Dinner with an American Friend

At the risk of sounding like a stuck record (now there’s an analogy that will pass the iPod generation by) I feel compelled to return to a favourite current hobby horse, namely the divergence between economic reality, particularly in the manufacturing sector, and economic reporting.

I had the good fortune of being able to catch up with the President of one of my clients’ North American operations at a dinner on Tuesday evening in Hannover. He was in Europe to promote his new valve body production machine at a German trade show and was in good form covering a range of topics.

We started with business performance. “How are things at the moment?” I asked.

“Great,” he replied, “we’ve taken on 200 extra employees this year already.”

Noting the slightly sceptical look on my face he went on: “I know, it’s like there’s a parallel universe between what is actually going on and what the media are saying!”

Well yes quite, I’ve certainly read enough in the Washington Post or New York Times to suggest that the American economy is shrinking at an alarming rate. “Oh I tell my guys not to read any of that stuff. You wouldn’t get out of bed of a morning if you took them seriously.”

He offered as an example, recent reporting of the American version of our Purchasing Manager’s Index. “The Index had fallen from 65 to 55 and it was reported as if the world had fallen in, but 55 is still growth!”

However, my American friend did concede that wider economic problems outside of manufacturing could make life difficult for Obama in 2012. “He’s going to find it awfully difficult to get re-elected because of problems in the wider economy. The big advantage he has is that the Republicans can’t find anyone to rival his political charisma that is also electable. If they do find someone then he’s in real trouble.”

What has happened to the party of Lincoln?

I have at times bemoaned the duality of British party politics (I think it is looking every day even more of a duality despite a third ‘force’ arriving in the shape of the LibDems) and have wondered whether a primary system to elect party candidates for general elections would help bring fresh thinking and new blood into parliament.

Then I look at the American system and conclude we are much better off with what we’ve got. Tuesday’s primary election results demonstrate what can happen when a major political party is hijacked by one of its wings, in this case the American Tea Party movement, spearheaded by Sarah Palin.

Christine O’Donnell who beat the establishment Republican candidate in Delaware is the new poster girl for ‘Tea Party-ists’. She is a product of the Christian Right who believes the Bible should be interpreted literally and is anti-masturbation, pro-guns and pro-torture (I’m not kidding!). She is widely regarded as being unelectable in the general election when she will face a Democrat on the first Tuesday in November.

Personally, I can’t wait to read her manifesto. Presumably the American public will be told that they can sell their youngest daughters into slavery (Exodus 21:7) and put to death any shop workers who defy the Sabbath and turn in for work (Exodus 35:2).

I’m being facetious, but there is a wider point here. Moderate Republicans, who are willing to reach ‘across the aisle’ and look for bi-partisan agreement in Congress on key legislation which could help lift the US economy out of recession and put people back into work, fear being branded collaborators or even worse ‘liberal’ by the Tea Party Movement who have no qualms about putting up one of their own candidates in a primary to face them.

How long will this go on for? There have been ‘movements’ in American politics before, notably the Bull Moose Party, the Progressives, the Populists and even Ross Perot. All have shone brightly for a time and then flamed out. It is likely that the Tea Party Movement will go the same way, but it could cause unbelievable damage in the meantime. It is difficult to believe at times that this Republican Party is the same party that Abraham Lincoln belonged to.

For Obama, the Tea Party movement is good news. He was looking at a whitewash in November but can now brand the Republicans as extremist. There is every chance now that the Democrats can hang onto the Senate even if they lose the House.

However, the Democrats have a long history of snatching defeat from the jaws of victory or in this case catastrophe from the jaws of a setback. As British comedian John Oliver said last night on the satirical news programme The Daily Show, he fully expects a leading Democrat to be photographed battering to death the American Eagle with a copy of the Koran any day now.

Obama puts BP in Deepwater

My first reaction to President Obama’s slating of BP was that those in glasshouses should not throw stones. I certainly would have liked to bring American business practices in this country to the President’s attention, particularly in relation to Kraft’s takeover of Cadbury and the leveraged buy-outs of our two most successful football clubs which leaves both now cumulatively £1.5 billion in debt.

However, while it is clear that the President is justifiably seething with BP, cold political calculation is also playing a part here. The President faces a difficult set of mid-term elections in November in which Louisiana, and in particular Florida, are likely to play key roles. He will be desperate to avoid the sort of backlash that hit the Clinton Administration in 1994 that ushered in Newt Gingrich and his ‘Contract with America’, which all but stopped the previous Democratic Administration in its tracks.

I also suspect that Obama sees opportunity in this crisis. One of the major stumbling blocks to reform in the US is the Senate, which remains precariously balanced with 57 Democrats, 42 Republicans and two independents, leaving the Democrats only a handful of seats short of avoiding a filibuster, by which a Senator can literally talk a bill to death without it ever coming to vote. Obama may be calculating that precious climate change and clean energy legislation can be rammed through the Senate with support of Gulf State Senators who dare not vote against such a bill at this moment in time.

Almost as big a question now is what happens to BP? Again, Obama has put them on the rack by demanding a $20 billion escrow account to compensate all those affected by the Deepwater disaster. The problem is that the money would most likely come from the shareholder’s multi-billion pound quarterly dividend which institutional investors are expecting in the coming weeks. The Board is therefore stuck between a seething President of the United States and very nervous, and potentially very angry, shareholders.

The smart money at the moment is that BP will muddle through in the short term before being taken out by a competitor once the furor has died down. This is infinitely preferable to bankruptcy, but whatever happens you have to suspect that this Board and the company is all but finished.

Bank Reform: Obama plays the populist card, Dave follows!

No Drama Obama is not living up to his name. Yesterday's announcement on banking reform was as unexpected as it was brutal in its detail. Limits on further banking consolidation in a bid to limit 'Too Big To Fail'; limits on interaction with hedge funds which rely on market volatility to make big profits (or losses) and limits on proprietary trading (using the bank's own money to invest in high risk investments) when they should be building their capital base.

Sounding more than a little bit peeved (presumably at the size of the combined investment banking bonus pot) Obama labelled much of what the investment banks do as "reckless" and sent this message "work with us, not against us," continuing "If these folks want a fight, it's a fight I am ready to have."

The reaction from the financial markets was expected with banking stocks on both sides of the Atlantic being hit (although it was interesting to note that HSBC, which has always been far more conservative and was never heavily exposed to the mortgage CDO market, only took a minor knock on the London Exchange).

However, some perspective is necessary. Obama faces what is increasingly looking like a difficult set of mid-term elections in early November. There is unquestionably a political calculation here as Main Steet America remains furious with its banks. Over here the Tory party's quick reaction last night welcoming the Obama initiative was equally as populist, with one eye on the General Election, while the Labour Government remains leaden-footed and cautious.

It is a strange world when the Tory party is aligned with the Guardian (today's editorial "At last, action") and the Financial Times (today's editorial "A dangerous populist flirtation with Glass Steagall") is more closely aligned with the Labour Party.

Obama’s Surge

Blogging offers the chance for instant opinion, but sometimes I can’t help but think that it is better to let things percolate through the brain cells a while before hitting the keyboard. Having been confined to my sickbed for a few days last week it gave me chance to think through the wider implications of President Obama’s decision to send a further 30,000 troops into Afghanistan.

My initial reaction was that Obama was on a road very similar to that which both Nixon and Kissinger trod in the early 1970s. As in Vietnam, America is propping up a corrupt government with a well armed internal insurgency. For “building the Afghan army” read “Vietnamisation”, for “troop draw-downs” read “withdrawal timetable”. The President does not like this analogy, but as Thomas Friedman said on The Daily Show, Vietnam was the “elephant in the room” when political journalists were briefed over lunch last week.

There is a wider question now though for both American and British foreign policy which is, “can modern democracies with a free press fight open-ended commitment wars?” The reason I ask is that the reality of the matter is that UK deaths in Afghanistan, whilst tragic have been astonishingly low, particularly when you consider the closer quarter nature of much of the fighting. Circa 240 deaths for a near 10 year commitment.

However, this perspective is lost in the media reporting from Afghanisation. Each death is now covered in an extremely personal manner. We know names, details of their family lives, we see coverage of a convoy of black cars from RAF Lyneham; we even have archive television interviews with the fallen. It was Stalin who said “one death is a tragedy, one million deaths is a statistic.” Without clear objectives and a timetable to “bring the troops home” it certainly looks like the British public cannot take too much more tragedy and that has deep implications going forward as to how troops are used in future. Short term, police actions such as that in Kosovo in the early 90s are likely to be the order to the day from now on.

Ultimately, Kissinger devised what became privately known as the ‘Decent Interval’ strategy to end American involvement in Vietnam. He knew the war was unwinnable, but tried to extricate America with as much face as he could retain. The idea was to build up South Vietnamese forces to a point where they could take up the burden of the fight long enough for America to extricate itself and leave a ‘decent interval’ before inevitable collapse. Ultimately American troops left in 1973 and the South collapsed two years later. Nobody will admit this is the plan for Afghanistan, but I suspect this is the road we are on.