’s unwillingness to cut spending unless it is accompanied by new revenue, tax revenues for instance, means Republicans can effectively block spending cuts, while President Hollande has to face the powerful unions in France, creating a stall in spending cuts or tax increases. And both countries face further downgrading of government debt.
The US government showed the inability of large bodies of people to make decisions as it approached the self-imposed ‘fiscal cliff’. In France, Hollande is presiding over the 19th consecutive monthly rise in unemployment, and despite calls to deregulate the labour market is making no moves on that front.
So there you have it – both countries paralysed by decision-making (or non-decision making) with futures determined not by design but rather by resources; accidental in decision making terms. What does this mean for us and the markets we’re interested in? I have to admit that in the short term, it doesn’t mean a lot. Markets can shrug off all sorts of ‘facts’ in the short term.
One thing we do know: With Obama in power and calls for restrictions on gun ownership, the US market for guns will continue to power ahead. Of the estimated 656 million firearms in the hands of civilians, 45 per cent are held in the US. Guns outnumber passenger vehicles worldwide, and each year eight million new small arms plus 10 to 15 billion rounds of ammunition are manufactured. The authorised international trade in civilian firearms exceeds $7.1 billion a year.
If you want to participate in this growth, your market is the US, not France. The worldwide paralysis of decision-making has no impact on this choice. However, it does mean we have not solved the huge debt problems of the world’s major economies. We’ve done nothing to solve the trade imbalances in the euro group of countries, and we are still, on a worldwide basis, spending more than we earn.
Long-term, this system cannot continue. Short-term investors and managers have a much more positive outlook. This is because they see prices for copper, the world economic leading indicator, rising. They can see iron ore prices moving, following the upward trend in copper prices. The chart on the left shows the price of iron ore in Tianjin, which is the fourth largest port in China. Prices are up 6 per cent in the last three months.
The question is: is this an uptick in the end of 10 years of China’s double-digit growth, or are stocks of iron ore truly at a two-year low, as some report? I think the jury is still out. I do not think this positive outlook is well founded, and it will not survive the next debacle (sure to come when non-decision-making rules). So until then, be careful you are not lured in to commitments you cannot cancel. Demand may not be as strong as the current New Year feeling suggests.