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EU: the musical, Hong Kong: the swan song, and a menacing ballet

By Jasper Cox, Ralph Sinclair
31 Jul 2020

Each week Keeping Tabs beings you the most interesting and entertaining reading from around the web that we have uncovered. This week, the perils of the EU recovery fund through the lens of the subject of Broadway's hottest show, a menacing whiteness of swans and a grim view of Hong Kong's future in finance.

Was the most recent EU summit, at which its leaders thrashed out the shape of its €750bn recovery fund designed to combat the economic ravages of the coronavirus pandemic, the bloc's "Hamiltonian" moment?

Harold James, a history professor at Princeton, thinks so in this piece for Project Syndicate. Not because it screams Broadway potential but because he says that it bears similarities with when founding father Alexander Hamilton persuaded the fledgling US in 1790 to club together over debt.

James argues that the €750bn needed for the programme, to be borrowed in capital markets by the EU, is a watershed moment, but also par for the course with European unity — whenever a crisis pops up, member states end up huddled closer together. This time, using the joint borrower on this scale is a complete game changer for Europe (and not to mention capital markets). But at what cost?

The problem, as James sees it, is that these moments of "ever closer union" are forged in ugly compromise. The scramble to create monetary union in response to the end of the Cold War ended with countries massaging the figures to join the single currency. 

A consequence of that, it could be said, was the near destruction of the euro during the sovereign debt crisis.

Much of the argument between different EU members now is set against the brutal austerity measures taken a decade or so ago, that were demanded when the eurozone periphery was bailed out. 

At stake in each of these crisis agreements is the rule of law, which James says US history shows us, is a tough thing to enforce in a federal structure. The EU would no doubt insist it is not, but he worries what problems were put in a box during the summit that will re-emerge down the line.

White swans, red pills

Also on Project Syndicate, Nouriel Roubini has been eyeing up Naseem Nicholas Taleb's swans (white ones on this occassion) to point out why we must not relax and why we are pricing everything wrong. He warns that climate change and pandemics will be a growing feature of life on Earth.

"Why are financial markets blissfully ignoring these risks?" he asks. "The problem is that what was true in February remains true today: the economy could still quickly be derailed by another economic, financial, geopolitical, or public-health tail risk, many of which have persisted and, in some cases, grown more acute during the current crisis. Markets are not very good at pricing political and geopolitical — let alone environmental — tail risks, because their probability is difficult to assess. But, given the developments of the last few months, we should not be surprised if one or more white swans emerge to shake the global economy again before the year is out."

Roubini says that as a species we're pretty awful at pricing cataclysmic risks. Therefore, there is a tendency to just blue pill the whole thing and lay back while the US Federal Reserve, the European Central Bank and other central banks buy everything in sight to spare us all the true economic horror of lockdowns.

But what if you want a red pill?

Then, dear reader, look no further than this Marxist deconstruction of the perils of the CARES Act on New Left Review by Robert Brenner. It is called Escalating Plunder, which is perhaps a more concise summary than we could hope to achieve. 

For those of you enjoying the London heatwave in the back garden, or with your feet dangling over the juliet balcony in Zone 2, reading it might well take up a fair chunk of that time you had allotted to decompressing from the relentlessness of it all. 

Upon closer reading, maybe it is more red flag than red pill. Here's a flavour: "With the US economy performing so very badly, as it has been doing for such an extended period, the bipartisan political establishment and its leading policymakers have come to the stark conclusion, consciously or unconsciously, that the only way that they can assure the reproduction of the non-financial and financial corporations, their top managers and shareholders — and indeed top leaders of the major parties, closely connected with them — is to intervene politically in the asset markets and throughout the whole economy, so as to underwrite the upward re-distribution of wealth to them by directly political means."

UK SMEs in trouble

Meanwhile, Schroders’ head of equities Rory Bateman is fretting about small and mid-sized companies in the UK, which he says raised about £3.8bn in capital raises the first half of the year.

He reckons this is a “drop in the ocean” compared with what will be required. However, these types of companies may have trouble accessing the equity market, particularly if they need to while stock markets are flat or falling once again.

“We see this as a big risk,” Bateman says. “The UK is in danger of losing a number of high quality, sustainable businesses out of that small and mid-size segment, with severe knock-on implications for jobs and future economic prosperity.”

And this is where Schroders comes in. “We see an opportunity — a responsibility even — for stock pickers like ourselves to have the chance to make good returns by investing in high quality firms, supporting them through this period, and then sharing in future growth.”

Talking of investor responsibilities, Richard Fields, Elizabeth Morgan and Cal Smith discuss the environmental, social and governance (ESG) movement on the buy-side as well as the companies they invest in taking more open political stances on social issues.

Writing on the Harvard Law School Forum on Corporate Governance, they say that more than 200 S&P 500 companies made public statements after George Floyd’s death.

They find that “companies have become more comfortable making pronouncements with pointed statements that may be polarising among stakeholders. While a number of these statements sound ‘corporate’ and are unlikely to inspire or offend any readers, many go further. Just a few months ago many companies would have shied away from the phrase ‘Black lives matter’. A dam has broken.”

And shareholder votes indicate a change among companies’ owners, too. The authors say that this year shareholder proposals related to “human capital management” (HCM) — ironically, a rather cold and clinical phrase — have been more popular, with proposals passing for better reporting on issues like diversity.

“Covid-19 has thrown more fuel on an already roaring fire,” they say. “Expect more pressure for disclosure of additional HCM-related data and for shareholders to devote more engagement time to workforce oversight issues.”

Politicised ESG

Companies becoming more overtly political on what might be termed cultural issues may cause a counterreaction too, especially given how those issues have become caught up in political “culture wars” in some countries.

UK minister Michael Gove recently gave a speech that was pored over by political wonks for its comments on the civil service. But Keeping Tabs was more interested to note a reference to ESG.

He grouped those who advise on ESG along with New York Times writers, higher education managers, business group chairs and government department bosses as having views, tastes and concerns that “tend to have become more distant over time from those who build homes, manufacture automobiles, work in logistics, harvest food and dispose of waste”.

He said: “The former are more sensitive to the harm caused by alleged microaggressions; the latter are less likely to be squeamish about tougher sentences for those guilty of actual physical aggression.”

ESG topics are inherently political, but will they become politicised, with those in the sector branded as part of an out-of-touch metropolitan elite?

In the US, this process may be further ahead. As GlobalCapital reports this week, a proposed rule from the Donald Trump administration would tell investors managing money on behalf of employee retirement accounts under ERISA (the Employee Retirement Income Security Act of 1974) not to put ESG or socially responsible investment criteria above “pecuniary factors”.

It would also make fiduciaries prove that ESG investments are “economically indistinguishable” from other alternatives.

Investors and advocacy groups have asked for an extension to the comment period.

Hong Kong's future

Talking of the Trump administration, economist George Magnus writes on the Jackson Hole Economics website about the hostilities between China and the US, and what it means for Hong Kong’s financial sector, in light of the most recent escalations in tensions.

While Trump is now on balance expected to lose the presidential election in November, it is worth pointing out Joe Biden would be unlikely to completely reverse course on the recent Sino hawkishness.

Magnus’s outlook is pessimistic from the perspective of Hong Kong’s financial sector.

Firstly: “If it chose, the US government could sanction individuals and or financial institutions in Hong Kong, potentially also restricting access to US dollars and or undermining the Hong Kong dollar peg, which has been the anchor of financial stability in Hong Kong since it was established in 1983.”

He says that undermining the peg would likely have repercussions for US banks and global markets, making it risky (an argument made elsewhere too). “Yet, in current geopolitical circumstances, who knows? Is there any turning back?”

He also says that if companies want to relocate, “trading foreign exchange, fixed income derivatives, trade financing and so on can be done pretty much anywhere and some of these types of business could easily migrate to Singapore or Tokyo, aided and abetted by both ancillary and geographic networking effects.”

By Jasper Cox, Ralph Sinclair
31 Jul 2020