Every so often democracy produces a result that is extreme and polarizing. The personal qualities displayed by Donald Trump were far from desirable or exemplary and his proposed policies appear vague, incomplete or ill-conceived. Yet Trump addresses some deficiencies, even if his remedies may be questionable.

While 47% of eligible voters did not vote and more people voted for Clinton than Trump, the fact remains that over a quarter of the people voted for Trump. That’s 25% of people who chose a misogynistic, avaricious, egotistical, disingenuous tax evader. Some of this may have been a protest vote against an opponent they felt they could not trust.

However, it is more probable that Trump represents the feelings and ideology of more people than we care to admit. It is an uncomfortable truth about the human race, about ourselves. We are less likely to condemn or punish another if we have been guilty of the same crimes, even if to a lesser degree.

That Trump lost the popular vote may tempt one to redesign the voting mechanism, but no voting system is perfect. What America and indeed the world needs to do is to give Donald Trump the opportunity to prove himself worthy or not. America’s democracy means that a man untrained and inexperienced in the workings of government can now lead the country. There are, however, useful checks and balances in the form of Congress. If we have to worry it is that the Republicans control the House and the Senate, albeit with an insufficient majority to force policy through.

The demonstrations against Trump should stop, as should the calls for “faithless electors” to confound the election result, or actions to impeach the President Elect as a political means to stop him from taking office. If Trump is prosecuted for one of his allegedly sham commercial practices it should not be a politically motivated action.

To unfairly deny the President Elect is to deny democracy. America has the institutions and the systems to constrain a rogue President. In the meantime, Trump has 4 years to prove himself. If he doesn’t it will be 4 years lost and some work for his successor or successors to cure. There are worse outcomes in the world, incumbents who cannot or will not be removed, despots who outstay their welcome and defy the will of their people and nepotic dynasties. Trump at least is the will of a quarter of the people. The silent 47% bear some blame and chronic non-participation should result in a permanent loss of voting rights. The nation should pull together, including the 25% who voted against Trump, to steer the country to a better future, even with all the pushing and pulling associated with a liberal democracy. It would be wrong to simply work against the man. It might give him cause to undeservingly seek a second term. If he fails despite the support of the country then there is no excuse.

What would you do? 

Russia:

· Christmas came early. Cosy up to Donald.

· Help the US out of NATO.

· Help Turkey out of NATO.

· Test the resolve of NATO by threatening Estonia, Latvia, Lithuania.

· Help the US out of trade pacts.

· Seems sympathetic to Russian strategy in Middle East.

China:

· Christmas came early.

· Time to replace TPP with a China led trade agreement.

· Reach out to Europe to form trade alliance. Possibly reach out to Canada and Mexico to form trade alliance.

· Push the AIIB initiative, the CIPS system, RMB internationalization, One-Road-One-Belt.

· Test US resolve in South China Sea, Taiwan and Japan, dam all the rivers. But balance this with the need to subvert US hegemony. It may be beneficial to be magnanimous and conciliatory.

Eurozone:

· Too busy with Dutch general elections in March, French presidential elections in May, German general elections in the autumn.

· Too busy with the Brexit.

· Worry about Turkey, Russia and NATO.

· What happens to TIIP, is China interested in a trade deal?

· Could the same popular revolt happen in Europe? How to appease voters? Be more populist?

· Rethink refugee and immigration policy.

· Weak EUR, no excuse for Draghi to keep expanding QE.

UK:

· Special relationship? The Foreign Secretary Johnson has called Trump unfit to lead. Perhaps he will want to reconsider that position.

· Too busy with Brexit, friendly fire from the Tory Eurosceptics and a febrile atmosphere in Brussels.

· Trying to cut deals with China and India, who may now be receptive. Thank god it’s not all bad.

· Europe may be rethinking immigration policy. Easier Brexit negotiation?

Japan:

· There goes the TPP.

· If JPY goes to 90 Japan will have a problem.

· How to work with China? RCEP?

Middle East:

· Trump will go easy on Israel which will be a problem for Palestinians.

· And hard on Iran which will sooth the Saudis.

· And easy on Putin and Assad which will disappoint Syrians.

· And easy on Turkey.

· It’s complicated and requires a considered, deliberate and judicious approach lest the solutions propagate further problems. A bit like dealing with hydra.

India:

· Re-shoring could accelerate on US tax plan. Loss of FDI.

· Trump anti-China position could be good for Indian pharma. On the other hand the ACA is a big source of demand for Indian generics. If ACA is repealed, there could be negative impact on Indian pharma. It’s a toss up.

· Cosy up to Trump in dealing with ISIS. Sideline Pakistan.

We have had central banks telegraph their intentions to us for years now, and mostly those signals have been dovish. Recently, however, there has been a backup in bond yields and some uncertainty around what central banks want and what they can achieve.

Is the current correction in bonds similar to the taper tantrum of 2013 when the Fed signalled an end to quantitative easing, or is it a shorter, shallower correction, or is it a more durable reversal in the one way market for bonds since the crisis of 2008?

Let’s explore a slightly cynical view of the world, that central banks are in fact not independent of their political masters and that the government uses all the apparatus at its disposal in the management of the economy.

Global debt levels have risen from 87 trillion USD (246% of GDP) in 2000 to 142 trillion USD in 2007 (269% of GDP) and to 199 trillion USD (286% of GDP) in 2014. Despite deleveraging of particular sectors in the aftermath of 2008, aggregate debt levels did not drop but instead accelerated.

A plausible strategy for dealing with excessive debt would run as follows:

1. The first order of business is to ensure that the holders of the debt are strong and do not attempt a market sale which would bring about price discovery.

2. Market rates of interest need to be contained to facilitate the refinancing of existing debt towards longer maturities. This involves suppressing two elements, the first is the underlying government bond curve, and the second, the credit spread.

3. A strong holder of debt is the government since it pursues objectives beyond economic and commercial ones.

4. The government needs to finance debt purchases with the issue of government debt. This will lead to an increase in the national debt, from in most cases already elevated levels. A strategy needs to be found to reduce the cost of government debt.

5. Central bank purchases of government bonds are an efficient means of financing the government’s debt purchases and moderating financing costs. In the case of more determined programs, central banks may buy corporate debt to suppress the credit spread as well as the base interest rates.

6. A pool of investment capital sufficient to finance and refinance the debt needs to be maintained and developed.

7. Excessive savings are to be encouraged as they are another source of cheap funding. Inequality of wealth supports excessive savings and may therefore be tolerated.

8. To channel savings to fund government debt, banks need to be encouraged to buy government bonds. Under Basel III, government bonds have a risk weight of zero, making them highly capital efficient investments despite their low yield. The zero capital consumption of government bonds makes banks demand highly inelastic. In the US, in the 12 months to Oct 2016 the holdings of US treasuries and agency MBS by banks has risen from 2.16 trillion USD to 2.43 trillion USD.  Western and Southern European banks’ holdings of government securities has more than doubled from 627 billion EUR in Sep 2008 to 1,422 billion EUR in mid-2016. This has been aided by credit lines (LTRO) for which government securities are eligible collateral.

9. The slower is economic growth and corporate profit growth, the lower must financing costs be maintained in order to prevent the excessive growth of the total debt. Ideally, the objective is to at least attain steady state if not shrink the stock of debt.

If the above conjecture is true, then interest rates will be capped over the long run. The current rise in interest rates would be a short term (3 to 6 months) phenomenon.

On this basis, while we would be tactically short the 10Y UST at 1.8, we would be long the 10Y UST between 2.0 – 2.3, and the 30Y UST between 2.84 – 3.06.

10 minutes into the future…

Growth remains positive but slow, equities are expensive, credit spreads are tight, and interest rates are low. High quality assets are even more expensive leaving only lower quality, less liquid, more esoteric or clearly troubled assets with any value.

A significant contributor to the current state of affairs is central bank policy which has included suppressed interest rates and competitive demand for assets. The only hope for traditional assets such as equities and bonds to appreciate is further central bank purchases or a sudden spurt in economic growth and productivity.

On the risk side of the argument we have, in addition to expensive valuations and slow growth, monetary policy being close to or at its limits, a dip into negative growth even if cyclically and short lived, social tensions from inequality and most pressing of all, political tensions from Europe to America to the South China Sea.

Governments may mitigate some of these pressures with fiscal policy but sovereign balance sheets are already heavily indebted. China’s growth has been supported only by a significant expansion of credit. The US has had contentious debates about their debt ceiling and Europe is constrained by fiscal rules which most of its member countries have been in protracted breach of.

If fiscal stimulus becomes widely adopted it will provide a lifeline to economies and markets for another 3 to 5 years, depending on how determined the effort. However, the world has experienced 8 years of recovery since the financial crisis of 2008, and a cyclical downturn can be expected soon.

That the monetary policy lever has not had a chance to be reset or restored is a serious concern. In the next downturn, monetary policy will have no room to act. The parachute has been deployed, there is no spare, and we haven’t packed it back in the bag.

The fate of fiscal policy will likely be the same as that of monetary policy. A slippery slope from which there is no return. Slowly, the wisdom of austerity has been pushed back, first in the fringes and then in the centre of academic orthodoxy. The biggest challenge for fiscal stimulus is not how it will be deployed but how it will eventually be rolled back.

Eventually, debt will have to be repaid or repudiated. The first step to debt forgiveness is to place the debt in friendly hands. This stage has already been done. The Bank of Japan, for example, owns over a third of Japan’s national debt. Were it to convert this debt into perpetual, zero coupon debt, the debt burden of the government would fall dramatically. If this debt was written off, it would reduce the leverage of the sovereign balance sheet to facilitate new issuance.

The mockery that such a debt restructuring would make of the concept of money and debt will have unpredictable consequences. Either interest rates go down with the leverage, or up as the internal (inflation) and external (exchange rate) purchasing power of the currency is questioned.

For the investor, this scenario is depressing. The only strategy is chicken. In the game of chicken, two cars drive towards each other at speed. The first to flinch, loses. If no one flinches, both die. The winner is the one who flinches as late as possible. For the traditional long only investor trafficking in equities and bonds, the runway is short. For less constrained investors, the runway is longer, slightly, but still finite.

Markets in asset backed securities, structured credit and leveraged finance may not be as accessible to fast money retail investors and their proxies such as mutual funds and exchange traded funds and may retain value for longer. However, it is a matter of time before the relentless pursuit of yield finds these niches and squeezes the value out of them. Regulation, complexity and tax structure may present barriers but not for long as the collective intellect of the financial industry is turned towards circumvention.

Shorting. If assets are expensive, then perhaps it makes sense to hold a short exposure to these assets. However, shorting is not a mirror image of ownership. The risks to shorting extend beyond the economics of the trade to the mechanics, regulation and legality of establishing and maintaining a short position. Shorting is an unpopular strategy particularly when it works.

What is an investor to do in this environment? If Lord Keynes’ observation that in the long run we are all dead, then chicken is a viable alternative. But do choose the longer runway, which means eschewing conventional, accessible assets and strategies.

In the long run, however, average returns have to be low, since growth is moderate and assets are expensive. The problem is most tangible in the pensions and savings industry where liabilities are chronically underfunded. The individual or individual institution may attempt to navigate the temporal distribution of returns, i.e. market timing, but for the industry as a whole, the problem is chronic.

As the memory of war fades and technology allows us to fight wars from long distances we become distanced by time and space. The more time passes and when wars are fought in faraway places and fought with detachment the more likely we are to engage in it.