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When successful investors warn of a global market crash, we should all be nervous

Profits are so thin that the slightest pothole could cause a crash.

This year’s January sales seem to have extended to the world’s stock markets. A week in to 2016, you could buy the FTSE for 6 per cent less than on New Year’s Eve. It is the worst start to the year in at least two decades.

What is behind these New Year blues? As ever, when it comes to the markets, there is an embarrassment of plausible culprits and a cacophony of self-styled experts willing to tell you what they are. This time, however, you can also turn to someone whose hard-earned credibility is not in doubt.

Martin Taylor is probably the best-known investor you have never heard of. A legend among the trading cognoscenti, he has returned over 20 per cent a year to his investors for more than two decades. On 4 January, he announced that he was closing his Nevsky Fund, arguing that we are heading for a combination of catastrophes that even the most skilful investor will be unable to avoid. His assessment makes fascinating reading. The root of the challenge that Taylor sees facing the world economy is simple. In December 2015, the US Federal Reserve raised its policy rate from near zero for the first time since December 2008. It is likely to be the start of a cycle. The direct effect is that the cost of borrowing dollars is rising. The indirect effect is that the dollar is strengthening on the foreign exchanges. After seven years in the bargain basement, the greenback is becoming expensive again.

Interest-rate hikes are always a shock to the system but they have happened numerous times before over the past few decades: so why should they be such a problem now? The answer is that, this time, the situation is different in three crucial respects. First, interest rates have been stuck at unusually low levels for an unusually long period of time. (In Britain, the Bank of England’s rate has been 0.5 per cent since 2009.) Borrowers throughout the economy have got used to easy money; a generation of homeowners and investors has never seen anything else. After more than seven years of cheap debt, the shock of the old will be all the worse.

Second, a terrible irony is at work in the corporate sector. Companies have responded to the lacklustre recovery from the global financial crisis with Protestant virtue, cutting costs and sweating assets, to make do now in the hope of better times ahead. Yet the perverse result is that even those companies that have not gorged themselves on free money are ill-prepared for the end of the cheap dollar era. Profit margins are so thin and balance sheets so stretched that the slightest pothole may cause a crash.

If we are lucky, that possibility will not materialise. Taylor’s third fear already has. In today’s financially globalised world, the US dollar is the currency not just of America but of half the countries on the map. Borrowing in US dollars by companies in emerging markets stood at a staggering $4trn as of June 2015. Rising US interest rates will put the squeeze on them, too.

By far the most important participant in this global dollar economy is China. Its companies have borrowed over $1trn. Now, just when the Chinese economy is slowing, its debts are becoming more onerous as the dollar becomes more expensive.

If that all adds up to a dismal outlook for the world economy, Taylor’s verdict on the state of the financial markets is perhaps even more worrying. Whereas many of us find William Goldman’s verdict on the movie business – “Nobody knows anything” – remarkably apt when it comes to economic predictions, few would bet against an assessment of the financial markets from a man with Taylor’s experience.

The successful co-ordination of modern capitalist economies rests on three critical supports. The first is reliable data – about company performance and macroeconomic activity – on which people can base their decisions. The second is the transparency and logical coherence of the frameworks used by powerful non-market actors: central bankers, politicians and regulators. The third is well-functioning stock, bond and currency markets, which generate prices that provide true signals to investors, businesses and governments.

Today, Taylor argues, all three supports seem ramshackle. China is the world’s second-largest economy and the decisive market for most emerging economies, yet its own leaders deride its macroeconomic statistics as unreliable. The old theories of monetary policy were discredited by the crash and nothing has yet replaced them, and so no one fully understands what central bankers are doing. The financial markets, meanwhile, are dominated by computer-driven trading. They have become a postmodern parody of themselves, in which prices are determined not by economic fundamentals but by the behaviour of other prices.

With an economic and financial-market outlook such as this, the New Year hangover for stocks hardly comes as a surprise. Yet there is a germ of optimism amid this well-founded gloom. In Taylor’s analysis, there is barely a mention of any of the structural economic challenges that have been exercising policymakers recently: the secular stagnation, the slowdown in productivity, the threat of technological unemployment, and so on. The problems that he foresees are, almost without exception, financial.

If this diagnosis is correct (and, in large part, I think it is), it is a reason for hope. We are not condemned to crisis or stagnation by epochal forces outside our control. It is the financial system – rules and institutions of our making – that has gone awry. The hardware of the global economy is in reasonable shape. It is only the software that has become corrupt. As such, it can be debugged. The alternative is a crash.

Macroeconomist, bond trader and author of Money

This article first appeared in the 14 January 2016 issue of the New Statesman, David Bowie

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To beat the Trump hype, we need a return to old-fashioned political virtues

If we want to resist the Trumpification of politics, what we need is restraint, duty and incorruptibility.

After the 1992 US presidential election, Alistair Cooke’s celebrated BBC radio series Letter from America struck a poignant note. Cooke described Bill Clinton’s worn jeans and checked wool shirt, contrasting them with George H W Bush’s buttoned-up Wasp manners and buttoned-down Ivy League shirts. Clinton’s style, Cooke argued, was a rebuke to a tired social and political establishment. His casualness was the new America.

Cooke, then 83, was honest enough to admit unease about this departure from the old, patrician modes and manners. “Along with the passing of George Bush,” he said, “we shall see, I fear, the passing of the blue blazer.” Cooke seemed right at the time. But don’t write off the blue blazer just yet. As ruling elites change, so does the appropriate counterpoint. To topple Bush’s stuffy golf club elites, Clinton picked up his saxophone, took off his tie and felt everyone’s pain. And now? The subtext of these turbulent months (the inevitable second question, prompted by “How do you beat Donald Trump?”) is: “What should ­tomorrow’s leaders, the leaders we crave, look and sound like?”

My conjecture is that, to beat Trump and his type – bling, shiny suits, dodgy deals – we should push towards centre stage an underestimated set of political virtues: restraint, duty and incorruptibility. If it weren’t for the gender associations, I would be tempted to call this quality gentlemanliness. Aside from personal virtue – signally lacking in the Clinton camp – how might decency inform public debate as it comes under attack from maverick showmen trained in the media circus? How can the middle ground regain its confidence?

First, level with the public. Maybe liberalism hasn’t failed so much as its messaging has failed. Instead of smashing the electorate over the head with the idea that everything is just great, make the case that not everything can be for the best in all possible worlds. As populists reach for empty slogans, a new space has opened up. Accept and exploit those asymmetries: more people are ready to hear uncomfortable truths than politicians imagine.

Kingsley Amis once argued that a writer’s voice should stay close to his speaking voice: not the same, but close. Adapting that idea, if politicians stayed closer in public debate to the truths that they articulate in casual conversation – some things are impossible; almost every policy creates a losing as well as a winning side; there really isn’t any money – they would be surprised how many people are ready to hear that not all problems can be evaporated into thin air. Stray too far from awkward truths and elections become about simple lies v tricksy lies.

Second, centrists do more harm than good when they rush to categorise dissenting opinion as not only wrong, but unacceptable. “Any suggestion that liberal values are not humanly universal,” as John Gray wrote in a recent NS essay, “will provoke spasms of righteous indignation.” Instead, we need to be more tolerant in our tolerance.

Third, stop pretending that everything desirable can be shoehorned into the “progressive” agenda. “I really care passionately about persevering with the common-sense middle ground and doing it quite well” is a problematic political sales pitch, but not for the reasons that are usually given. The gravest difficulty may come at the beginning, with the faux passion, rather than with the substance – public service and competence – underneath.

It is revealing that those closest to David Cameron expended so much energy trying to persuade us that he was not an updated version of Harold Macmillan. That is why the gay marriage reforms, though admirable, were accorded too much significance. Ah, Cameron was a natural crusader! But he paid a price for dressing up as a “radical” when greater challenges arrived. It weakened some of his strongest cards – calmness, perspective, proportion – just as politics was coarsening. Aren’t Tories supposed to understand the virtues of yesterday? In other words, as an electoral strategy to beat Trump (or Nigel Farage), I’d put up a Macmillan type over a Clinton type every time.

Fourth, cut ties with “messaging experts”. It’s a fraud. They teach that everything must be asserted with powerful conviction. Yet ideas unworthy of powerful conviction are best left shorn of them. The electorate has endured a communications version of crying wolf. As a result of the messaging game, when something genuinely important crops up, it sounds simply like the same old shtick.

Fifth, ditch the bogus quantification. Few things signal untrustworthiness more reliably than fake precision. Something shifted in me when George Osborne argued that Brexit would leave households £4,300 worse off. What, no decimal point? Voters understand uncertainty better than politicians imagine. Precise quantification used to sound professional. Now it sounds suspicious.

Finally, think about tone. Conventional wisdom holds that the mainstream must fight the Trumpian revolution on its own terms: a simple solution, memorably expressed, a guiding vision for the country or the world. If anyone has a good one to hand, I’m all for it. But what if – after decades of ­sophisticated argument and counterargument, as politics has solved the easy problems while parking the difficult or insoluble ones – we have reached a state of such evolved equilibrium that no such easy answer can exist?

Pretending otherwise is no longer a point of difference. It takes you towards the lowest common denominator. As Trump has shown, that is well-occupied territory. Perhaps wooing the angry mob is not the solution. Instead, the admirable and successful politician of the future will have to win back the support of moderate, sensible but disillusioned voters. 

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 01 December 2016 issue of the New Statesman, Age of outrage