On 12 Jun 2018, US President Donald Trump met with North Korean Supreme Leader Kim Jong-un in Singapore in what was hailed as a historic meeting. The document the two leaders signed state the following:

• The United States and the DPRK commit to establish new US-DPRK relations in accordance with the desire of the peoples of the two countries for peace and prosperity.
• The United States and DPRK will join their efforts to build a lasting and stable peace regime on the Korean Peninsula.
• Reaffirming the April 27, 2018 Panmunjom Declaration, the DPRK commits to work toward complete denuclearization of the Korean Peninsula
• The United States and the DPRK commit to recovering POW/MIA remains, including the immediate repatriation of those already identified.

So, slightly less detail than on a driving licence application. The document clearly lacks detail but can be viewed as a starting point for more detailed discussions towards these ends. In a press conference following the meeting, President Trump said he would halt joint military exercises with South Korea in the peninsula as well as, at some point, repatriate US troops from South Korea.

Critics of the deal cite the lack of detail on both sides, in particular the failure of the US to obtain serious concessions and detailed milestones for the denuclearization of North Korea. The joint statement also made no mention of “complete, verifiable and irreversible denuclearisation (CVID)”, which the US had insisted was the only acceptable outcome.

For the moment the consensus seems to be that Mr Kim was the winner in the deal. Time will tell. North Korea has not been above reneging on agreements. Neither has Mr Trump. So call it a draw for now.

One probable scenario, which I present as pure conjecture, but which seems plausible, is that sometime in September of 2017, North Korea’s nuclear tests went wrong resulting in a catastrophic and total loss of nuclear capability, and a 6.3 seismic event not lost on the Chinese scrutinizing their neighbours. A de facto CVID (Complete, verifiable, irreversible denuclearization) if you will.

Either of his own volition, or at the behest of the Chinese Premier Xi, Mr Kim sued for peace and reached out to both South Korea and the US. With self-inflicted and accidental CVID, Mr Kim would have seen the logic of trading North Korea’s perceived nuclear capability for concessions and a de-escalation of tensions in the Korean peninsula.

The approach appeals to the insular and isolationist instincts of President Trump, though less so to his intelligence and military forces. He is eager to come to some agreement which will let him retrench US forces from the Asian theatre.

Mr Kim gets, not a lot, but he gets something for nothing, an end to hostilities he can no longer afford.

Mr Trump gets something, an end to what he regards as expensive and wasteful military exercises and potential future repatriation of US forces, not to mention the glory of ending the sixty plus years of conflict in the Korean peninsula (which might in his own mind seed thoughts of a Nobel peace prize).

Singapore gets publicity, and the usual uncharitable grumblings of the locals inconvenienced by the summit or incensed at having to foot the bill for Mr Kim while they face rising healthcare costs, impending GST increases, and being the most expensive city to live in (according to the Economist Intelligence Unit’s March 2018 survey.)

The US gets, at this point, a host of promises, and the  hope of denuclearizing one of the most intransigent nuclear capable regimes in the world. They also get to disengage in Asia and repatriate assets and eventually, troops, from the peninsula. The military might see this in a different light than Mr Trump for if it comes to fruition it will diminish prestige, influence and power in the region.

And Mr Xi gets, something too. He gets a de-escalation of tensions between North and South Korea, and he also gets a diminished US presence and engagement in the Korean peninsula. Mr Xi might have negotiated the deal with Mr Kim himself but by encouraging Mr Kim to deal with Mr Trump instead, it meant that any concessions by the North Koreans would lead to reciprocal concessions by the US, not China. Basically, China would get what it wants while America foots the bill. Well played.

Conjecture and speculation of course but you see how it might make a lot of sense.

Average hourly earnings are growing at 2.7% YOY, well below the 3.6% growth rates seen pre crisis 2008. The unemployment rate has fallen steadily from 10% during the crisis to 3.8%. The JOLTS Quits Rate (which measures voluntary quits, presumably in search of better prospects) has risen steadily since 2009 to 2.3%, near its post crisis high. Skeptics of the recovery in the US labour market can point to few metrics of weakness, prime among them a stubbornly low participation rate (currently 62.7%).

The following chart shows the participation rate for the various age groups of the labour force. Apparently the age group most responsible for reducing the participation rate is the 16-19 year age group. Second is the 20-24 age group. These two groups have seen participation rates fall steadily since the late 1990s, presumably as the emergence of the knowledge economy encouraged greater investment in education and development of skills resulting in a later entry into employment.

The 25-54 segment participation rate may have fallen from 84.6% in 1999 to 80.5% in 2015 but it has since recovered to 81.8%.

From this picture of the US labour market, it appears that the market is tight.

On 9 May 2018, the Malaysian general election saw an unexpected win for the opposition Pakatan Harapan coalition against the Barisan Nasional juggernaut despite extensive gerrymandering. Malaysians ended UMNO’s 61 years of rule, albeit with the efforts of UMNO alumni, ex PM Mahathir Mohammed, ex Deputy PM (and ex political convict) Anwar Ibrahim, and a few UMNO defectors such as ex Finance Minister Daim Zainuddin. Disgraced ex Prime Minister Najib, is effectively under house arrest as he is investigated for various financial shenanigans most notably the looting of 1MDB and the subsequent ham fisted coverup. The new government is in the driver’s seat and the direction of Malaysia is in its hands.

For decades, Malaysia has been regarded with mild condescension by its more successful neighbours. A policy of affirmative action for the indigenous races have weakened them rather than toughened them. Rampant and pervasive corruption from top to bottom, from millions to loose change has turned what in other countries is a commercial lubricant to a stultifying sludge. Racial politics has polarized a potentially industrious people who might as one achieve great things. Case in point is AirAsia founded 24 years ago when Singapore Airlines was already in its 47th year . AirAsia earns an ROE of 22% to Singapore Airlines’ 6.5%, yet it trades at half the valuation. Top Glove is the world’s largest maker of latex gloves with 25% of global market share. Not even Apple’s iPhone has that level of dominance in its industry. These pockets of enterprise have risen in spite of the government. 

There is an opportunity here to realize Malaysia’s potential. Momentum is of the essence; there is little time for mistakes or prevarication.

One: Unity and sense of purpose. The PH coalition must be united behind a common cause and that is to reform Malaysia to international standards of governance, law, and development. It is imperative that mischievous or opportunist elements are purged from the new management (or old management, as the case may be. Its complicated.) No personal agendas should be tolerated, only the good of the country and the people.

Two: Corruption needs to be addressed. It is true that no country is entirely free of corruption; some manage it better than others. Corruption has to be turned, co-opted, legalized, nationalized and rationalized into a single, efficient infrastructure. Rule of law is very important as it is transparent and efficient. Investment, foreign and local, relies on confidence and on rule of law. Within this framework the usual biases to favour the elite can be built in which ensure moderation, some optical semblance of equality or fairness, but blunts criticisms of cronyism, nepotism and favouritism. Investors want to know where they stand and that the rules will not change arbitrarily and quickly.

Three: Education. This will cost money and face political inertia. Malaysia has a young population which can supply a potential demographic dividend, but it has to be enabled. The percentage of population over 65 is a mere 6% and the working age population has grown from 63% in 2000 to over 67% today. This is a tremendous resource, but it needs processing. The education system requires a complete overhaul, not incremental patches. It is faster to import the expertise and model and for the country at this juncture speed trumps parsimony. The education needs to be more flexible to adapt to the demands of the economy so Malaysia can rely more on internal human resources in future. 

Four: Abolish Bumiputera policy. Set aside that Bumiputera policy is affirmative action for the majority (some 60% of the population), that it sows dissatisfaction and disenfranchisement among the non-Bumiputera, that it is basically unfair, that it encourages justification for reactionary corruption, that it is divisive and socially risky. Affirmative action weakens its beneficiaries. Adversity breeds strength. What made Singapore great was adversity and an existential threat which inculcated a constant, low level paranoia and preparedness for more adversity, a vigilance that often antagonizes, and a drive to show the world, which often wasn’t even watching, how great it was. And it succeeded. Singapore of this generation is basking rather slightly too complacently in its past success, evidence of the one of the factors behind the cyclicality of societies. Give a man a fish and feed him for a day. Teach him how to fish and feed him for a lifetime. Threaten depleted fish stocks, drought, famine and you will be surprised by the mettle you forge.

That’s a lot of words for concepts we can summarize thus:

Be united.
Be honest and just.
Get an education.
Toughen up.

The difficult part is getting everyone to sign up to it. The prize? Malaysia is a country with 31 million people and a nominal GDP of 296 billion USD, or a per capital GDP of 9800 USD, ranked 66 in the world, behind the world average of 10700 USD. Malaysia has identifiable problems with established and tested (by others) cures. Unlike some of its more developed neighbours it does not have to struggle to find the next stage of development. It just needs to fix things, to copy the solutions of others. The potential rewards of simply meeting the world average in terms of wealth and development will see a significant improvement in the welfare of Malaysians. 

PS: Don’t worry about the budget. Underinvestment in long cycle oil means a high chance Brent holds 80 for the next few years. In fact I would hazard to guess at least 100 from 2019. That will allow Petronas to plug the budget gap. The young population means a healthy dependency ratio which postpones the issue of the budget for at least a decade. Also, anti-corruption efforts will cut the cost of government infrastructure projects and maintenance by over half (if anecdotal evidence of the margins of rent extractors are accurate). Add to this some recovery of pilfered 1MDB money and the government can safely plug the GST gap for the next 3 years at least by which time the fiscal accommodation of the GST cut would have boosted growth.

The European economy has long been bogged down with structural impediments and the challenges of a partially unified single market. Yet in 2017, the European economy experienced a significant pick up. PMIs surged and GDP growth recovered to levels before the 2011 European crisis. Some of the strength has come from a rebound in international trade after European exports picked up noticeably in the second half of 2017 after 6 years of stagnation. Another source of strength has been QE. The ECB balance sheet has increased at over 2.3 trillion EUR since it began buying bonds some three years ago. The weakness of the EUR helped in 2015 and 2016.

Now, however, things are beginning to turn. The Eurozone manufacturing PMI which rose from the low 50s to over 60 has recently retraced sharply to below 57. Industrial production has shown a similar pattern. The ECB’s asset purchases have been extended to September but sizes have been halved from 60 to 30 billion EUR. International trade has begun to slow, and this before material action on tariffs. The strength of the EUR is another complication. Once trading at 1.03 it rallied to over 1.25 and has settled around 1.22. EUR strength will act as a brake on the economy especially since Europe is heavily dependent on trade (which represents over 80% of GDP). And as Europe imports over half of its energy requirements, 90% of its oil, 69% of its natural gas, 42% of its coal and 40% of its nuclear fuels, rising energy prices are a tax on the European economy.

The task facing the ECB is a daunting one. It has begun to slow its purchase of bonds but it hasn’t yet begun to stop accumulating assets although has signalled that it will do so in September 2018. It has not yet raised interest rates and maintains negative deposit and zero repo rates. Its accommodative policy tools are fully deployed and while the economy is still growing that growth has begun to slow. If Europe tips into recession, it has little ammunition left to fight it.

For now, the slowdown is moderate and recession risk is low. There are, however, a couple of sources of risk.

The risk that the trade war resumes is significant. Apart from a general state of strategic competition, trade wars are politically expedient. For the last 5 years China has turned its focus to the domestic economy while the US has re-shored manufacturing (not to mention discovered a lot of oil). Both countries are now less dependent on trade than before despite being the main protagonists in the war. Both will calculate that they have less to lose than the other, and other innocent bystanders, in an escalation of hostilities. Trump may require the diversion for the mid-term elections while Xi, despite recently consolidating power may choose to appease a proud and nationalistic people. He may have won the war within the Party but may still need to win hearts and minds. Europe could be collateral damage in a trade war not of its making. It could choose a side, Europe exports twice as much to the US as to China, but future growth is another consideration. While the US builds walls, China builds bridges and would appear to be a more willing and constructive partner. Europe’s history and scale mean that it is more likely it will be a third player in a trade war, fighting its own corner.

Political risk in Europe has receded in the eyes of the market but remains a significant factor. Emmanuel Macron presses on with his reform agenda despite a series of rail strikes that will last into the summer. His federalist vision is not shared in Germany where a grand coalition governs. If only it were a strong coalition. The CDU/CSU and SPD command but 53% of the vote, while the far right AfD has 13% of the Bundestag seats. Italy as yet has not formed a government since elections in early March produced a hung parliament dominated by populists and Eurosceptics. Spain operates under a minority government and faces secessionists in northern Catalonia. The ECB’s policy will likely be influenced by the fiscal discipline of each member state, which is correlated to the prevailing political regime. The ECB cannot fund a member state but it needs to manage effective interest rates across the union and policy needs to be designed to that effect. The ECB can also influence the level of cross border debt to either discourage a member from leaving the currency union, or defuse the impact of such a member exit. The risk of a member exit is negligible at this point but cannot be ruled out in future.

The ECB meets in a couple of days and it will be interesting to see how Mr. Draghi communicates policy. What he wants is an economy strong enough for expansionary policy to be retrenched, if nothing else so it can be deployed in the next inevitable crisis. His hope is that the EUR retreats and provides some latitude for easing back on accommodation. He may try to talk down the EUR by sounding more dovish. At some stage he will want to stop expanding the balance sheet, maybe even shrink it. And he will need to raise rates into positive territory. (A one-time boost may result from bank lending before rising rates actually act as a brake.) At some point he will want to be more hawkish while sounding more dovish. The days of central bank signalling and clarity may soon be over. As ex Fed Chair Greenspan once said: if I turn out to be particularly clear, you’ve probably misunderstood what I said.

Humphrey: This fake news has to stop and we are going to be the ones who have to stop it. As it is information or possibly misinformation has proliferated around the internet while our reliance and faith in Google or Wikipedia has grown to dependence. It’s a dangerous state of affairs when people trust wholeheartedly news or information which may not be true.

Bernard: Quite so, but what can we do about it? It is quite a complicated problem. Who is to be the arbiter of what is fact and what is fiction? The task would be too daunting for any government to undertake, surely?

Humphrey: Yes, Bernard, but we have to at least have the power to do something, even if we have not the means to do it. The power alone would discourage those who would deliberately spread fake news.

Bernard: But, do we not have legislation in place to deal with defamation, invasion of privacy, hate crime and terrorism?

Humphrey: And sedition.

Bernard: Of course. My mistake. And sedition.

Humphrey: Yes we do. But we face a different kind of threat. We are under siege from technology and the people.

Bernard: The people who vote for us?

Humphrey: The people don’t vote for us, they vote for the politicians.

Bernard: Whom we work for.

Humphrey: Pedantry Bernard? In this quagmire of misinformation and chaos, the people need order, direction, a guide, without which they would be lost, unable to decide whom to believe, to put their trust in.

Bernard: Absolutely Sir Humphrey. We’ve got to limit the proliferation of fake news. So often a rebuttal only fans the flames. We should encourage scrutiny. We should present the facts and let the people come to their own conclusions. We should fight misinformation with greater transparency and more accurate information. That would enable the people to make up their own minds.

Humphrey: Certainly not Bernard! Let the people make up their own minds? Have you gone mad? There would be chaos, they would be lost, unable to decide whom to believe, to put their trust in. We are their guide, Bernard, their beacon. Can you imagine the people thinking for themselves? Parliament would be perpetually hung. Wait… That might be interesting. No. Too unpredictable. Where was I? Parliament would be hung. Yes, we would have a freer hand in policy but just imagine how capricious policy might become as the politicians pander to their constituencies? And the scrutiny Bernard. How can one make policy or execute policy in the face of such scrutiny? Policy is not a simple thing, it relies on trial and error. If we were critiqued for every failure, every blind alley, policy would be paralyzed. No no no no. We need to be able to lead in peace without the constant grumblings of the people driving us to distraction and policy errors. So important a function as government needs calm, calculated and thoughtful consideration which would evaporate in a crescendo of complaint and dissent. It would be impractical. Impossible.

Bernard: But do we not do the will of the people, Sir Humphrey?

Humphrey: Bernard, Bernard, Bernard. If we did so, we would be mere populists. Is that wise?

Bernard: With respect, we appear to be populists every 5 years Sir Humphrey.

Humphrey: And where has that got us? Pandering to the people has led us some of the most misguided policies in the history of the government. The trains. A shambles. It was impossible to run a rail system at those prices, turn a profit and invest in maintenance and improvements. Three incompatible objectives which we failed to present properly to the people. Our reliance on financial services. The City is the economy. No more manufacturing, no more industry, no mining, no steel, no auto industry, unless you count the Chelsea tractors for the rich and aimless, no diversity. We are a hedge fund Bernard. And not a very good one.

Bernard: With respect Sir Humphrey, that’s not entirely true.

Humphrey: Are you calling me a purveyor of fake news? How dare you Bernard.

Bernard: Well, last week in the PM’s office you did say that the idea was not to stop fake news but to monopolize it.

Humphrey: Never said it. Wasn’t there. I believe Bernard, that you’re spreading fake news.