Many of our current economic issues are cyclical

Another “fin de ciècle” atmosphere is brewing.

via Christine Roy/ Unsplash

This past weekend brought the midsummer solstice. The weather here was as it ought to have been. We had guests and sat out in the garden until late in the night supporting the viticulture of the Languedoc. It was a short period of time when all the troubles that beset the world were far away, and we were blissfully unaware that the White House and Pentagon had decided to send in the B2 bombers with their “bunker busters”. So, as the year turned a corner, so did the geopolitical backdrop. It has not been a good weekend for either watching the news or for reading. The thought of the days becoming shorter again was perhaps the least depressing one that one might have had.

I recall going to school in the sixties and into the seventies in the afterglow, or shadow if you prefer, of 1968. Some of us might have been more bound up in the philosophical aspects of the changes than others. The war was gradually being confined to history and despite the towering presence of the Cold War and of the American engagement in Vietnam, a new can do optimism was emerging. It would have come as no surprise to find some amongst my gang of mid-teens to be reading Proust or Wittgenstein or Adorno aside Marx or in my own case Bakunin. To what extent we did that out of interest and to what extent out of pretentiousness shall remain moot. We did, however, also look backwards and try to find leads in what was known as “fin de ciècle”, that French era – it wasn’t really a movement – that emerged towards and around the end of the 19^th century and which was reflected in widespread melancholy.

A century and a quarter later we are back in a decidedly “fin de ciècle” atmosphere and the political and military reshaping of the world is only a part of it.

With it comes a turbocharged version of Cartesian systematic doubt and all the list of the 10 best beaches, best restaurants, best schools, best reads, best ever games of football or Wimbledon’s men’s finals that fill two thirds of our daily papers cannot detract from the fact that the front third has precious little encouraging news to report.

The question is simple: are we more scared of the outcome or process of change? Seeing as that we cannot see what the former is actually going to look like, I suppose it must be the latter and if one were to subscribe to the Trumpian view, we should embrace the ongoing change in the vein of the motto of our own Royal Tank Regiment which is captured in its regimental colours of brown, red and green: “Through the mud and the blood to the green fields beyond”.

But that’s not what it feels like. Although the tariff policy which the Donald is still in the process of implementing is making the international headlines, the shift in immigration policy is likely to have a much deeper and more lasting effect on the US economy than the tariffs. And what applies to America applies in a very similar way to much of Europe with an emphasis on the old industrial powerhouses of Britain, France and Germany.

The Washington administration’s three pronged attack on immigration – stop inward migration, clamp down on hiring and housing illegal immigrants, followed by mass-repatriation – looked and sounded great on the stump but, anti-ICE demonstrations aside, the longer term implications for the American economy and, frankly, way of life are profound.

The first question has to be “Whose jobs are the Latin immigrants taking and if they get sent home who will take their place?”. Since the 1960s, western industrialised economies have, whether they like to admit it or not, become dependent on immigrants to fill the jobs at the bottom end of the spectrum, be they Mexican fruit pickers in California, Pakistani bus conductors in England or Turkish street sweepers in Germany and the near-endless supply of imported cheap labour, now from other less-traditional sources, has underpinned growing western prosperity, so the siren call to the “global south” has become ever louder.

Now we have a scene redolent of Johann Wolfgang von Goethe’s sorcerer’s apprentice, indelibly imprinted in my mind by Walt Disney’s “Fantasia” with Mickey Mouse in the part of the apprentice.

Donald Trump sees the Biden administration, which he anyhow blames for everything including no doubt the moths in his closet and the holes in his shoes, as the sorcerer’s apprentice and himself as the old sorcerer who knows the spell that will stop the brooms with the buckets and the rising inundation. He is wrong. The entire fabric of the US economy is woven with a high-tech superstructure warp and the low-tech substructure weft. Most of the bits in the middle, if you permit the generalisation, have been offshored.

Although the tariff policy is supposed, repeat supposed, to bring much of the medium-tech manufacturing back onshore, it is the damage that is being done to the bottom stratum of the economy that is likely to have the deepest and longest enduring effects on the States. Sure, AI and all that jazz will be able to fill lots of the gaps in the middle and upper strata of the economy but many of the very lowest level jobs cannot simply be automated.

Although the monthly Labor Department job figures have remained fairly positive, it is far deeper down that most economists ever look that the truth behind them is to be found. The participation rate amongst “indigenous” Americans – and I don’t mean those with bows and arrows – has remained static since Covid and jobs created have been largely filled by those who were not born in the country. This has been a phenomenon across the West to which switching off and reversing the flow of immigrants, as politically appealing as it might appear, is not the simple answer.

Trump prides himself on having stemmed the flow of immigrants but at the same time he has by his very vocal polarisation of the political narrative begun to trigger a measurable outflow of talent. Visa applications to the UK by US academics have in the past six months doubled. Not so long ago, we were fearing a brain drain as the smartest and most entrepreneurial of our own young were heading for America; now the Americans are coming to us. There appears to be no plan as to how the vacuum that the ICE is creating is to be filled, let alone the assault on academic freedom.

I shall make no bones about my delight that the POTUS with the cajónes has chosen the path he has. I have no doubt that in September 1939 there were plenty of perfectly nice English people who wondered whether it was really necessary to declare war on Germany. For the books, we declared war on them, not the other way around and I’m sure that across the country there will have been those who could not understand why there was no question of “de-escalation”. Of course I am aware that by 1945 the Soviet Union had alone lost more people and soldiers – 21 million in total - than the rest of Europe and the USA put together but maybe the enthusiastic wavers of the red flag should remind themselves that, between September 1939 and June 1941, Berlin and Moscow were supposedly best friends and that the German invasion of Poland from the west was being mirrored from the east by the USSR. The Katin massacre of 22,000 Polish officers and intellectuals in May 1940 had nothing to do with the Great Patriotic War and no doubt Vlad the Invader is busily trying to find a new way of explaining the Nazi-inspired mass-suicide of the Polish elite. I digress.

Many of the economic issues we are currently facing are, although they don’t feel like it at the time, cyclical. I have long questioned whether the persistently and artificially low interest rate environment was not going to prove over time to be more destructive than constructive. The build-up of debt – my old hobbyhorse – will of course not be resolved by lowering rates again if the intention is nothing more than to drive new borrowing. I recently pointed to the UK Gilt 1/8% 1/2026. With a volume of £ 41,178 billion the annual interest payment on this single gilt issue is just north of £51 million a year. When it is refinanced, and assuming it is rolled over for 5 years and rates are more or less where they are now – let’s call that 4% - the interest cost alone will rise 36 fold to £ 1.6 billion a year. As I pointed out not long ago, that is an increase in interest due equivalent to the annual cost of the winter fuel payments.

That is a single example but one which might serve as a pars pro toto for the refinancing wall that is facing the entire West and to an even greater extent Japan. With that, with the disruption to trade by way of the pending tariff regime, with the disruption to labour markets and now the uncertainty over the Pandora’s box which the US intervention in Iran has brought on and with days now again getting shorter, there is something of another “fin de ciècle” atmosphere brewing.

The USA needs the cost of a protracted military engagement like it needs a hole in the head. That said, and with Trump having been so proud of in his first term not having committed America to a new military adventure, even the most fervent of sceptics must somehow agree that his decision to let the B2 take off was not taken lightly. The Joint Comprehensive Plan of Action (JCPOA) specifically banned sub-terranean construction and, although Trump in his first term walked away from the agreement, the very fact that the Iranians have dug themselves into the hill at Fordow must tell us all we need to know about the ultimate intention. Whether they are a week, a month or a year away from creating weapons grade material is irrelevant; the process has to be stopped and even the most fervent of anti-Americans will barely be able to argue that the bomb, if in the hands of the Mullahs, is nothing but a harmless toy. “Oh, it’s just Poland. I’m sure Hitler will be happy after that…..”

Oil will continue to rise as fears abound that Iran will close the Straits of Hormuz although I suspect that they will not do so. Given the domestic weakness of the regime, showing restraint and statesmanship might prove to be important. I can’t see the US$ 100/pbb price, or at least not sustainably so. We are watching history in the making but at the same time are still short of a better flight to quality than US Treasuries. What is notable is that gold, having done so well so far this year is struggling to get back up to US$ 3,500/troy oz or even beyond which given the rising tensions would stand to reason.

Markets are altogether showing remarkably few signs of panic. Is this because they don’t want to jump or because they can’t decide which way to do so? Probably the latter whereby the euro, having looked like as good a safe haven as any, is now giving back a bit. Maybe the much-maligned dollar isn’t entirely dead in the water? Quarter-end is beginning to loom large and much of what will happen in markets during the coming week will not be fundamentally but technically driven as portfolio managers begin window dressing. Their personal views will be subjected to quarter-end benchmarking requirements so one must be cautious of drawing too many conclusions from money flows which happen this week. It is not going to be easy to square the circle between this growing political and economic uncertainty on one hand and plain old quarter-end technicals on the other.

So, off we trot into yet another new week and an odd one it will probably be. I have once again a diary full of fun and music which includes an awful lot of driving. I shall be watching markets although I shall refrain from trading. What is in the portfolio might prove to be as right or wrong as anything I might try to put there instead, and costs and fees can of themselves stress performance. For equally irrational reasons, bitcoin has lost the better part of 10% in a week to just around US$ 101,000; it does what it does and once it has done it folks line up to explain why it could not have done otherwise. Search me. Kathy Wood still believes it’ll be at US$ 1.5 million in 5 years’ time. If that’s her opinion, why does she own anything else?