Hot Town Summer in the City…

20 years ago this year marked the world’s strongest recorded ENSO event (El Nino Southern Oscillation). ENSO is a classic example of what scientists refer to as internal climate variability, similarly, just like ENSOs anthropogenic counterparts, it is also characterised by having teleconnections. Simply put, the energy released from an ENSO event, in the equatorial Pacific, drives global and regional climate, and those deviations from the mean result in extreme and wacky weather (teleconnections). It just happened that the 97-98 ENSO is the granddaddy of them all in recent, instrumental, history. Concomitantly, it sent global temperatures for that one year period into uncharted territory. In a similar vane, this year, politically, we can expect a super-ENSO event in the world of politics and international affairs. And just like a meteorological ENSO, we don’t know when it will peak; what the damage will be to people, economies, and investors, or how the world will respond in its aftermath. What we do know is, this year, a lot of political energy is going to be ‘released’.

The start to 2017 has been mired in the controversial 2016 US presidential election, and in less than 12 days time the world will have its newly elected leader of the free world: President Trump, number 45. Yet is it all doom and gloom left of Ireland? Certainly, compared to the events of 1786, 2017 isn’t anything for the world to be too dreary eyed over.

Trump, as far as ‘risk’ goes, has chosen a business focused team. He has sent positive sentiment to the market and to the street of dreams (Wall Street), this has seen the US stock market rally to dizzying heights – compared to the years of stoicism under Obama. However, Trump remains an enigma. His presidency won’t be the vanilla type that was characterised by his two predecessors but if his hair is left to its own devices, who knows what we’ll see. Saying that, if team Trump (fuck yeah!) do the unimaginable and patch up relations with the chest thumping Russian tsar, Vladimir Putin 1, it will go down as the ‘deal of the decade’. Will do great things for peace and prosperity across the Eurasian landmass and FDI will flood into Russia, probably creating another flood myth except this one won’t have an ark with two animals of every type.

Turning counter-clockwise from Washington and over the Pacific, taking note to evade the gyres of plastic in the world’s largest ocean, we eventually come to the Korean peninsula. Ian Bremmer’s outfit, Eurasia Group, has placed North Korea at the top of its 2017 forecast for political risk, see here. I understand their thinking but really? If anything, the now experienced Kim will be looking to keep his ‘six’ and ’12’ secure. North Korea is quickly becoming a pariah state and with the Chinese looking for new growth opportunities I don’t foresee them entertaining any trouble from this part of the homeland. The North will no doubt greatly increase its ICBM capabilities but China is its only lifeline. Does the tail really want to be cut off from the body? No. Of course not. This is just Confucian peacocking. A new young ruler has to consolidate his power and invoke terror somehow. This is Kim’s approach.

However, saying that, if China were to enter a ‘hot’ war with the US over the Nine-Dash line and Spratly-Islands, then it could potentially escalate with the North joining the body for the mother of all wars. The net beneficiaries other than arms producers would be the much-maligned shipping industry. As an industry insider has said to me over the past year, what’s really needed to get the industry out of the doldrums is another global war. As readers are probably aware, shippings latest super-cycle came to an abrupt end around 2009 – 2010 with the end of China’s commodities boom, this wasn’t helped by greedy ship owners, noticeably the Germans and Greeks, building too much tonnage. Nevertheless, whilst shipping recovers, the glut in tonnage will likely see more Hanjin style bust-ups!

Moving past the Nine-Dash line, the Filipino President, Duterte, will no doubt continue to cosy up to Beijing, in an anti-American protest, whilst puffing his chest up. I think Duterte is more unpredictable than commentators want to admit. We should be keeping a vigilant eye on his movements because he has the potential to disrupt investment opportunities, now the TPP is dead.

Closer to home, the Continent has a number of crucial elections this year. Out of the EU’s continental nations, German and French elections are by far the most important. In France will Francois Fillon triumph over MLP? But more crucially, will German Chancellor Merkel be given another term in office to ‘Merkel’? The French elections are a bit hard to call. I think, the lesser of two evils will prevail and this means Fillon will most likely win. However, the question of Germany’s Chancellor, I see Merkel losing. Merkel will most likely loose because of the migrant and refugee crisis within Germany and central Europe.

In Blighty, I can only imagine what Bagehot has to say about Brexit. It seems there are two key themes emerging from PM May’s tenure. Firstly, there is no plan about Brexit, it’s a right old mess. Secondly, the British PM, seems rather lacking in meritocracy herself. If she hangs in for the remainder of the Parliament, that will be a shock. If she goes and if Brexit actually happens, the markets, investors and the world will need to come to terms with what’s happening at 51.5 degrees north.

Turning to rosier topics, firstly, let’s hope the peace deal brokered by the Russians holds for Syria. Economically the region is likely to become a key piece in the geopolitics of western and eastern Asia – sitting at the centre of key gas pipelines. The Chinese will no doubt increase the frequency of the trans-Eurasian train service. The One Belt One Road (OBOR) will continue apace; it has to and Xi knows it. In fact his consolidation of power later this year will no doubt mark a watershed moment for the Chinese Communist Party. Indeed, it seems the new strongmen on the block, including Turkey’s Recep Tayyip Erdogan, will be looking to firm up his vice-like grip on power. Strangely enough, perhaps Emirates airline’s “Hello Tomorrow” should be Xi’s and Erdogan’s new catchphrase when they become defacto dictators?

2017 will, no doubt, prove to be another volatile year politically, institutionally, and financially. Will the markets and investors continue to see the FTSE at levels unseen? Will it smash through the glass ceiling?

In last month’s closing post, I quoted Ian Bremmer as saying the world is entering a G0 world: A world with no global leadership. I think this position is factually incorrect. The world is entering its first period of non-Anglo-Saxon leadership for the first time since the Chinese banned ocean-going vessels. China is filling the vacuum that America has created. Obviously, institutions that have defined the past 70 years, after the end of the Second World War, that are based in the US and western Europe have a lot to lose. Perhaps the time is right for a Confucian century? I know the old fox has spotted an opportunity – perhaps this is the signal of this change?

Until we meet again, take a look at this offering from Eurasia Group, it’s very cool!

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