Entering 2019, I wrote here about three themes impacting markets, politics, and society. Each has materialized, in some form, and with varying impact.
- Tangible Government Regulation of Big Tech Platforms
- Dramatic and Rapid Breakdown Of Post-WW2 Multilateral Structures
- Military Conflict Between India and Pakistan and Between Israel and Arab States
I also published posts on other major topics. My expectations for a stronger than expected U.S. economy and stock market have materialized. The Fed proved less hawkish than NLP analysis implied. Presidents Trump and Xi seem closer to a trade deal (albeit just a first phase) than I expected they would at this point.
- No US recession here and here
- A dramatic rise in US stocks into year-end here
- Trump can hold the Rust Belt (and thus win again) here
- No trade deal with China here, here, here, here
- A more hawkish Fed here, here, here, and here
- Summer of discontent in stocks here, here, here
Tangible Government Regulation of Big Tech Platforms
US Big Tech companies are under scrutiny from regulators in the U.S. and the EU. And continued acrimony in the US-China trade war means that they may be in China’s crosshairs as well.
Facebook, Google, Amazon, and Apple face over 16 inquiries from U.S. authorities. Apple’s CEO Tim Cook recently spoke about the importance of regulating Big Tech, a preferred outcome to breaking up his company. Jeff Bezos has come out in support of working with the Department of Defense despite Amazon having just lost its bid for the DoD JEDI cloud contract.
Every Democratic candidate for President has spoken out about the need to break up or regulate Big Tech.
Several new proposals are coming out of Europe. Incoming European Commission President Ursula von der Leyen has tapped Margrethe Vestager to fill a new position, executive vice president for digital. Vestager is best known for pursuing Big Tech as the European Commissioner for Competition from 2014-2019.
This month, the Financial Times reported that China’s Communist Party (CCP) has ordered all state offices to remove foreign hardware and software within three years.
Politicians represent the views of their constituents. A recent poll of 10,000 people in nine countries (Brazil, Denmark, Egypt, France, Germany, India, Norway, South Africa, and the USA.) by You.gov on behalf of Amnesty International showed that about 71% of people worry about how Big Tech is using their data.
Big Tech Stock Returns
Big Tech 2019 stock market returns did not suffer despite these inquiries. The major platforms (Alphabet, Amazon, Apple, Facebook, Microsoft) posted dramatic gains. Except for Amazon, they also all outperformed the S&P 500.
I wrote in May about Microsoft’s fate after the famous 1998-2001 antitrust investigation. It’s worth noting how well Microsoft stock performed while the case was being triedStock Returns for Microsoft and NASDAQ 100 During Antitrust Suit (5/18/98 - 11/2/01)
|Annualized Return||Gross Return|
Things were very different after the DOJ settlement. It took Microsoft 15 years to catch up to broader market returns.
|5-Year Return||10-Year Return||15-Year Return|
Microsoft co-founder and former Chairman & CEO Bill Gates recently stated:
“There’s no doubt that the antitrust lawsuit was bad for Microsoft, and we would have been more focused on creating the phone operating system and so instead of using Android today you would be using Windows Mobile,” claimed Gates. “If it hadn’t been for the antitrust case… we were so close, I was just too distracted. I screwed that up because of the distraction.”Bill Gates speaks at NY Times DealBook Conference – 11/6/2019
Initial investigations into Microsoft began as early as 1992. A full nine years passed before the DOJ settlement. By 2001, society was concluding a long cycle of private sector confidence, and change was afoot. We are in the early years of another cycle of private sector confidence and it may be many years of stock market gains before Big Tech loses its luster.
Dramatic and Rapid Breakdown Of Post-WW2 Multilateral Structures
The world’s multilateral institutions are showing their age, the all-important 70+ years. Since 2016, the U.S. has scrambled their futures, withdrawing from or renegotiating its role in almost every single one.U.S. Decisions on Treaties and Multilateral Institutions Post-2016
|Treaty/Organization||Date Entered||Post 2016 Decision|
|Intermediate-Range Nuclear Forces Treaty||1987||Withdrew|
|Paris Climate Accord||2015||Withdrew|
|UN Human Rights Council||1946||Withdrew|
|Iranian Nuclear Accord||2015||Withdrew|
|Arms Trade Treaty||2013||Withdrew|
|Open Skies Treaty||1992||Considering Withdrawal|
NATO seems to be in everyone’s crosshairs. With the Trump administration openly questioning NATO’s value, smaller member states have attempted to assume the leadership mantle. This has not gone well. NATO headlines here and here revolve around its inability to form a cohesive stance of security. Carnegie Europe recently published a series of research reports New Perspectives on Shared Security: NATO’s Next 70 Years. They lay bare tough questions facing history’s most successful military alliance.
Security Has Been Trumped By Politics:
- Germany’s views remain unknown, with Chancellor Merkel pressing for a “committee” to review NATO’s political stance
- The Trump administration wants NATO to counter China’s rise
- French PM Macron is pressing for a coordinated war on terror
- Turkey’s President Erdogan wants legitimacy for his Syrian incursion
Observers have been quick to highlight the political nature of NATO.
“Politically, it is difficult due to the U.S. factor and Turkey. There’s a real challenge in keeping Europeans united,” stated Claudia Major, Senior Associate for International Security at the German Institute for International and Security Affairs.
“Yet, 2019 confirmed the politico-military substance, which is the true glue of NATO,” said Dominik P. Jankowski, Political Adviser and Head of the Political Section at the Polish Permanent Delegation to NATO
According to Pew Research, the American electorate remains favorable of NATO. Yet, voters believe NATO is more important to other countries than the U.S. Any further rise in populist fervor in the U.S. could quickly shift popular opinion away from NATO.
But Politics is Led by Economics
As a share of global GDP, NATO is now smaller than it was at the collapse of the Berlin Wall. And the U.S. share of NATO’s GDP is at a multi-decade high.
Supporters of NATO highlight its club size of 30, versus 15 when the Berlin Wall fell in 1989. This means that the famous Article 5 of the NATO treaty applies to the collective defense of 30 nations. While this may increase the cost of aggression on the part of an enemy state or actor, it also increases the defense burden. Will U.S. voters embrace the cost of defending North Macedonia as easily as the defense of Canada or Germany?
“What Macron wants is for NATO to think and act politically and for Europe to consider the future of its security in case Trump wakes up one day and pulls America out of NATO. Many alliance leaders prefer to keep their heads in the sand rather than contemplate such a possibility.” Judy Dempsey, a non-resident senior fellow at Carnegie Europe, said here in late November.
European leaders would be wise to no longer assume the U.S. security guarantee. Economics leads politics, and Europe continues to fall further behind.
The U.S. has thrown the United Nations into a funding crisis. Until November 25th, the U.S. owed over $1 billion of 2018 and 2019 contributions. Per passblue.com, the 2018 tranche of $533 million was delivered that day.
According to passblue.com, “Lack of money has limited headquarters operations in New York, including even shutting down escalators and providing no paper for the photocopy machine in the Dag Hammarskjold Library.”
The Trump administration has focused its apparent disdain for the UN on peacekeeping operations. Leveraging a law passed in the 1990s, but often waived by Congress, the administration is enforcing a cap on not funding more than 25% of the Department of Peacekeeping Operations’ budget. This cap has been the biggest contributor to the current U.S. arrears.
Beyond that, there have been reports of access issues by foreign diplomats to the United Nations headquarters in New York.
In a widely covered speech on September 24, 2019, President Trump made clear to the UN General Assembly his belief in a nation-first style of diplomacy and suggested that all nations follow this path. It was yet another clear signal of his disdain for multilateral institutions.
Military Conflict Between India and Pakistan and Between Israel and Arab States
India & Pakistan
On August 5th, Indian Home Minister Amit Shah announced in Parliament that the government would scrap Article 370 of the Indian Constitution. This ended 72 years of the near-autonomous ability of Jammu & Kashmir to manage internal affairs. It was South Asia’s version of one country-two systems, and it ended with a thud. Of note, violence has fallen in Kashmir since the announcement. According to Times Now News, per Minister of State for Home G Kishan Reddy, there were 88 incidents in the 115 days since August 5, versus 106 in the 115 days prior. The preemptive detention or arrest of thousands of political leaders and dissidents may very well have contributed to the relative calm.
Pakistan’s immediate response has been mostly diplomatic, including the formation of “Kashmir Cell”, within Pakistan’s Foreign Office at embassies across the globe. Perhaps the issue is economics, where Pakistan is holding a weak hand.
The Pakistani government issues an annual Pakistan Economic Survey. Some highlights:
GDP growth is expected to plummet to 2008 Financial Crisis levels:
Inflation is expected to jump to 2011 levels:
Government expenditures are expected to increase by 30%:
Interest payments have skyrocketed to 47% of total expenditures, up from 34% in 2009:
The Pakistani Rupee has lost over 30% of its value against the US Dollar this year:
Israel and the Arab States
No question, it appears tensions have risen in the Middle East, fueled by unrest in Iran, ongoing US-Iran tension or JCPOA, and an ongoing “shadow war” in Syria involving numerous Middle Eastern and global powers. The issue is too complex to be covered here. Numerous prominent publications have discussed the rise in tensions this year:
- New York Times: The Israel-Iran Shadow War Escalates and Breaks Into the Open
- Washington Post: The Iran-Israel War Is Here
- The Atlantic: The Coming Middle East Conflagration
- Haaretz.com: How Israel’s Conflict With Iran Will Be Different in 2020
- BBC News: Israel-Iran: Risk of an all-out conflict grows
Internal unrest in Iran is sure to add more kindling to an already tense situation. There has been a dramatic rise in conflict events inside of Iran since 2016, according to The Armed Conflict Location & Event Data Project (ACLED)
Once Again, Politics is Led by Economics
As has been widely reported, Iran’s economy is in turmoil, fueling internal unrest. Per the BBC, consider the following data since US sanctions were reinstated:
GDP Growth has collapsed:
Oil output is nearly halved:
Oil exports have fallen nearly 90%
The Iranian Rial has fallen dramatically against the US Dollar:
Economics drives politics. The Middle East and South Asia remain powder kegs.
Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.