economics

However much you think Spurs need to spend, double it

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We think Todd Boehly is an idiot, but it may be he alone knows how much investing in a new squad really costs, whilst we continue to underestimate it

The “ENIC Out” movement, which is seemingly gaining traction, has a number of complaints: the pace and scale of commercialisation, the prices of ticketing and matchday experiences, the incoherence of managerial appointments to name a few. But more than anything, there is a sense that Spurs just will not spend what is necessary to take the squad to the next level. The recent overreaction to the momentary news that Pedro Porro might not sign was a case in point.

I have previously written about how poor Tottenham really are and why the fans are somewhat wide of the mark in their financial expectations – particularly when unhelpful and misleading news comes out about “record profits” or our wealth rankings. But here I want to consider how misleading the headline numbers are about what is needed or how much a certain amount buys you, since we supposedly know what the gaps we need plugging are. A central defender and an attacking midfielder, for instance, will likely cost us some £125m between them. Factoring in another young talent and we can round that up to maybe £150m – the amount, incidentally, that ENIC put into the club back in the summer.

But the problem is this: that £150m will get you two players that you need, in theory only. The reality is that one of them will be a dud, and possibly both. We may need at least one more player, if not two more, just to bring us the likelihood of two decent players who fulfil our potential. This is a leads us to a risk-adjusted spending of more like £250m-£300m.

To think about how much we need to risk-adjust, I have gone back to every transfer Tottenham have done since the summer of 2015, and assessed broadly how successful they were for us. Why 2015? Well, it was the summer after the new 2016 Premier League TV rights package was announced in Feb 2015, leading to clubs spending more money in anticipation (the TV rights have stayed static since then). As an example, it was the summer of Anthony Martial’s £36m-rising-to-£58m transfer to Man Utd, a symbol, if ever one were needed, of the new age of spending.

Source: Sports Business Institute

Looking at these transfers, we then need to think about what the “hit rate” has been. For instance, if one in two signings have been successful, this would be a 50% hit rate and based on this, the amount we need to spend to get £150m of value is £300m. If only one in three signings have been a success, we would have to triple our spend, with £150m becoming more like £450m of real spending required.

There are two ways of looking at our hit rate: simple numeric (did a given player succeed?) or weight-adjusted (how much of his transfer fee as he worth?). Neither is perfect. The weight-adjusted number makes it difficult to account for free signings such as Perisic or Lenglet. The simple numeric figure treats players as more or less equal. I lean towards the simple numeric however, because for me the transfer fee is a function of the market you cannot control. Much as players supposedly try to ignore their own transfer fee in terms of the weight of expectation, the reality is that if we need a player for that position, we need him whether he costs £100m or is free.

Based on this, I have had a go at allocating Tottenham’s hit rate over time since 2015:

Source: Transfermarkt
Note: only total final fees are included (eg Lo Celso, Bentancur); exclludes players who are too early to tell

From this analysis, in turns out that indeed our hit rate on weight-adjusted transfers is about one in two, and on the simple numeric basis it is even worse, one in three.  We can argue all day about whether the success allocations I have given are right or wrong, but in the end this will not affect the final percentages much. I think it conveys a sense of, did a given player fulfil the expectations we would have had of them, particularly in making regular first team appearances, whilst he was there?

Taking these numbers therefore, to get the aforementioned £150m of necessary talent through the door, would actually cost ENIC between £300m and £450m of spending, given our track record. Is that a lot of money? Yes – but it also puts into perspective why the other clubs have been spending so much. If they are splashing out £1bn in transfer fees, the likelihood is they are only getting £300m – £500m in actual talent. The headlines are distorted.

So then the question arises, are we better or worse than the others? I have gone into a single other example below, that of Chelsea, due to their recent big spending. Comprehensively analysing other clubs is not only time-consuming, but I also do not know their players well enough. The assessment of Chelsea really is based on a mixture of comments from Match of the Day, Gary Neville and Twitter. I think it’s a reasonable reflection, but stand to be corrected.

It makes interesting reading though:

Chelsea have, if anything, been even worse than us over this period. And this makes intuitive sense of course, since for every N’Dombele they have had a Lukaku and a Pulisic thrown in for good measure. If anything, our possibly better hit rate on a weighted basis means we are more careful with our money, and do better with more expensive signings. Unsurprisingly.

To round this off, I would add one additional measure, which is that Chelsea do of course have a much better academy than us. Against our Harry Kane and, to an extent, Harry Winks, Chelsea’s free production list includes:

We can reasonably say that this has not only produced sellable talent, but has over time strengthened their squad significantly for a period. On this score, we could improve. Are any other clubs materially better than us? Off the top of my head, only Man City feel like they hit the target more frequently than others, and this may be poignant.

To bring this to its conclusion, when we think about our transfer needs, we should be realistic. If we feel we need, say, £150m of talent, double it (or more). If we have £150m to spend, halve it (or less). And do not be distracted by the headline spend of others – whilst they are buying more talent, they are not quite pulling as far ahead of us as we fear. What we need is to either improve our hit rate considerably (the role of Paratici et al), improve our academy, or find a backer who will spend not only what they need, but twice as much as that, just for us to make even a small improvement. Because the absolute money numbers associated with life in the Premier League will continue to astonish us – and Todd Boehly may well be ahead of the game on this.

An Argentine-Brazilian currency is insane, but still interesting

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Monetary unions rarely fall down on their economics, but do so rather on the political competencies of the participants

The reaction to this week’s announcement from our Argentine and Brazilian friends, of tentative plans for a monetary union, met with predictable – and mostly justified – derision. “This is insane“, tweeted Olivier Blanchard from that bastion of economic propriety, the IMF. Below the line comments on the FT included one wag which described this as “a version of the Euro where every member is Greece”. And no wonder, since the announcement was accompanied by the kind of hubris more befitting Argentina’s junta days than now – “It is Argentina and Brazil inviting the rest of the region” they said, as though they occupy anywhere near the global status of their erstwhile Brazilian partner these days.

Yet, this is consequently a poignant moment to reflect on currencies, economies and the lessons of the Euro – to date, the only effected currency union in existence (there are a few others, but these are paltry). There are in reality two main drivers of such things: one ‘imperial’, the other ‘democratic’.

The ‘Imperial’ model of monetary union is where the economics of one power dictate the others. Historically this includes arrangements such as the Sterling Area, but in today’s more consensual world it more regularly indicates some states wishing to copy or import the strengths of a neighbour. In the Euro, it was very apparent that the motivation for many countries was the ability to import Germany’s low inflation and depreciation – basically, to emulate and outsource the role of the Bundesbank. This was certainly true of Italy, and even if they do not admit it, the French. The Euro became (and is) and consensual imperial project on behalf of Berlin. I, for one, have no qualms at all about such a thing.

But the Euro, and its predecessor the ERM, was also conceived of as the other model, the ‘democratic’. In this world, the new currency would marry German manufacturing with French agriculture and British finance. This provided not only a balance, but also allowed the EU to exceed the sum of its parts – it relied on complementarity and relative equality. At that point, too, the only countries involved were wealthier ones, not the collection of rich and poor that it became. The problem was that over time, two truths emerged: Britain was too Eurosceptic to join the Project, and France was in fact nowhere near equal to Germany. Therefore, the ‘imperial’ model superseded the ‘democratic’.

This was aided by the fact that Germany, suffering from the after-effects of reunification, entered the final straight pre-Euro in an artificially depressed exchange rate. The best way of looking at this is through this exchange rate effect on current accounts over the period:

Source: Eurostat

The reversion of this undervaluation over time inevitably led to German economic and monetary dominion over the rest of the Eurozone. Economic empire became a reality and, although there are plenty of high profile problems requiring German taxpayer bailouts of, say, Greece, this simply became the “cost of empire”, in exactly the same way the UK home population had to cover the balance sheet of the British Empire after the 1850s.

If we therefore look at the proposed Argentine-Brazilian ‘Sur’, we have to ask ourselves before we dismiss it, what are the objectives and how might they be achieved? The Argentina peso is a basket case, but the Brazilian real is not exactly the Deutschmark either. Regardless of recent crises therefore, the Sur must be based on some sort of complementarity: theoretically a commodity exporting superpower whose overwhelming dollar reliance might be transformed into a monetary of its own, aided by some flattening of the cycles between various commodity prices. The trade between the two countries, interestingly, is much more diverse than one might think:

Brazil exports by value to Argentina (left) and vice versa (right) in 2020

Source: The Observatory of Economic Complexity

Now, none of this is to suggest the Sur will work. On the contrary, guessing today, it seems unlikely to ever take form. Neither Brazil or Argentina represent a clear imperial winner over the other. Neither is notably better managed (though Lusophile lobby would contend that Brazil has had a better recent innings). Yet neither are they clearly complementary: although Brazil is Argentina’s largest export destination, at just 14% this is not determinative; on the other hand Argentina accounts for just 4% of Brazil’s exports, dwarfed by its relationships with China and other emerging markets.

In fact, far from being different, Argentina and Brazil are probably too similar. Apart from a history of poor public policy, the strengths outlined above are their weaknesses too: both countries are still overly focused on commodity trade. Dollar-based raw materials account for two thirds of each country’s exports. Indeed logically, both might be better adopting the Dollar instead of looking at such a doctrinaire project – Argentina’s experiment with the peg over the 1990s, whilst it collapsed ignominiously at the end, was in retrospect quite successful at the core objective of halting inflation – which has since returned with a vengeance.

So neither model of currency union are obvious, for now. Yet, the reasons it may succeed or fail ultimately are not economic, since economics is the servant of politics. The Euro’s greatest weakness has not been economic but political, the Project falling between these two contrasting motivations of democracy and empire. If the Sur starts life with a clearer assertion at the outset, it may have some rationale. The lack of an obvious imperial winner between the two countries, ironically, actually gives the project greater clarity – this will be democratic and complementary, or it will be nothing.

It will probably be nothing, of course. Or, we will quickly discover that Argentina is in such a hole that Brazil effortlessly becomes the imperial power in this relationship. Either way, I await the political will behind this idea to manifest, before I judge the dream quite so harshly, and there remains a lot to learn from the Euro along the way.

In defence of … Empire

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The Muse bids me consider the good, the bad and the necessary forms of power

Two decades ago, the subject of empire, which had long fallen under the pall of apologetic navel-gazing in academia and in political discourse, experienced something of a revival. On Home Counties coffee tables in around 2003 emerged books such as Niall Ferguson’s Empire: How Britain Made the Modern World and, a couple of years later, his follow up Colossus: The Rise and Fall of American Empire. Both were made into TV series, leading to rather bitchy comments from my own tutors at Oxford over exactly how much of a sell-out he had become. Ferguson moved on soon to NYU and latterly Harvard, where he continues to be a proponent of sorts, of the imperialist revival.

He was not the only one however. A far more academic book, though still accessible, from a few years later in 2009 was John Darwin’s After Tamerlane, which charted the Asiatic land empires over the period 1400-2000 and took a nuanced view on empires, their existence, longevity and, buried amongst the prose, their benefits. The obvious point being that:

“[A] propensity in human communities has been the accumulation of power on an extensive scale: the building of empires. Indeed, the difficulty of forming autonomous states on an ethnic basis, against the gravitational pull of cultural or economic attraction (as well as disparities of military force), has been so great that empire (where different ethnic communities fall under a common ruler) has been the default mode of political organization throughout most of history. Imperial power has usually been the rule of the road.”

On the other side of the Atlantic, the process of soul-searching brought on by the foreign policy of George W Bush generated much writing, with 2010 alone producing three prominent volumes in the shape of Empires in World History by Jane Burbank and Frederick Cooper, The Rule of Empires written by Timothy Parsons and Empire for Liberty by Richard H. Immerman; this unsurprisingly coinciding with the accession of Barack Obama, probably the most forthright anti-colonialist (and perhaps anti-British) man to occupy the White House since Grover Cleveland in the 1890s.

However, after that burst of activity, Empire has again experienced decline in the perceptions of the liberal public – not least through the sophistry of race relations which re-emerged through the 2010s, accelerated by Trump’s election, BLM and in my world, the absurdity of movements such as #RhodesMustFall (though I am glad to report that as of this moment, Rhodes’ statue still looks down majestically from its cupola on the High). Iraq and Afghanistan have gone the way many feared; perceived Russian and Chinese aggrandizement continues. ‘Empire’ has not had a good innings. Yet the lessons about why they are good, bad or necessary are still overlooked, and I feel obligated to rehearse them once more.

First, Empires bring peace; and their decline brings conflict. Whilst this may sit in cognitive dissonance with how history is taught today, the reality is that for a majority of peoples governed under imperial structures, lives were more stable under this regime than what they might otherwise have. This is not only empirically true – Spain and North Africa for instance were largely left in peace for three centuries between the Punic Wars and the Crisis of the Third Century, despite not being Roman “heartland” – but also logically. See also China, Byzantium, the British and French empires and even the dysfunctional American equivalent (though as Ferguson says, Americans just aren’t very good at empire). Ethnically-focused nation states must be more prone to friction with neighbours than an empire which is first and foremost self-interested in minimising that friction. No successful empire has ever seen greater violence and destruction in its borders, than its alternatives.

Secondly, Empires bring prosperity. Much like any political system, the proof is in the pudding and there are very few examples of empires which successfully exist for long based only on coercion. Even the Empire in Star Wars, for instance, would have had more adherents than resistance and the Jedi should probably have asked themselves why they were in such a minority for so long – probably because their own scattergun and slightly racist alternative proposition could not even persuade Ewoks, let alone the merchants, professionals and other middle classes of the Empire that their mess was better. Most complaints about empire comes from self-indulgence, and nowhere was this more plainly set to rights than in Monty Python, whose sketch in The Life of Brian was a thinly-veiled lampoon of anti-colonial opinion across Asia and Africa:

Lastly, empires bring diversity. Given the propensity to celebrate everything “D&I” these days, it is worth pausing to think about how much empires, rather than nation-states, and created and sustained true multi-culturalism. Ultimately, empires are agnostic about the culture they carry, and as they expand absorb ever greater amounts of what they oversee. It is notable for instance, the Prime Ministers such as Thatcher and Blair were eminently more parochial than similar bourgeois classes a century earlier, whose relatives would have grown up in India, the Sudan and elsewhere serving as bureaucrats and engineers. Whilst Europe has provided some remedy to this parochialism, it is not complete: since the decline of empires in the 1960s, modern (western) nation states and their governing classes know less about the world around them than ever before, leading to everything from half-baked trade pacts like the WTO to neo-conservative adventures in the Middle East. The borders of empires are soft and porous; the borders of nation states are hard – and with it hardened views on identity and inclusion.

Coming from a family that emigrated under the auspices of Empire from China to India to Britain, I take a personal pride in the system that allowed for this to occur. Britain offered an attractive cultural and civilisational prospect, of course, and its contemporary weakness in this needs addressing; but more importantly it was the infrastructure of empire that served so many millions of people so well, for so long. It gave opportunity, egality, stability to the very poorest in society, at the expense, ironically, of the “home” nation.

Empire is here to stay, not just because of legacy but because its really quite a popular system. The definitions may vary over time, but the principles of expansion and peaceful, productive dominion of a periphery by the centre will remain permanent. A decade ago I argued that we were witnessing the emergence of a new “community of empires”, given the way not only Russia and China, but also India, Brazil and others were run. Some of this has come to pass, others are slow burning. But before we continue to trample the legacy of empires, we should remember why they appealed; since they are an inevitability, perhaps it is better we embrace their positives rather than engage in futile self-flagellation.

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.

This devaluation exposes how poor Britain really has been for two decades

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The decline of Sterling in recent days has caused the kinds of panic amongst MPs and commentators usually reserved for global warming, Brexit and early England exits from finals tournaments. As an economist, I can testify that currency economics is amongst the more arcane and complex – at least, to model. What traders do on a whim may reflect current issues, or longer term ones; but precious few really know – certainly not politicians.

First, we should be clear about what the exchange rate is or is not. It is not, for instance, a broad measure of “a country’s strength”, a term that has been bandied around by gammons and globalists alike as they face the prospect of achingly expensive holiday costs to Mallorca and Miami, respectively. Nor does it reflect “how rich we are”, as though a 20% fall in the pound makes people, in any real sense, 20% poorer than they were weeks ago. Exchange rates are a measure of value, particularly for lubricating cross-border trade, and more than anything are a measure of demand for money and assets within an economy, from abroad.

A strong economy can of course lead to a strong currency as people seek to invest into your country. Over time though, much of this will be ironed out through PPP as import prices start to rise over time reflecting demand. But currencies can also be artificially high, often for prolonged periods, due to trends such as the continued opening up of various asset classes to foreign capital, which can happen without the underlying economy producing anything more than it did before. I refer to this as the financialisation of an economy, a common feature throughout the Anglosphere from the 1990s onwards. Britain is particularly guilty, as seen below, and these numbers do not even reflect the unseen financial burden placed on UK taxpayers from housing foreign banks.

Ratio of bank assets to GDP

Source: TheGlobalEconomy

The consequence of all this is important: Sterling has been over-valued on a real economy basis for years – since well before Brexit or even the global financial crisis. The 2:1 exchange rate against the dollar reached in 2007, for instance, may be seen as the height of a monetary hubris unleashed by Thatcher but really bedded in by Gordon Brown, her true son. Everything was thrown into the financialisation of the economy and, as a second layer of back-up, the property market which saw Britons become richer by gross asset value but not usually by income or net assets. One way in which this washed through, therefore, was through looking at the gap between nominal exchange rates and PPP, where it could be seen that Britain was getting no richer compared to America than it had before or since. The yawning gap in the mid-2000s was totally driven by things other than the UK economy.

GDP per capita at PPP, US vs UK since 1990

Source: World Bank

In my humble opinion, something approaching parity between Sterling and the dollar had been due for a long while. I must admit to quite some surprise at how small the fall in Sterling was after the referendum in 2016, and had always assumed a rate of closer to 1.1-1.2 over the succeeding years. That it has taken a second crisis to cause the devaluation speaks more of the limited attention span and economic comprehension of currency traders, than it does of any lingering strength of the post-Brexit economy to punch above its weight.

The decline has now gone beyond my own instinct of where the “natural” level. This may be an exaggerated response to the budget from the markets, it may be my underestimation of British strength, or it may just be, like so much else, a temporary feature of the vagaries of the markets. On the other hand, it could signal a further long term deterioration of the structure of the UK economy. Either way, this decline had been coming for years and should have been expected. Even without Truss – indeed even without Brexit – we should have been at lower levels than what has been the case.

Because this “crisis” has really exposed how weak Britain had been for so long: continued poor productivity, an enormously skewed domestic economy with a whole political apparatus focused on maintaining house prices, and rampant financialisation to the detriment of the real economy. It is an unedifying sight to see semi-literate, over-reacting traders being observed and reflected by even less literate and even more hyperactive MPs and journalists. However more than anything, we should be digesting this new normal as the correct reflection of where we have been – and it may even help us plan properly going forward.

The asymmetries of Putin vs the West (or, why The Economist keeps looking stupid)

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It has been some time since this blog has taken its title at face value and looked at some of the large scale asymmetries at work in the world around us. The Ukraine conflict, however, presents just such a chance. Plenty has been written on the subject now by armchair experts in Eastern European strategy, many of whom no doubt only recently become epidemiology experts too. I offer a few simple thoughts about the asymmetric nature of the game Putin is playing, and in every case I start with the panacean truisms one finds in the media.

“Russian GDP is not even as big as South Korea, it is overreaching itself!”

The globalist response to almost any conflict has been to look to economic indicators – at least, the ones we are familiar with – as a measure of how powerful a country is or can be. I will give such commentators the benefit of the doubt that in most cases, they are aware there is some nuance and that localised imbalances can affect outcomes; but still, by and large, they will believe that historical determinism tells us that a country’s GDP will indicate the way the winds are blowing.

What Putin is exposing, however, is that for Russia (and China, amongst others), expenditure in materiel capital has to be matched with the commitment to expend human capital. On a GDP basis, many others will be more powerful than Russia; but judged on the basis of its hard resources multiplied by the factor with which it is willing to use them, Russia’s position on the world stage is not one of punching “above its weight”; it is very much a significant player (which, let’s be honest, is exactly how it is treated within the world of realpolitik). This is a case of asymmetric capital deployment.

The Western response in offering the Ukraine arms and supplies is a case in point: it costs the West nothing to do this. Indeed, given the realities of the military-industrial complex, offering military equipment which is in turn paid for through loose monetary policy actually helps the West. The problem is, it does not do much to help the Ukraine. Putin knows that no Western government at this stage is willing to lose the life of a single soldier in defence of Kiev; China knows likewise about Taiwan. And they are able to gamble that even with the best of wills in armament support, if the West has no boots on the ground, its commitment will be as fickle as the next budget discussion in Cabinet. Only blood counts.

So whilst it is absolutely true that Russia is not rich enough to match much of the West, it really does not matter because that is not the game being played. I suspect not a single Ukrainian soldier coming under a rocket attack is thinking to himself, “well the joke is on you, you’re overreaching your GDP base”. Unless the West changes its tune on how to respond, the Russian bear is not going to be paying too much attention. Instead, as one of my friends pointed out, “there is no significant military force standing between Russia and Paris today, a situation we have not faced for generations”. Another added, “but there is a lot of GDP standing in the way”.

“Russia is on the decline anyway, in ten years time this will be seen as a massive mistake!”

Again, this is very possibly true. After all, the big difference between the Russian threat and the Chinese threat is that it seems difficult to imagine Russia being more important in ten years time than today. Again however, I suspect this is cold comfort to the dying Ukrainian civilian, who is most probably not shouting to the incoming tanks “well you’re on the wrong side of history!”. As Keynes says, in the long run, we’re all dead.

The fact is that in this kind of game, a grenade in the hand is worth two on the production line. Most incidents like the Ukraine are not played out over the kinds of timeframe that the Cold War was; once an aggressor gets its way, it can be almost impossible to dig them out again other than at enormous costs which, as described above, people are unwilling to pay. Yet the fact is that Russia is doing this today, not years down the line when history has come to bite it. This is a case of asymmetric timing.

All powers are likely to rise and fall cyclically. Russia doubtless is on a down cycle already – but so what? History is not decided by trajectories (much as historical determinists and progressivists would love to believe), and still less are real objectives today affected by those long term trends. A power willing to punch today can easily and consistently outcompete the larger power waiting for things to fall into the natural order of things. Obama’s pushing of this wording is perhaps his most pernicious legacy as a clarion call to inaction.

“The whole world is watching this and will be judging Russia!”

Whilst the first two popular claims may well hold true, even if they are irrelevant, this last one is questionable due to one last great asymmetry, which constitutes the eternal dilemma of the policeman. The West is of course judging Putin – for now. Sanctions will come in. There is discussion of banning Russia from the SWIFT payment system for instance, as well as the removal of this season’s Champions’ League final from St Petersburg (Russia’s involvement in the Eurovision Song Contest however, has been subject to confusion).

The problem though, is precisely that the whole world is watching this – through the 24 hour news cycle, through social media, through memes. Yet the policeman’s dilemma is, why do I prioritise this over anything else? And with the fragmentation of Western attention, through so many channels, the cohesion of Western attention is less than in generations past, even as the volume of that attention is more. This is asymmetric focus.

The Russians know that Western observers struggle with creating a hierarchy of what is supposed to be important. Modern media has dampened our sense of proportionality, meaning that there is a perception of crying wolf. How much better or worse is Biden’s performance over the Ukraine, compared to the retreat from Kabul for instance? Or Obama’s red lines in Syria? Or his response to the last time Russia invaded the Ukraine? In the heat of the moment, everyone is entitled (as many are) to believe this is the most important issue in the world today; yet that same raw sensation will also see it be less to tomorrow. Maybe another invasion, maybe another form of Covid, maybe just forest fires will do the trick. Our lack of media curation has brought us to this.

I would additionally add that, in all of human history, sanctions have only ever to my knowledge worked in one example: South Africa. In this case, it worked because the target society of the sanctions (white South Africans) looked up to and respected those sanctioning them – they cared. Not the case with Russia, or with China. Probably not even the case with India. The corollary is that asymmetric focus is only solved when the matter is close to home – culturally, ethnically. Sweden, for instance, is not a member of NATO, but will still be able to count on American and European physical support in the event of a Russian invasion in a way the Baltic states might struggle with. Let’s be honest, because they’re white. This is the only thing which cuts through the ADHD of modern life. Are the Ukrainians really white enough and middle class enough for people to sustain their care? We will find out.

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If this sounds cynical, that is because it is. Asymmetries unlock many of the answers where there is more heat than light and war has been so unknown for so long. As long as Putin is playing a different game, the constant refrains about meaningless measures will remain rhetoric whilst real people are suffering. Grasping these asymmetries can lead to small but very effective changes in policy, and consequently enormously different outcomes. Given that the US purported to know about the coming invasion so long ago, a single battalion of American soldiers, under the guise of ordinary joint training exercises, would have made Putin pause for thought.

One must always ask oneself, “what would Putin do?“.

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PS – where now those anti-nuclear deterrent voices?

North Shropshire was never much of a surprise

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Tory mauling in North Shropshire by-election was self-inflicted by Boris Johnson | Financial Times

Since the by-election in North Shropshire, described variously by lazy journalists and commentators as “stunning” and “shocking“, a lot has been written about how historic the North Shropshire result has been. Clearly, it was an extremely poor showing for the Tories and, arguably, for Boris personally. The actual historical context, of the seat being held by the Tories for two centuries, is also somewhat true – it certainly has not been held by Labour or the current Liberal Democrat party before this. However, the Tories of two centuries ago were clearly not the Tories of today, so unlike some of the Red Wall seats which fell to the Tories in 2019, the historicity of this claim is rather tenuous – those seats, for instance Workington or the Don Valley, were literally in the camp of just one party (Labour) since 1918.

So much for the soft stuff. The statistical context is even more important. The fact is that whilst North Shropshire was a bad result, it nonetheless was much to be expected. Most obviously, incumbent governments will of course always suffer during mid-term by-elections, since there is little reason for voters to turn out for anything other than “sending a message. In the 146 contested Parliamentary by-elections since 1979, only 7 have resulted in the incumbent party of government not losing vote share. Most of these have some particular backstory to them as well, such as the Blaenau Gwent or Glenrothes by-elections under Labour. Gains by the Tories such as Copeland or Hartlepool are, by definition, remarkable.

The second most obvious point to make is that by-elections in the aftermath of major crises – domestic or global – will always magnify this swing effect. The statistical evidence is more limited here, but it is worth noting that the greatest swings against have tended to come in the wake of enormous economic dislocations, in the early 1990s for the Tories (Newbury and Christchurch) and in a statistical basis of one, in 2009 for Labour (Norwich North). These represent the only times since 1979 that real GDP growth has slipped into negative territory, and it shows. Since Covid-19 has created an economy dislocation some 2.5x greater than the 2008 crisis, it stands to reason that anti-government swings will be larger still. It is imperfect but it stands up to scrutiny.

Most importantly however, it should also be noted that swings against incumbent governments have, over time, been larger and larger. This is a secular trend divorced from specific party politics, since it has continued as a trend throughout various Tory and Labour governments. Below is a chart of the swing against in all by-elections since 1979 where the ruling party has lost a seat. Not only can you visually see the increasing size of the swings against, but statistically it also works out that whereas in the 1980s a government could expect an average swing of ~-15% against at an election, by the 2010s one could expect a ~25% swing against on average. Swings have increased by 10% in and of themselves.

The obvious question to ask is why this has occurred, to which I will only for now speculate. The first reason is the ongoing evidence of partisan de-alignment since 1979, which has become more pronounced even after 2010. The second could be the ongoing evolution of social media and its impact on the 24 hour news cycle, something which actually affects by-elections more than general elections. After all, electorates are used to being inundated during a general election and have done since the 1930s. But the amount of national focus on individual by-elections, first from television and now through social media, has made both dealignment as well as the “bloody nose” concept more pronounced. Regardless of the specifics, governments are going to find it ever harder to win by-elections.

This is not to say that the Conservatives had anything other than a poor result. But long-term increases in anti-government swing + largest economic dislocation in a century = almost certain defeat for a government. Boris still did worse than he needed to; but anyone believing this was not the opposition’s to lose is kidding themselves.

What Covid-19 mortality might look like if we all counted like the Germans

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Germany Covid

One of the less covered aspects of the Covid-19 crisis has been the wildly differing ways in which countries – and within the US even states – count the dead. This in turn has made comparability between countries almost meaningless, with very little to be learned between the numbers of deaths in Italy for instance, and those in Sweden. And by the time you bring China into the discussion, comparability ceases even to be mentioned. The singular failing of the WHO is not failure to combat the virus (which it has little power to do), but failure to at least coordinate consistent numbers. On this basis alone, the WHO has been a fiasco.

The problem is that how one counts deaths, even though it sounds like it should be scientific process, is actually an art. There will always be huge amounts of subjectivity in interpreting whether a virus like Covid-19 constitutes the “primary cause” of death, or whether it is merely a “contributary factor”. The discipline with which a group of medical practitioners understand and stay within guidelines on this reflects all sorts of local conventions and culture. Generally, one might assume that the more technocratic a society is, the more strict they would be.

Step forward Germany. Throughout recent months, German numbers have been hailed as an example of what good governance should look like, with early testing being seen as key. Yet if you look at the details, a puzzle is presented: although German total deaths are much lower than that of France, for instance, its total numbers of infections are almost the same.

Total Covid deaths

Note: mortality rate defined as reported Covid deaths as % of total infections “Non-German Europe” are countries coloured in red; Source: Worldometer.info

All the good governance in Germany would, one assumes, mostly have led to lower deaths through lower infections, yet this has not occurred. Rather, the gap between total deaths is partly filled by the differences in counting methodology. In fact broadly speaking “Greater Germany”, encompassing Austria, Switzerland and Denmark, together average a mortality-to-infection rate at around one-third that of Non-German Western Europe (and this is already distorted by the fact that in Switzerland, non-German cantons are reporting much higher mortality than their German brethren).

So what is going on? Whilst I have no doubt that the Germans are doing better, they are not doing that much better. But at present, if there is a difference in counting methodology, I also have no doubt that I would lean towards the German over the non-German way. What then would the UK and other countries’ mortality rates look like under the German system?

First, I have assumed a simple re-basing of these mortality rates to the Greater German average, creating a like-for-like “Germanic deaths” number for each country. This lowers them substantially. “But”, I hear you cry, “is the German healthcare system not better?” Well, perhaps it is – though in fact there does not appear to be much consensus on this from various authorities. But let us say for the sake of argument that there is a qualitative difference, we might use a simple proxy such as the number of hospital beds per capita to readjust this number and make it more apples-for-apples.

Greater Germany Covid

Source (for beds): Nationmaster.com

Greater Germany does have a better-than-average provision of hospital facilities, particularly in Austria and in Germany itself. Taken together, the Germanic average of hospital beds per capita is higher than most other Western European countries, although France is also quite high. If we then adjust the “Germanic deaths” number upward again, by the number of beds, we have an indicator of what German-style Covid-19 death counts might look like.

European Covid like for like

Note: “adjusted” figures adjusted for hospital beds per capita compared to Greater Germany

Despite making this adjustment upwards, non-German Covid-19 deaths, whilst higher than Germany’s (and almost certainly correctly so), are still substantially below the current reported numbers. In other words, if the UK used German-style death counting, its numbers of Covid-19 deaths might be about half the current number and possibly well below. The same applies to all other countries in the region. I would posit that this is the basis of real comparability, not the published statistics.

Of course, this is all back-of-the-envelope stuff and many will complain that this does not take into account all the nuances of each country’s policies and virus reactions. But there can be no doubt that:

  1. Each country is counting in a different way;
  2. If the UK were counting along German lines, reported deaths would be much lower; and
  3. Conversely, if Germany were counting along UK lines, their numbers would be higher.

However taking into account what has been happening in each country, if I were to guess at who’s numbers are a better and more accurate representation of the real situation, I know where my money would be. But then, I am Austrian.

 

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(For reference I did the same analysis incorporating the Asian OECD statistics, which seem remarkably similar to Germanic numbers. China in particular, whatever else is may have covered up, has a stringent policy of how it reports Covid deaths and the region as a whole would likely be similar. However the outcomes from this analysis did not move the needle enough to start having to justify commonality between Asia and Europe)

Asia OECD Covid