Month: October 2022

British politics is now unconnected to power – we need leaders who understand this

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We should look to candidates who prioritise things they can actually do something about

Politics is fundamentally about power, one would think. Liz Truss barely had any when she arrived; now she has gone. Sunak has a little, but not a lot, more. Boris had it in spades in December 2019, but had lost it by earlier this year. Elsewhere I have written about the extent to which Cameron’s 2015 election victory represents something of a modern high, by mandate and power, albeit subsequently wasted.

Yet the politics of the UK these days is largely reminding me of the quote, usually misattributed to Kissinger, that “academic politics is the most vicious and bitter form of politics, because the stakes are so low”, aka Sayre’s Law. The fact is that, like academics eyeing each other warily across the High Table (Maurice Bowra’s adage that he felt “more dined against than dining” was just such an exposition), politicians of the United Kingdom of Great Britain and Northern Ireland are now squabbling over an ever-diminishing realm of authority, and this should impact electoral choices.

The Truss-Kwarteng debacle a few weeks ago demonstrates the limitations of what an “independent” medium-sized country actually are. Whilst on the face of it we can deplore financial markets and globalisation, and say to ourselves that this happens even to the greatest powers – Bill Clinton’s healthcare reform in 1994 foundered “fucking bond traders” – we also know that size matters. Taking on the financial markets as a large economy is different to taking one on as a small one. This is a rather Manichean world and Britain is showing itself to have neared the dividing line.

Of course, this could all have been better managed and the specifics of the Truss administration made a bad situation worse. But with Sunak coming in, we can judge whether simply a more articulate and deft touch would make the difference, much as Leopold II succeeded Joseph’s reforms in the 1790s. In fact, he will not, because Sunak understands precisely that Britain can ill-afford to operate outside the bounds of economic convention dictated to us, from the major institutions via the capital markets. Britain cannot have a truly independent monetary or fiscal policy, and Sunak will not want to test this again. This is because of two factors: first, Britain simply is not big enough, with an economic hinterland of adequate heft, to support Sterling and the government borrowing markets on its own. It is almost uniquely globalised in terms of its financing and the shift to this model in recent decades (see my previous note on exchange rates) means that Brexit or not, this will not improve. Secondly, Britain is buffeted about by two economic forces – the EU and the US – who do carry their weight. Interest rates in both will effectively dictate British interest rates; the only scope for freedom are in those occasional periods of divergence between the two:

Source: IMF database, figures annual

Interest rates are of course only one lever of economic power (albeit an important one in a financialised economy); but the recent reaction to Kwarteng’s budget shows that fiscal tools are equally to be judged by the narrow minds of financiers of little imagination, and it was not only the exchange rate that collapsed for a time, but also the cost of borrowing which rose (Clinton’s “bond traders” in action). The notions that Britain could just “do its own thing” was always fanciful, at least without accompanying “pain” which no politicians are as yet prepared for.

So what does all this mean? Well for me, as an active Conservative Party campaigner and even one-time candidate, it means thinking about leaders who will actually will do something because they are focused on areas which a domestic agenda can still influence. Truss vs Sunak was a false dichotomy because neither promised actionable agendas. I supported Kemi during the last leadership contest, first because I agree with her, and secondly because those areas were one a Prime Minister of the United Kingdom of Great Britain and Northern Ireland can actually do something about.

I am more or less talking about kulturkampf in a broad sense. Readers of this blog will know that I prioritise issues of identity above most other things because nation-building is both important and something of a lost art in the globalisation age. Kemi’s most impressive speech for me was her response to the House during Black History Month in 2020, where she laid out some very obvious but important points about British culture:

“Our history is our own; it is not America’s. Too often, those who campaign against racial inequality import wholesale a narrative and assumptions that have nothing to do with this country’s history and have no place on these islands. Our police force is not their police force. Since its establishment by Robert Peel, our police force has operated on the principle of policing by consent. It gives me tremendous pride to live, in 2020, in a nation where the vast majority of our police officers are still unarmed.

On the history of black people in Britain, again, our history of race is not America’s. Most black British people who came to our shores were not brought here in chains, but came voluntarily because of their connections to the UK and in search of a better life. I should know: I am one of them. We have our own joys and sorrows to tell. From the Windrush generation to the Somali diaspora, it is a story that is uniquely ours. If we forget that story and replace it with an imported Americanised narrative of slavery, segregation and Jim Crow, we erase the history of not only black Britain, but of every other community that has contributed to society.”

I commend everyone to watch this.

We can debate the specifics of her message here, but the important point is that she can campaign and do something about this. There is a culture war to be won, through the media, through institutions, through agency capture and other machinations if we really want. These are all within the remit of a leader. What she cannot do anything about, is bring interest rates into the realm of fairness for savers and the hard working rather than constantly inflating domestic household debt. At least, not for now – although if you get the identity question right, at some point down the line you can begin to ask the people for the sacrifice needed to finally rectify the economy and bring it back to something which serves the population and not the other way around.

Britain needs to break out of its mindset that it still carries the kind of status and power which allows for true independence. It is this wrongheadedness which led to one specific strand of Brexit support for which I have no sympathy whatsoever – the Dan Hannan school of “Singapore on Thames”. If these politicians spent half as much of their time trying to change things that are changeable, instead of pursuing doctrinaire dreams of economic engineering, Brexit might actually be made to work. In the meantime, the economic shackles we live under continue to demonstrate what a poor economic choice Brexit was. Better panem et circenses.

Not all emerging markets are the same (Part 2)

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Tent vs marquee economies (or why Indonesia is bad and Vietnam is good)

I previously looked at the SE Asia economic picture overall and drew out some pretty stark contrasts. I want now to focus specifically on two markets I know well, both of whom have cheerleaders: Indonesia and Vietnam. Only one of them, I would suggest, has a bright future. Against these, as ever, I find it useful to benchmark against China, the one regional example of an economy that has made progress.

In fact, based on statistics previously discussed, even in a basic way Indonesia has constantly under-performed Vietnam (and indeed most peers) over the period 2010-2020:

Source: World Bank, Credit Suisse Global Wealth Report 2022

It is poignant that once we move beyond real GDP, the variation is marked. Both Indonesia and Vietnam have experienced significant population growth – but even factoring that in, Vietnam has sped ahead on a per capita basis. In terms of nominal GDP, Vietnam comes close to China levels of growth and, incidentally, does so with a currency which has not depreciated against the dollar anywhere near as much. In median wealth, Vietnam, coming from a low base and with CPI not much less than Indonesia, is still notably ahead. And lastly in household consumption – that portion of GDP growth that we consider “good growth” – Vietnam is more than double Indonesia even though the latter experienced the greater part of a commodity boom during the period. In other words, Vietnam, from a standing start, has led everyone in the region bar China; and is the only country to come close to matching China’s remarkable overall levels of growth.

So much for the past – but what about the future? Well the problem comes in understanding the structure of the economy, and in particular the effects of inequality, inflation and where relevant, currency depreciation. Indonesia’s under-performance is due to both a long-standing inequality and inability to distribute the proceeds of growth into a mass middle class, as well as peculiar governmental weakness at tackling inflation and currency depreciation, which are linked.

Source: World Bank, Credit Suisse Global Wealth Report 2022, Bloomberg

As a demonstration of the former, I tend to use my own measure of inequality, which is to look at the “wealth multiple” of mean-to-median assets per capita. The higher the multiple, the more unequal the economy. I find Gini coefficients to be too muted in their outcomes, and most of the public sources such as the World Bank still inhabit a pre-Piketty world focusing on income distribution rather than asset distribution – but all this will be in a future post. What is important is how much higher Indonesia’s wealth multiple is compared to the two post-Communist economies which are doing better (for the record, others such as the Philippines are unsurprisingly even worse). Both Indonesia and Vietnam have experienced high levels of inflation – but, of course, this comes against the background of Vietnam’s much higher rates of nominal GDP growth. And above all, whilst most of currencies have weakened against the dollar, none have been so spectacular in their depreciation as the Rupiah.

2020 exports by industry for Indonesia (left) and Vietnam (right)

Source: The Observatory of Economic Complexity

Indonesia has been sustained by commodity cycles in the past and may benefit from another which has recently commenced – but the problem is, this is only arrow in its quiver. For me, there are two broad models of economic emergence, which I visualise as “tents” and “marquees”. A tent is simple, and has a couple of simple poles which hoist the whole fabric. These poles can raise a high summit point, but they are frail and narrow. A marquee takes longer to assemble, but has multiple poles and is usually more robust. Indonesia’s reliance on commodities – and its marked inability to produce an export-quality value-adding sector (for instance, manufacturing) – makes it a tent. Vietnam, whilst its summit point is still lower than that of Indonesia, is supported by multiple sectors. Importantly, this also means producing a wider “middle”, which somewhat depicts the creation of a real middle class.

Tent vs marquee models of economic development

In short, whether you are an entrepreneur, a foreign investor, or just the common man on the street, Vietnam is a much better prospect than Indonesia. This reality belies the generic theoretical focus on demographics and real GDP, and correlates to the empirical and anecdotal evidence from the streets. Anyone who goes to Jakarta and then Saigon will feel a difference in energy and enterprise. In Indonesia – much like Thailand or the Philippines – a few rich incumbent families own practically everything. Jakarta, by another shorthand metric I like to use, has no pavements: the rich go by car and the poor have nowhere to go. Saigon has middle classes who walk around urban landscapes. Likewise, the streets of Saigon are full of absurd little shops where the emerging consumer is upgrading their life (not anything I would personally buy, but nonetheless); Indonesia instead has little between the gleaming malls and the warung.

From a business level, it shows through as well: the long-hoped-for mass ownership of four-wheel vehicles in Indonesia has never really materialised – passenger car growth over the decade is half that of China and Vietnam, and behind even Thailand. Modern retail (for instance hypermarkets) has never yet had its day in the sun, instead being swamped with by the low-end providers like Alfamart and Indomaret. Banking has not had the traction expected, particularly in additional services; but meanwhile low-end app-based financing is common place. And at the end of the day, Indonesia’s new economy champions still tend to feel much lower in quality of management than even their regional competitors – Go-Jek vs Grab, for instance.

The reasons for all this are manifold, and would warrant a full academic paper (although some of the topics around cultural traditions may not even make it past the censors of modern publishing). But what is clear is that, following from the previous post, there are better and worse markets and Vietnam and Indonesia, often compared together amidst a group, are good examples of this contrast. I would hazard that Indonesia’s presumed consumption take-off may simply never materialise. People talk of Indonesia sitting at the heart of the revolution in EVs – which is questionable – but even if it happens this may never feed through to the population. Certainly, alone amongst the beneficiaries of the last commodity boom over 2006-2012, Indonesia saw little gain for median families, and such wage growth as came was washed out by its rampant inflation. Indonesia seems destined only to be constantly extracted from, by local families or foreigners. Personally, if I had a dollar to invest today, the choice between these two is pretty clear.

Not all emerging markets are the same (Part 1)

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ASEAN is not a single place – there are winners and losers

Emerging markets have frequently been grouped together in the expectation that evolution in one could be carried across to others, and thereby allow investors in particular to draw large thematic lessons. The Asian Tigers was one example, BRIC was another; the Economist even spent an inordinate amount of time trying to find a successor to BRIC, all versions of which were unsatisfying. Southeast Asian economies are often put into one bucket, too, given what appears to be a similar stage of development between several of them, their proximity to the regional influences from Japan and China, and most of all due to the supposed progress of ASEAN.

However, taking a dispassionate view there is little reason to see these markets as similar enough to have a common investment principle. Indeed, I would argue that several of them face diverging fortunes and I very much like some of these markets and do not have time for others. There is a surprisingly limited amount of analysis from the outside on these markets individually; and when they are written, they are often quite amateurish.

So let me get to who is Good and who is Bad in SE Asia. To begin with, it is worth looking at the macro numbers over recent times to consider which countries if any, have actually made progress. On the face of it, many in the region have performed decently compared to their OECD brethren. Yet ultimately the variation beyond real GDP, to which analysts are constantly beholden, shows quite a difference.

Source: World Bank, Credit Suisse Global Wealth Report 2022
Note: “Middle classes” refers to population with greater than US$10,000 of wealth per capita; standard deviation calculation excludes Australia which is only included for comparative purposes

For a start, whilst real GDP numbers look somewhat comparable and almost clustered towards the 4%-6% range, this becomes markedly less so when looking at other metrics, and the standard deviation shows this. These others are important, too: we look at nominal GDP from an investment perspective because earnings and returns are nominal, not real. Per capita numbers wash out the effects of rapid population growth as an artificial bolster for underlying growth. Middle class population tell us how any of this notional growth is actually converting into mass consumers.

Much can be read into these figures but the most stark representation of it all, for me, is looking at total growth in recent years. Below is the total cumulative nominal GDP growth since 1990 for all the main countries in the region:

Source: World Bank

It turns out there are really only two groups of economies in emerging Asia: those that have generated huge amounts of growth and those which are just trundling along. China and Vietnam come from different bases but share the enormous benefits of a post-Communist economic surge; almost everyone else is unremarkable – both developed Singapore and Australia are not all that different to supposed stars such as Indonesia, Malaysia or the Philippines. China and Vietnam have performed not just better, but better by an order of magnitude.

This has a knock-on effect on middle class consumption. Using the Credit Suisse data, I tend to look at the numbers of people who have US$10,000 in assets as a guide – what I call “true population”. China of course has created a huge true population who can and do consume – but elsewhere we can see why our views should be moderated. Indonesia, for instance, has 250m people; but only a fifth of them are real and – as per the table above – their track record of growing this has been poor compared to Vietnam for instance, which has a smaller true population but is growing it quickly.

Source: Credit Suisse Global Wealth Report 2022, own calculations

I will delve more deeply into Indonesia and Vietnam in future posts, but the overall message here is clear: SE Asia is not a single type of market and there are clear winners and losers. The reasons why can be explored elsewhere but simply having a large population is not going to mean a country will develop within the time-frames we need to make money. Demographics is not destiny, and political and economic systems matter. Investors and companies ignore this at their peril.