“Grigory Potemkin was a Russian army officer and statesman, for two years Empress Catherine the Great’s lover and for 17 years the most powerful man in the empire. An able administrator, licentious, extravagant, loyal, generous, and magnanimous, he was the subject of many anecdotes..
“..there was exaggeration in all his enterprises. He spared neither men, money, nor himself in attempting to carry out a gigantic scheme for the colonization of the Ukrainian steppe, but he never calculated the cost, and most of the plan had to be abandoned when but half accomplished. Even so, Catherine’s tour of the south in 1787 was a triumph for Potemkin, for he disguised all the weak points of his administration—hence the apocryphal tale of his erecting artificial villages to be seen by the empress in passing. (“Potemkin village” came to denote any pretentious facade designed to cover up a shabby or undesirable condition.)”
Get your Free
financial review
Now that the euphoria of Donald Trump’s election victory is wearing off, and the dust from an extraordinarily divisive campaign is slowly settling, it’s back to harsh economic reality. The good news is that America’s new President and his team have a real mandate for change. The bad news for the rest of us in the West is that we desperately need that mandate – and the politicians to deliver it – too.
Just a day before Trump’s re-election, The Financial Times (‘Is Germany’s business model broken ?’) published a damning analysis of the world’s third largest economy:
“The federal republic’s all-important automotive sector, chemical industry and engineering sector are all in a slump at the same time..
“Over the past three years, Europe’s largest economy has slowly but steadily sunk into crisis. The country has seen no meaningful quarterly real GDP growth since late 2021, and annual GDP is poised to shrink for the second year in a row. Industrial production, excluding construction, peaked in 2017 and is down 16 per cent since then. According to the latest available data, corporate investment declined in 12 of the past 20 quarters and is now at a level last seen during the early shock of the pandemic. Foreign direct investment is also down sharply.
“Light on the horizon is hard to detect. In its latest forecast, the IMF says that German GDP will expand by just 0.8 per cent next year. Of the world’s largest and richest economies, only Italy is expected to grow as slowly.
“In manufacturing, where Germany is Europe’s traditional powerhouse, things look especially bleak. Volkswagen has warned of plant closures on home turf for the first time in its history. The 212-year-old Thyssenkrupp, once a symbol of German industrial might, is bogged down in a boardroom battle over the future of its steel unit, with thousands of jobs at risk. The tyremaker Continental is seeking to spin off its struggling €20bn automotive business. In September, the 225-year-old family-owned shipyard Meyer Werft narrowly avoided bankruptcy with a €400mn government bailout.
“Robin Winkler, Deutsche Bank’s Germany chief economist, labels the fall in industrial production “the most pronounced downturn” in Germany’s postwar history. He is far from alone. “Germany’s business model is in grave danger — not some time in the future, but here and now,” Siegfried Russwurm, the president of the Federation of German Industries (BDI), warned in September. A fifth of Germany’s remaining industrial production could disappear by 2030, he said. “Deindustrialisation is a real risk.”
Many of these problems are self-inflicted, in that they are the result of domestic political decisions, as opposed to exogenous economic shocks or acts of God. Choosing to favour (capricious) ‘green’ energy over traditional fossil fuels is just one of them. High corporate taxes, higher labour costs, and choking levels of bureaucracy are others. Add in the metamorphosis of China from lucrative import market to aggressive producer and exporter, and it’s easy to see why Deutsche Börse chief executive Theodor Weimer recently warned that Germany was at risk of becoming a “developing country”, that the government was viewed as “stupid” by international investors – and that German politicians were turning the country into a “junk shop”.
Speaking of stupid governments brings us to the new UK Labour administration of Keir Starmer, which unleashed its maiden Budget on a rightly wary nation just before Halloween. James Vitali for The Spectator:
“Over the last fourteen years, the Conservatives have been the ostensibly reluctant midwives of a bigger, more interventionist state. But advocates of ‘securonomics’ genuinely believe in one.
“The Autumn Budget was the policy manifestation of this economic worldview, and the first opportunity for Reeves to put ‘securonomics’ into practice. In concrete terms, what the Chancellor has done this week is instigate a profound transfer of resources away from productive parts of the economy and towards the state.
“The Chancellor’s tax rises are in cash terms the largest in history. And while increased investment is the broader theme of her budgetary decisions, that large quantum of extra tax revenue will go towards boosting spending on the day-to-day operations of a larger and more active state.
“The Budget has also reinforced a shift in decision-making authority away from households and businesses and into the hands of government. The government will now dictate to a greater extent the conditions under which businesses can take on workers. By ramping up borrowing by £142 billion over the forecast period, the government is also indicating its confidence that it can make superior investment decisions to private enterprises. And this is ultimately why they are changing the debt measure too; to facilitate an expanded role for an active state through increased borrowing..
“Across the decisions made during the Budget, the Chancellor has conducted ‘a hands-on rebalancing between market forces and state control, tipping more power towards the latter’. Investment needs to have ‘guardrails’, so that it advances the political ends of the government. Risk taking by businesses needs to be regulated, so that the state can guarantee the security of workers. Money needs to be shifted from businesses to the government, because the latter knows how to spend it better.
“This is, of course, but a rearticulation of a very old economic dogma – that in a complex society, the government can make better decisions than you can. That the welfare state can better provide for people’s security than households savings and private investment can. And as surely as night follows day, its practical effects when acted upon will be the same – inflation, higher taxes, and wealth destruction.”
With the chaos and vitriol of the US Presidential campaign now (hopefully) behind us, shrewder heads can start to consider the intractable problem that both candidates never publicly addressed: an unpayable dimension of debt. As Matthew Lynn for The Telegraph fairly points out (‘We may be heading for a new financial crisis’), this problem is not isolated to any one country; it is properly global in scale (and consequent insolubility):
“In Britain, Chancellor Rachel Reeves is facing a bond market revolt after her half-baked, misjudged Budget. On the other side of the Channel, Michel Barnier, the French prime minister, is scrabbling around desperately for any extra tax revenues he can get his hands on to keep the credit ratings agencies on board.
“Meanwhile, the EU has no takers for its common bonds for a “green industrial strategy”, and whoever wins the American presidential election.. will quickly find they have to calm Wall Street’s growing nervousness over the country’s massive borrowing.
“In the UK, it would be easy to focus just on the chaos in the gilt market this week. And yet, in reality, something far more serious is underway, and it is happening across the world. The financial markets are rebelling against overspending governments – and that means we are in for a long spell of financial turbulence and potentially a full-blown crisis..
“Investors crunched through the numbers, rumbled that she would not get nearly as much from her tax rises as she hoped for, worked out that her “fiscal rules” were completely bogus, and promptly started demanding more for holding the vast quantities of debt she plans to issue over the next few years.
“If Reeves was even a quarter as clever as she keeps claiming she is, she would not have been taken by surprise. She would have figured out this was the worst possible moment to tax, borrow and spend more.
“It is a mistake to be too parochial. The backlash against this Budget is simply part of a global trend. Driven by Left-leaning bodies such as the IMF, many political leaders fell for the line that the markets automatically supported bigger government..
“Perhaps most importantly of all, Wall Street is starting to worry about the stability of the American government’s debt, with bond yields hitting a three-month high over the last week even as the Federal Reserve cuts interest rates (which means yields should be going down). It has become clear that neither candidate in next week’s presidential election has any plans to reduce a deficit already running at 6pc of GDP and might even increase spending further.
“Add it all up, and one point is clear. The bond markets are now turning ruthlessly on big-spending governments. They are no longer willing to finance every programme a president or finance minister wants to launch, and will charge a huge premium unless deficits are kept under strict control. They are starting to worry that governments have reached the limit of potential tax revenues.
“In France, for example, the state already collects 48pc of GDP in tax, and it is very hard to believe Barnier can get that over the 50pc line no matter how hard he tries. In Britain, even Attlee in the 1940s didn’t manage to squeeze the 44pc of GDP in tax that Reeves has planned..
“Back in the 1990s, when the bond vigilantes reigned supreme, James Carville, Bill Clinton’s political adviser, used to joke that he hoped to be reincarnated as the bond market because “you can intimidate everybody”. That is about to be true all over again, and even more ferociously than in the Clinton era.
“So far we have only seen the first skirmishes, but we are about to witness an epic clash between governments and investors. The result will be huge volatility and potentially a full-scale crash.”
These problems were all visible. We were able to identify them. So as discretionary investment managers we responded by a) avoiding all forms of government debt entirely, and b) focusing on productive and inflation-hedging investments, including gold and silver and related mining interests on attractive valuations.
We may be living in an economic and financial Potemkin World, but the assets we own are real.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“Grigory Potemkin was a Russian army officer and statesman, for two years Empress Catherine the Great’s lover and for 17 years the most powerful man in the empire. An able administrator, licentious, extravagant, loyal, generous, and magnanimous, he was the subject of many anecdotes..
“..there was exaggeration in all his enterprises. He spared neither men, money, nor himself in attempting to carry out a gigantic scheme for the colonization of the Ukrainian steppe, but he never calculated the cost, and most of the plan had to be abandoned when but half accomplished. Even so, Catherine’s tour of the south in 1787 was a triumph for Potemkin, for he disguised all the weak points of his administration—hence the apocryphal tale of his erecting artificial villages to be seen by the empress in passing. (“Potemkin village” came to denote any pretentious facade designed to cover up a shabby or undesirable condition.)”
Get your Free
financial review
Now that the euphoria of Donald Trump’s election victory is wearing off, and the dust from an extraordinarily divisive campaign is slowly settling, it’s back to harsh economic reality. The good news is that America’s new President and his team have a real mandate for change. The bad news for the rest of us in the West is that we desperately need that mandate – and the politicians to deliver it – too.
Just a day before Trump’s re-election, The Financial Times (‘Is Germany’s business model broken ?’) published a damning analysis of the world’s third largest economy:
“The federal republic’s all-important automotive sector, chemical industry and engineering sector are all in a slump at the same time..
“Over the past three years, Europe’s largest economy has slowly but steadily sunk into crisis. The country has seen no meaningful quarterly real GDP growth since late 2021, and annual GDP is poised to shrink for the second year in a row. Industrial production, excluding construction, peaked in 2017 and is down 16 per cent since then. According to the latest available data, corporate investment declined in 12 of the past 20 quarters and is now at a level last seen during the early shock of the pandemic. Foreign direct investment is also down sharply.
“Light on the horizon is hard to detect. In its latest forecast, the IMF says that German GDP will expand by just 0.8 per cent next year. Of the world’s largest and richest economies, only Italy is expected to grow as slowly.
“In manufacturing, where Germany is Europe’s traditional powerhouse, things look especially bleak. Volkswagen has warned of plant closures on home turf for the first time in its history. The 212-year-old Thyssenkrupp, once a symbol of German industrial might, is bogged down in a boardroom battle over the future of its steel unit, with thousands of jobs at risk. The tyremaker Continental is seeking to spin off its struggling €20bn automotive business. In September, the 225-year-old family-owned shipyard Meyer Werft narrowly avoided bankruptcy with a €400mn government bailout.
“Robin Winkler, Deutsche Bank’s Germany chief economist, labels the fall in industrial production “the most pronounced downturn” in Germany’s postwar history. He is far from alone. “Germany’s business model is in grave danger — not some time in the future, but here and now,” Siegfried Russwurm, the president of the Federation of German Industries (BDI), warned in September. A fifth of Germany’s remaining industrial production could disappear by 2030, he said. “Deindustrialisation is a real risk.”
Many of these problems are self-inflicted, in that they are the result of domestic political decisions, as opposed to exogenous economic shocks or acts of God. Choosing to favour (capricious) ‘green’ energy over traditional fossil fuels is just one of them. High corporate taxes, higher labour costs, and choking levels of bureaucracy are others. Add in the metamorphosis of China from lucrative import market to aggressive producer and exporter, and it’s easy to see why Deutsche Börse chief executive Theodor Weimer recently warned that Germany was at risk of becoming a “developing country”, that the government was viewed as “stupid” by international investors – and that German politicians were turning the country into a “junk shop”.
Speaking of stupid governments brings us to the new UK Labour administration of Keir Starmer, which unleashed its maiden Budget on a rightly wary nation just before Halloween. James Vitali for The Spectator:
“Over the last fourteen years, the Conservatives have been the ostensibly reluctant midwives of a bigger, more interventionist state. But advocates of ‘securonomics’ genuinely believe in one.
“The Autumn Budget was the policy manifestation of this economic worldview, and the first opportunity for Reeves to put ‘securonomics’ into practice. In concrete terms, what the Chancellor has done this week is instigate a profound transfer of resources away from productive parts of the economy and towards the state.
“The Chancellor’s tax rises are in cash terms the largest in history. And while increased investment is the broader theme of her budgetary decisions, that large quantum of extra tax revenue will go towards boosting spending on the day-to-day operations of a larger and more active state.
“The Budget has also reinforced a shift in decision-making authority away from households and businesses and into the hands of government. The government will now dictate to a greater extent the conditions under which businesses can take on workers. By ramping up borrowing by £142 billion over the forecast period, the government is also indicating its confidence that it can make superior investment decisions to private enterprises. And this is ultimately why they are changing the debt measure too; to facilitate an expanded role for an active state through increased borrowing..
“Across the decisions made during the Budget, the Chancellor has conducted ‘a hands-on rebalancing between market forces and state control, tipping more power towards the latter’. Investment needs to have ‘guardrails’, so that it advances the political ends of the government. Risk taking by businesses needs to be regulated, so that the state can guarantee the security of workers. Money needs to be shifted from businesses to the government, because the latter knows how to spend it better.
“This is, of course, but a rearticulation of a very old economic dogma – that in a complex society, the government can make better decisions than you can. That the welfare state can better provide for people’s security than households savings and private investment can. And as surely as night follows day, its practical effects when acted upon will be the same – inflation, higher taxes, and wealth destruction.”
With the chaos and vitriol of the US Presidential campaign now (hopefully) behind us, shrewder heads can start to consider the intractable problem that both candidates never publicly addressed: an unpayable dimension of debt. As Matthew Lynn for The Telegraph fairly points out (‘We may be heading for a new financial crisis’), this problem is not isolated to any one country; it is properly global in scale (and consequent insolubility):
“In Britain, Chancellor Rachel Reeves is facing a bond market revolt after her half-baked, misjudged Budget. On the other side of the Channel, Michel Barnier, the French prime minister, is scrabbling around desperately for any extra tax revenues he can get his hands on to keep the credit ratings agencies on board.
“Meanwhile, the EU has no takers for its common bonds for a “green industrial strategy”, and whoever wins the American presidential election.. will quickly find they have to calm Wall Street’s growing nervousness over the country’s massive borrowing.
“In the UK, it would be easy to focus just on the chaos in the gilt market this week. And yet, in reality, something far more serious is underway, and it is happening across the world. The financial markets are rebelling against overspending governments – and that means we are in for a long spell of financial turbulence and potentially a full-blown crisis..
“Investors crunched through the numbers, rumbled that she would not get nearly as much from her tax rises as she hoped for, worked out that her “fiscal rules” were completely bogus, and promptly started demanding more for holding the vast quantities of debt she plans to issue over the next few years.
“If Reeves was even a quarter as clever as she keeps claiming she is, she would not have been taken by surprise. She would have figured out this was the worst possible moment to tax, borrow and spend more.
“It is a mistake to be too parochial. The backlash against this Budget is simply part of a global trend. Driven by Left-leaning bodies such as the IMF, many political leaders fell for the line that the markets automatically supported bigger government..
“Perhaps most importantly of all, Wall Street is starting to worry about the stability of the American government’s debt, with bond yields hitting a three-month high over the last week even as the Federal Reserve cuts interest rates (which means yields should be going down). It has become clear that neither candidate in next week’s presidential election has any plans to reduce a deficit already running at 6pc of GDP and might even increase spending further.
“Add it all up, and one point is clear. The bond markets are now turning ruthlessly on big-spending governments. They are no longer willing to finance every programme a president or finance minister wants to launch, and will charge a huge premium unless deficits are kept under strict control. They are starting to worry that governments have reached the limit of potential tax revenues.
“In France, for example, the state already collects 48pc of GDP in tax, and it is very hard to believe Barnier can get that over the 50pc line no matter how hard he tries. In Britain, even Attlee in the 1940s didn’t manage to squeeze the 44pc of GDP in tax that Reeves has planned..
“Back in the 1990s, when the bond vigilantes reigned supreme, James Carville, Bill Clinton’s political adviser, used to joke that he hoped to be reincarnated as the bond market because “you can intimidate everybody”. That is about to be true all over again, and even more ferociously than in the Clinton era.
“So far we have only seen the first skirmishes, but we are about to witness an epic clash between governments and investors. The result will be huge volatility and potentially a full-scale crash.”
These problems were all visible. We were able to identify them. So as discretionary investment managers we responded by a) avoiding all forms of government debt entirely, and b) focusing on productive and inflation-hedging investments, including gold and silver and related mining interests on attractive valuations.
We may be living in an economic and financial Potemkin World, but the assets we own are real.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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