Week in Review

April 8, 2019

Global Roundup

May asks for Brexit extension to June 30; EU could offer a year. British Prime Minister Theresa May wrote to Brussels on April 5 asking for a delay of Brexit until up to June 30, while saying she aims to get Britain out of the EU earlier to avoid it participating in European elections. (Reuters)

Trump team, China resume uphill effort to end trade rift. The Trump administration on April 3 resumed negotiations with China toward ending a trade war that has deepened uncertainty for businesses and investors, and dimmed the outlook for the global economy. (Business Mirror)

Trump moves to cut U.S. aid to three Central American countries. Taking drastic action over illegal immigration, President Donald Trump moved March 30 to cut direct aid to El Salvador, Guatemala and Honduras, whose citizens are fleeing north and overwhelming U.S. resources at the southern border. (MarketWatch)

EU, China stumble over trade, human rights ahead of summit. Tensions over trade, investments and minority rights are preventing China and the EU from agreeing on a joint declaration at a summit this week, multiple sources in Brussels said on April 5, sapping a European push for greater access to Chinese markets. (Reuters)

China’s construction binge spreads to Americas, rattles Washington. China’s expansion in Latin America of its Belt and Road initiative to build ports and other trade-related facilities is stirring alarm in Washington over Beijing’s ambitions in a region that American leaders, since the 19th century, have seen as off-limits to other powers. (Business Mirror)

France maintains blockade to opening EU-U.S. trade negotiations. Member states failed to convince France on April 3 to support the negotiating mandates for trade negotiations with the U.S. but hoped to find a compromise to accommodate Paris’ concerns before the Easter break. (EurActiv)

Italy embraces Belt and Road initiative. On March 23, Italy formally endorsed China’s landmark Belt and Road Initiative (BRI). The new arrangement risks riling fellow EU members, the United States and the rest of the G7. It could also see a seismic shift in China’s European strategy. (Global Risk Insights)

Big LATAM economies remain under scrutiny. Sovereigns in Latin America continue to face negative rating pressures despite a cyclical economic recovery. Growth in the region will likely remain modest and highly uneven in 2019, with larger economies remaining on a fairly sluggish growth path or, in the case of Argentina, posting another annual contraction. (Fitch)

Brazil real outlook dims on pension overhaul uncertainty. The outlook for Brazil's real has weakened for the first time since President Jair Bolsonaro took office at the start of the year as an eruption of political tension cast doubts on his pension reform drive, a Reuters poll showed. (Nasdaq)

India: One more rate cut seen as world’s fastest-growing economy slows. India’s central bank is on course for its most aggressive monetary policy easing in more than three years, as it seeks to support the world’s fastest-growing major economy in the face of risks both at home and abroad. (HSN)

Thailand’s election has redrawn the political landscape. After nearly a week’s delay, Thailand’s Electoral Commission has announced what can best be called the “official preliminary” results of the March 24 national elections. While it will probably take at least until the final official results are out in early May for a new government to be formed, the outcome already points to an emergent national divide. (Brookings)

Poker and business: How poker skills mirror negotiation tactics. Negotiating the price of purchasing a business, negotiating with vendors, discussing sensitive matters with employees and a host of other things that regularly occur in business may also happen in many poker hands. (Global Trade Magazine)

Anger and Frustration Fuel Elections

Chris Kuehl, Ph.D.

The assumption is that when voters finally go to the polls what matters most is their economic well-being. They will vote for whomever has the best economic plan. That supposedly favors the technocrat who has answers to those economic questions, but often that technocrat is unable to compete with the demagogue who could make endless promises.

Slowly, the pattern has morphed and now people are voting out of anger and frustration. Often, that anger is motivated by the economic issues that matter most to people: jobs, income, inflation and recession. However, just as often, the anger is more diffuse: anger at immigrants who might “steal” their jobs or change their culture, anger at the corruption of their government, anger at those whose lifestyles frighten or offend, anger at violence and despair.

Populism has surged throughout the world. It has taken root in the U.S., U.K., Sweden, Italy, Greece, Spain, Poland, Brazil, Philippines, India and elsewhere. Elections have already brought populists to power in many of the East European states. It is likely that there will soon be more.

The leading candidate in the Ukraine election is a comedian who has made a living lampooning the leaders over the last few years. There, the populism is of the right with Volodymyr Zelensky winning enough votes to face the incumbent in a runoff. Right now, he has support from over 30% of the voters. Meanwhile, Slovakia just elected an anti-corruption lawyer to be their president. Zuzana Caputova is a populist of the left who promises a broad attack on the powers that be.

That both candidates can be seen as “populists” illustrates the challenge of defining this movement. Caputova is pro-European and liberal, while Zelensky is more typical of the populist leaders that already hold office in the region—Viktor Orban in Hungary or Andrzey Duda in Poland. Both left and right reject the status quo and seek more radical alternatives. That frequently draws severe critiques from the technocrats and experts who try to point out the fatal flaws.

The U.S. elections of 2020 are shaping up the same way with President Donald Trump’s brand of populism competing with the more leftist version as personified by Bernie Sanders, Elizabeth Warren and others who have thrown their hats into the ring.

At the heart of the populist message (left or right) is rejection of change. There are many millions of people who have been left behind by the rapid changes that have taken place in the last few decades. People have lost jobs they thought they would have for a lifetime as they watched their employers replace them with robots or move to other nations.

Cultural standards have changed to be more inclusive, but many do not want to include other races or other cultures. Whether the populism is from the left or right, there are powerful waves of nostalgia—references to the old ways when they had secure jobs, kids behaved and everyone knew their place in the order of things.

Much has been made of the personalities that have been driving populism in a variety of nations—Trump in the U.S., Jair Bolsonaro in Brazil, Rodrigo Duterte in the Philippines, Marine Le Pen in France, Boris Johnson in the U.K., Beppe Grillo in Italy and so on. In nearly every case, these have been outsiders with little traditional political backing or experience. They have been propelled by these populist movements and desperately try to stay ahead of them rather than control them. Anger is palpable and is driving a wedge in the very heart of a democratic principle—the ability to work with and respect one’s opponent in search of common goals.

Saxo Bank Warns of European Economic Headwinds

Likely successes for populist parties in next month’s parliament elections and the growing prospect of Germany falling into recession make this year and 2020 crucial for Europe’s evolution, says Saxo Bank.

In its latest quarterly outlook, covering the second quarter of 2019, the Denmark-based online trading and investment specialist publishes likely developments for equities, FX, currencies, commodities and bonds. It is particularly downbeat on prospects for both Europe and its single currency.

“The euro could struggle to rally until a path towards economic and monetary union (EMU) deepening opens up,” says Steen Jakobsen, chief economist and chief information officer (CIO), Saxo Bank.

“The gulf between European valuations and their U.S. counterparts remains high with Europe trading at a massive discount. Part of this lies with the composition of business—Europe has less technology firms and more privately owned companies. In fact, the most truly successful companies in Europe remain in private hands, and for good reason as they refuse to cave to short-term, quarterly earnings report-centered strategies.

“The view from the outside is that Europe is a perennial basket case. This is an easy conclusion to reach if you don’t understand Europe’s history, its vested interests, the peace dividend and the need for government to sell the naive illusion of fiscal self-rule.”

Recession in Germany

Jakobsen says that Saxo firmly believes that any macro change has to come from a breakdown or a crisis, and it regards 2019 and 2020 as key years for Europe’s evolution. The bank’s analysts foresee populist parties getting 20% or even 25% of the popular vote in May’s European parliament elections.

“The most important factor, though, is the collapse of German growth,” adds Jakobsen. “We see a risk of recession there by Q4 even without a trade spat with the U.S.

“Germany, with its very successful “industry 3.0” model, is being left behind. Underinvestment in the technology sector leaves it unprepared as “industry 4.0” rolls in, and its internet speed ranking is just one of many symptoms.

“Germany needs to catch up in terms of digitalization, in terms of programs for working women, with new airports and more overall infrastructure spending.”

Déjà vu

A faltering Germany will reopen the Franco-German “hotline” as well as making the debt issue a pan-European issue, and not one of Germany versus the so-called PIIGS—the five European economies of Portugal, Italy, Ireland, Greece and Spain that need a financial bailout post-2008—or austerity versus free spending, says Jakobsen.

However, on a more positive note he comments: “Investors long convinced by talk of basket cases would be unwise to count out Europe. It is, after all, perfectly positioned to benefit from automation, artificial intelligence (AI), digitalization and a capital market that is cheap by any standard.

“Q2 will see the noise increase; the “basket case” narrative will be spread far and wide and the euro, led by the European Central Bank (ECB), will probably test 1.05 if not 1.03 versus the dollar. The next 12 months, however, will be 2000 all over again.”

Saxo’s main trading ideas and themes for Q2 on equities, bonds, FX, commodities and the macro environment can be accessed here.

Reprinted with permission from CTMfile.

UK Study: Businesses See Fraudsters as ‘Ahead of Industry’

The fraudsters are pulling ahead in the eternal battle between businesses and the bad guys, especially in the U.K.

To that end, Vocalink, a Mastercard company, released its third annual Business Fraud Report, which found that as much as 73% of the U.K. businesses it surveyed think the payment fraudsters are “ahead of the industry.” Additionally, 22% of respondents said someone has attempted to commit payments fraud against their businesses. A full 37% said they have either been a victim of payments fraud or know a firm that has been.

As reported last year, £1.2 billion (nearly $1.572 million USD) was lost through fraud, per statistics from UK Finance. The Vocalink data showed that, of the companies that were victimized, one in 10 thought about closing up shop.

Though the impact of these fraud efforts has been far-reaching, internal processes leave much to be desired. The study found that only 32% of U.K. firms have put tighter standards in place to deal with payments fraud, and as much as 17% said they do not have any processes in place at all.

The Vocalink findings come against a broader backdrop, where the International Monetary Fund (IMF) has estimated that stanching corruption would mean that $1 trillion in annual tax revenues could be garnered across the globe.

“Less corruption means lower revenue leakage and less waste in expenditures, and higher quality of public education and infrastructure,” the report found.

In terms of other reports, SAS found that procurement fraud is rampant in the U.K., and these firms lag behind those in other countries that have comparably better systems in place to detect and combat fraudsters. In some cases, employees and suppliers collude to defraud firms during the procurement bidding processes. The survey found that 24% of businesses have been victims of such collusion, while 31% of businesses surveyed were exposed to contract bid rigging and 43% to duplicate invoices.

Hertz Hurt by Accounting Scams

Hertz has demanded a claw back of as much as $70 million from a number of former senior executives in an accounting scandal that took place a half-decade ago.

In a scheme that used accounting fraud to inflate earnings, where investigations and restatements cost the company $200 million, Hertz filed the suit late last month after former CEO Mark Frissora, former CFO Elyse Douglas and former General Counsel J. Jeffrey Zimmerman refused to return compensation that had been tied to those inflated financial results. As reported by Accounting Today, Hertz’s corporate policy allows the company to seek claw back compensation where employee misconduct or negligence has led to a restatement.

Credit Card Fraud

In Washington state, KEPR News reported on a business scam that targets small businesses in the state. The scam is one where fraudsters trick credit card readers to approve transactions for cards that have not been linked to accounts—or that have been linked to accounts with no money.

The in-person purchases are done at the terminal, with fraudsters posing as customers and saying they must enter a card PIN, which helps them bypass the chip reader. The transaction is completed and, thus, the small business becomes liable for the card transaction.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations