There is no need for the extremely powerful Seti radio telescopes, intent on picking up any cosmic whisper in search of alien messages, to listen to the profound silence that has suddenly descended on Washington DC. The congressional commission that has to evaluate the ties between Trump and the Russians, prodromal to the president's impeachment, is silent and withdrew in a phase of meditation. The demonstrators are silent and have returned home who, a rare occurrence for America, had filled the streets of the capital and promised ever more impressive marches to denounce and thwart the ongoing fascistisation.
The new Congress is silent, which up to now has achieved nothing and is preparing for a long Easter vacation which will soon be followed by a very long summer vacation. Trump's water pump, the one that was supposed to drain the great Washington swamp, is silent. The hiring freeze of civil servants, the first decree signed in the Oval Office in front of all televisions, has not been renewed and has been replaced by the request to all federal offices to produce self-reform proposals (bureaucracies are notoriously famous for their ability and willingness to renew and streamline). And even the most heinous bandwagon, that Export Import Bank that has always given credit to multinationals friends of the government in total opacity and that every Republican has dreamed of razing to the ground, will be kept alive.
Trumpian economists of the first hour are silent, Navarro, Malpass, Kudlow, those who, together with Taylor and Feldstein, were preparing to become governors of the Fed next year or members of the FOMC already this year (there are already three vacancies ). Now Trump seems oriented to confirm Yellen just as the brilliant Kevin Hassett of the American Enterprise Institute (one of the main Republican think tanks of the establishment), always pro-immigration and anti-protectionist, is being chosen as chief economist of the White House. And on the other hand, the K Street lobbyists are now silent, satisfied with having truncated and allayed the protectionist ambitions of the tax reform prepared by Ryan and now in the hands of Gary Cohn, the energetic democrat former president of Goldman Sachs who is making it completely unrecognizable. Perhaps infrastructure will be saved, a one-off expense to be financed with the one-off entry of the preferential tax on the repatriation of funds held abroad by companies and therefore revenue neutral.
Trump's centrist and pro-establishment turnaround is spectacular and very fast not only in foreign policy (with Russia restored to its position of public enemy and Xi Jinping paid homage in every way in exchange for vague promises on Chinese openness to American financial services) but also and above all on the domestic side. The great financier and creator of President Trump, that Robert Mercer of the hedge fund Renaissance Technologies who two years ago explained to Trump polls in hand that a populist electoral campaign would oust any candidate of the system, is losing any residual influence with the downsizing of Steve Bannon, your man in the West Wing.
We put forward the hypothesis that centrism will also prevail in France, Italy and throughout Europe. Despite Mélenchon's strong rise and Le Pen's hold, Macron remains the broad favorite. It is probable that he will govern with a large parliamentary coalition between the Socialists, the Gaullists and his own party, En Marche. The mighty constitutional scaffolding of the Fifth Republic will bend to make room for the grand coalition (just as it already folded in the XNUMXs to make room for the cohabitation of the president and the government of different colours) but will continue to fulfill its essential function of barrier against extreme . Should Mélenchon or Le Pen then win, both would find themselves having to cohabit with a moderate government (the government can be discouraged by the National Assembly, which after the June vote will remain with a firm pro-European majority).
In Italy we will have three electoral alignments but only two realistically possible government outcomes. On the one hand, a grand system coalition, the most probable, and on the other, an anti-system Five Star-League coalition. The second would have a greater dispersion of positions than the first but both would be substantially centrist. For now the aliens are silent.
In the probable case of Macron's victory, Italian Euroscepticism will be isolated and in the end, in the event of victory, it will have to settle for the creation (or discussion on the possible creation) of a complementary currency, the so-called fiscal euro. Parallel currency in modest quantities and in local circulation is quite harmless. If the quantity is high, it should be considered the antechamber of the deactivation of the official currency, or rather of its replacement. Varoufakis proposed it to Greece and Tsipras rejected it and fired Varoufakis. In Italy the confusion and anxiety created by the parallel currency would far outweigh any benefits. After the conclusion of the European electoral cycle (and therefore after the Italian elections) if there are no surprises, Europe will try to strengthen its scaffolding. Not big things, but some support beams in the most fragile points. One of these beams will probably be made up of European Safe Bonds, the so-called ESBies, a good idea that has been around since 2011 and which now seems increasingly mature. This is the securitization of debt issued by the various countries of the Eurozone up to a value equal to 60 per cent of GDP. BTPs, Bunds, Oats and Bonos would be assembled and redistributed in two tranches, one senior and one junior. If the BTPs were to be restructured, even aggressively, the damage would be absorbed by the junior tranche. In this way, a safe pan-European debt would be created (in the senior part) without mutualisation and with a very low coupon (again for the senior part). This would help Italy a lot without harming Germany in any way (the idea of ESBies comes from a German).
In recent times it has been said that the downward spiral has begun for populism. Trump's centrist turn and Macron's eventual victory would only be the confirmation of a decline already seen in Spain and the Netherlands. There is no doubt that it is so in the short term. Yet those who insist on populism in retreat are often the ones who say that immigration to the West has just begun, that the bulk is yet to come, and that the process is inescapable.
Now it happens that populism feeds on low economic growth and the rejection of out-of-control immigration. Global growth is picking up modestly this year, but it seems rash to say (just now that America is watering down its reforms and the global cycle is showing increasing signs of maturity) that we will return to pre-2008 levels. Low growth and high migration flows will therefore continue to fuel the malaise underlying populism. Its downsizing is therefore to be considered temporary and non-structural. At the next recession many knots will come home to roost.
The markets are now called upon to the challenging task of reconciling and pricing the loss of sense of the Trump trade on the one hand and the restoration of Markus Brunnermeier, the creator of the ESBies, on the other. A centrist status quo that seemed threatened by Trump's protectionism and global destabilization. The adjustment to the new reality began with the deflating of the Trump-related reflation trade (the mature cycle reflation trade remains, but here the timeframe is much longer). On the stock market, the erosion of the index is modest and gradual, but under the surface the counter-rotation from banks and cyclicals towards defensives is already well advanced in America.
We suggest selling the US stock and Bund on strength and buying the European stock and Oat on weakness. All in moderate doses because surprises are never to be excluded.
