Geopolitical Potpourri - Alaska Permanent Capital Management


Geopolitical Potpourri

Markets have been reacting lately to geopolitical risks causing a mild flight to safe-haven assets like Government bonds, which has pushed yields back down.

In a lengthy analysis Charles Schwab notes that history shows “market reactions to the majority of geopolitical conflicts have been small and brief”. They advocate avoiding overreaction and sticking with a diversified portfolio. We agree. Still, let’s do a quick tour of some international headlines.

Exit Madame Frexit

The run up to the first round of the French Presidential elections last month was a nail biter with four legitimate candidates vying for a second round, two person, runoff on May 7. It will be National Front’s anti-EU and anti-immigrant candidate Marie le Pen vs En Marche centrist candidate Emmanuel Macron who is pro EU. Macron is the overwhelming favorite with a 60-40 lead in the polls. (And they are never wrong, right?) His election would be good news for the EU, euro and investors.

Le Pen wants to take France out of the EU and bring back the franc, hence her nickname Madame Frexit. A Le Pen victory could mean an existential crisis for the European Union, although she would still have to deal with the French Assembly (like our congress) who would likely fight tooth and nail to keep France in.

Macron is a newcomer. He has not held an elected office before and lacks an established political party. He was the economics minister in the previous socialist government. He will likely have to cobble together a government after the French National Assembly elections in June, and share power with establishment parties.

There is hope that he will be able to reform France’s sclerotic and unsustainable social welfare state. Government in France accounts for 57% of GDP compared to the low 30’s in the more dynamic US. Economic growth is low (but improving!). However, unemployment is still high and hope isn’t a strategy. Plus ca change, plus c’est la meme chose.

Anti-EU populism has been on the rise in Europe. Witness Brexit. But the victory in Holland by the existing pro-EU government in February, and now a likely Macron victory in May have calmed fears of an EU disintegration, for now.

German elections in September will likely not be a referendum on the EU and euro currency. Italy is the next possible flashpoint. Elections are scheduled for early next year and the anti-establishment 5 Star Movement is in the lead. They want a referendum on leaving the euro. Italy is in worse economic shape than France.

The year of elections in Europe, with populism rising and the establishment on its heels, was billed as a test of the euro and EU. So far it looks like they will have weathered yet another squall.

Crush the Saboteurs

That’s how London’s Daily Mail described conservative PM Theresa May’s strategy in calling a snap British election for June 8. She hopes to strengthen her Brexit negotiating position by gaining seats in Parliament by trouncing the Labor Party. Polls show she has a good chance of doing just that.

She also wants to strengthen her position with hardliners in her own party who want a “hard Brexit” with little give and take in EU negotiations. Recall Britain and the EU now have two years to negotiate an amiable “divorce”. May wants a “soft” Brexit” option, with extensions and an interim agreement a possiblility.

Most economists – enamored with “the gains from trade”- think that Brexit will be a drag on UK growth. I think in the long run more freedom will beat the EU regulatory and administrative albatross. Britain will be fine in the long run, but short-term growth could take a hit due to uncertainty.

Growth improving with modest inflation

From time to time we’ve used the line from All about Eve where Bette Davis exclaims “fasten your seat belt boys, it’s going to be a bumpy ride” to describe the outlook, or investing in general.

Economist Ed Yardeni, noting that the IMF recently raised their expectations for global economic growth (the first time in quite a while), suggests another Davis line from the movie Now,Voyager. In it she famously asks her love interest “Oh, Jerry, don’t let’s ask for the moon. We have the stars.” Yardeni thinks that’s a fitting assessment of the current US and global economic situations. We seem have shaken off the ghosts of the panic of 2008 and Great Recession and be in the midst of a synchronized global expansion. It’s not gangbusters, but improving.

Heading to Grand Rapids

Each year Joann and I head to Grand Rapids for Acton University, a weeklong seminar sponsored by the Acton Institute; a think tank that promotes a “free and virtuous society by connecting good intentions with sound economics”. Your brain is mush at the end – so much to take in – but just a wonderful experience. Here is the link

I’ll be speaking at the Western Michigan Financial Analysts Society while in GR. The topic: The Wit and Wisdom of Legendary Investors. I’ll discuss investment luminaries like John Maynard Keynes, Benjamin Graham, Warren Buffett and John Templeton. If you’d like a copy of the speech just e-mail me.

Summer is just around the corner. Enjoy it!

Jeff Pantages, CFA®
Senior Vice President, Investments


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