MALMGREN GLOBAL LLC GLOBAL MARKET COMMENTARY Harald Malmgren November 9, 2017 Confidential forthe exclusive use of clients of The Malmgren Group and ‘Malmgren Global LLC{jaten@gmaitcom HIGHLIGHTS FOR NOVEMBER Central Banks on Autopilot, fearing any change could trigger market crashes Trump's tax bill won't pass Congress before Chrismas, and what emerges 2018 won't do much for economic growth After decudles uf yradualcominy toyetier te BU hus beyun to evme apart —And a shakeup in China as Xi Jinping addresses debt and income disparity ‘Major Economies on Autopilot--For Now Among the final list of candidates, Fed Governor Jerome Powell was selected on the basis he was the candidate least likely to seek changes in current monetary and regulatory policies. He was viewed as the safest choice because he ‘was unlikely to say anything that might disturb the continuing upward momentum in the stock market. Trump had become accustomed to taking credit for stock market bullishness, which he viewed as an indicator of investor confidence in his Presidency. (Reappointing Yellen might have achieved the same objective of encouraging continued ‘market complacency, but it was fel her public suggestions of multiple rate hikes next year could prove troublesome. ‘There also were significant objections to her reappointment among senior Republicans in Congress who had uncomfortable encounters with her in past Congressional hearings.) ‘The choice of Powell was dictated by Trump Administration obsessive focus on successful passage of tax cuts asthe primary tool for boosting economie growth. ‘Trump's team wants the Fed to take a back seat while Trump's tax cuts have time to gain traction. ‘Thus markets can expect Powell’s leadership to move along the same path the Fed had already taken, beginning with a rate hike in December, but ‘moving more slowly with future hikes than Yellen might have preferred. Continuing flattening of the Treasury yield curve accompanied by lower ong maturity yields is consistent with what the Fed under Powel is likely to do or not do. Although the first step in unwinding the Fed's balance sheet has been taken, the Trump ‘Administration expects litle additional unwinding prio to 2018 elections. ‘Malmgren Global LLC ‘The Malmgren Group{jaten@gmaitcom ‘The European Central Bank (ECB) wil hold interest rates steady and continue its QE program of purchasing Burozone sovereign debt, although the volume of monthly purchases wl ikely be tapered to3o billion per month in January, then to continue at that rate until a year (or more) from now: ‘The Bank of Japan (BO) has showin no intent to change its current policies. To the contrary, BOJ Governor Kuroda has just declared the central bank stimulus will be ‘continued as far into the future as needed to achieve a 2% inflation rate. Of the major central banks, only the Bank of England (BOE), Bank of Canada and the US Federal Reserve look likely to raise their target interest rate in coming months, and even then by only one notch (talk of more than one notch sometimes surfaces, but then fades). Several central bankers and market commentators have publicly argued that “normalization” of interest rates and QE liquidity injections should begin soon, now that the world coonomy soems to them to have regained upward traction, However, behind seeming complacency that the negative effects ofthe Great Financial Crisis of 2008 have been overcome, no government or central bank seems eager to take risk that rate hikes or phasing down of QE might trigger another great crash of stock and bond markets. Rather than break out new monetary policies, the international consensus among central bankers seems to be to keep doing what they have been. doing. Even ifthe Fed explores tapering ofits balance sheet, the ECB and the BO are not yet prepared to take such a step. While the Fed cautiously explores “tweaks” of restraint in the volume and pace of liquidity injections, the ECB and BOS will rely on use of words of caution while watching with keen interest how Powell will all about unwinding the Fed's balance sheet In the meantime, continuation of present ECB and BOJ policies can be ‘expected to help keep global asset markets, particularly stock and bond markets, propped up. In public discussion ofthe dominating role of central bank policies in the aftermath of nereasingly recognized that QE did generate a ising asset values and compressing risk spreads. Itis gradually now also being acknowledged that this wealth effect did not increase capital spending on productivity enhancement or production expansion. It also did not trickle down to ‘wages and household incomes. Instead, QE resulted in sharply rising concentration of ‘wealth in a narrowing slice of population, ‘The wealth effect of sustained QE had a huge, unintended redistribution effect, which in turn encouraged growing populism and political unrest ‘This phonomenon is not yet being directly addressed in policy discussions in ‘Washington or other major capitals. However, it was addressed in Beijing, when 2 Malmgren Global LLC ‘The Malmgren GroupSoten@gmaitcom Prosident Xi Jin Ping personally gave it prominence atthe core of his ell for “rejuvenation” of China's economy at the 19% Party Congress. A Popular Illusion of Synchronized Global Growth Governments and mainstream media around the world have recently promoted the idea {that the world's major economies ate now experiencing a synchronized piekup in ‘economic genuth. The Timp Administration is taking eredit for appearance of a higher ‘estimate of 3% annualized GDP growth rate that appeared in the last two quarters. This {ata pickup even seems to be raising hopes in Europe that global growth may finally be gaining traction, after several years of disappointing economie performance. "The recent uptick in GDP growth estimates created a temporary illusion of improved cconomie performance, bt it was primarily the result of inventory buildup (in other words, goods produced but remained unsold). Consumers, aecounting for roughly 70% ‘of whatever grovth is achieved, did increase spending, but much ofthat spending went tohealthcare, reat and utilities as disposable ineome declined. Household incomes for most Americans have remained flat for more than a decade. Rising household debt and declining savings are sustaining an illusion of consumption growth without rising incomes to sustain it, Business fixed investment is showing no sign of sustained pickup. Yes, stock market valuations are rising, driven by stock buybacks using borrowed money and encouraged by earnings reports increasingly generated by manipulative non-GAAP accounting US exports and imports remain subdued by continuing slump in world trade, as worldwide demand remains on a path of barely perceptible growth, In reality, if world economies were experiencing a pickup in momentum we would see it in a pickup in world trade. There is no evidence of a new surge in trade in the US, the EU, China, or anywhere else, On the contrary, world trade remains mired in a slump that has prevailed for the last several years, with no srowth or even slight decline since 2014. It should be recalled that in most of the post WWII decades world trade grew faster than national production. This enabled many economies ensnared in weak domestic incomes toboost growth by reliance on external demand. Exports became the primary engine of srowth for more and more economies. That high rate of world trade growth eame to a crashing end atthe time ofthe Lehman crisis in late 2008. What followed was a long collapse of world trade, then a slow return tothe level of trade in 2008, but subsequently flattening on a barely positive trend, ‘With regard to trade today, it should be kept in mind that Germany's economy is more ‘export dependent than the eeonomy of any other nation, even including China. 3 Malmgren Global LLC ‘The Malmgren Group{aton@gmaitcom ‘Moreover, as we have commented in the past fom now on China can be expected to ‘engage in direct competition with German industrial exports tothe rest of the world, ‘hile China's demand for imports of industrial machinery and autos from Germany are destined to decline dramatically. Inessence, Germany, the Eurozone’s primary engine of growth is likely to falter in the near future. With the rest of Continental Europe still struggling with EU imposed austerity policies, unemployment sill running at unusually high levels and debt growing much faster than incomes, stagnation in some and decline in other EU nations should be expected. Rather than gaining momentum, we should expect European growth to weaken in coming years. ‘Trump's Fix to Rejuvenate the US Feonomy Asset valuations are continuing orse faster than official data on economic growth. Public and private debt also continues to rise faster than economic growth, extending borrowing faint the future. President Trump seeks to cure this eancerous increase in the ratio of debt to GDP by flipping the economy into a sustainable higher rate of growth. ‘The Trump Administration starting assumption is that the US economy is already showing signs of improvement as a result of optimism driven by ‘lection of President Trump. The Administration believes its planned tax ents wil boost growth faster, by encouraging higher investment by both large and small businesses. The acceleration of business activity is in turn expected to generate growing Jos. ‘Trump's leadership team is convinced its tax cuts and shift to tersitoral tax system wil lift the nation’s rate of economic growth from the sickly 2% per yearn recent yeas oa 3 104% per yar trajectory. There does not appear to be any worry that a boost to business profits and repatriation of corporate earnings held abroad may just end up in stock buybacks. No deep thought was given to the possible need to discourage buybacks, For political reasons it was apparent to most Republicans in Congress that some cats must also be made for individuals and households. However, the benefits to households that would be generated by the House bill would be fairly small, ‘To put the projected benefits to individuals in context, the size of gains to take home incomes would be less than the expected rise in healthcare insurance premiums and deductibles in the next couple of years. Put simply, taking into account rising costs of rent, utilities and healtheare Inusenee and services , the tax euts for lower income tax brackeds will 4 Malmgren Global LLC ‘The Malmgren Grouptenegmaitcom result in no gain, but rather a loss in terms of household disposable (after tax) ineome. Reliant on majority control of House and Senate, Republican leaders are attempting t0 use Budget Reconciliation rules asa means to approve tax legislation without taking into ‘account Democratie opposition concerns. Within the antieipated budgets ofthe next 10 years, Republicans have agreed to a net increase in the Federal deficit of $1.5 trillion into which a combination oftax euts and tax revenue increases must ft. All ofthe tax cuts being sought taken together could not fit into the $1.5 trillion cap ‘One means of fitting tax cuts through the narrow opening would be to manipulate their effective lifespan, Tax euts that are enacted as “temporary”, subject to expiration at a specified later date would not be required to be counted in calculating the net deficit effect. For example, it has been estimated that a cat ofthe corporate business tax from 35% to 20% would result in a negative revenue effect of more than $2 trillion. One way ‘of dealing with this challenge would, of course, be to make a smaller cut, Another way ‘would be to define the cut as temporary, with expiration in, for example, 2020 or 2021, and seek to extend it in a future vote. Yet another idea being discussed isto phase the downward adjustment ofthe corporate tax rate over several years so that the net effect over 10 years would be much smaller. House Republicans are also engaged in battles with one another over ways to increase revenues by eliminating current eligible deductions for taxpayers. Many Republicans ‘want to terminate deductibility of state and local income taxes and property taxes from caleulation of taxable income. Although itis not admitted publicly, this would hit hardest the “bine states" controlled by Democratic Party Governors and Mayors and ‘which typically maintain the highest tate and local taxes inthe nation. Tt turns out that ‘some Republican members of the House and Senate are elected from such high local tax states. Politically they eannot support elimination of those deductibles. Similarly, many Republicans in the House want to eliminate deduetibility of mortgage interest on residences, This would hit middle income families hardest, and would be vigorously opposed by the real estate sector of the US economy. ‘Many additional technical adjustments are being explored that might capture revenue back from any new tax cuts, for example by linking the definition of tax brackets to some kind of inflation index, raising revenues gradually over time. ‘Once the House approves a tax bill, the Senate will start to work on its own version. The White House will oon discover the interests of Senators, who represent states, are very different from the interests of House Members, who represent narrowly defined Districts, some in cities, some in rural areas, some with specific business interests, some dominated by agricultural concerns. ‘Malmgren Global LLC ‘The Malmgren GroupSsten@gmsiLcom 1 willbe difficult to gain 50 Republican votes in the Senate. (50 would be enough, enabling the Vice President to cast a deciding vote inthe event of failure to secure a majority under the Budget Reconciliaton rules.) Itis possible although unlikely, that ‘Trump might persuade a few Democrats in the Senate to join in support of a tax eut package, President ‘Trump has engaged in personal attacks on some Republican Senators, ‘dramatically diminishng their willingness to follow his ead. Several Senators remain ‘opposed! in principe to tax changes that would increase Federal detieits in future years ‘Senator MeCain voted no to the Obamacare Repeal and Replace bill that reached the ‘Senate floor ealier this year. At that time, he urged the Senate to take up healtheare under “Regular Order” later, which would mean opening discussion and revisions in healtheare insurance laws to members of both parties. He was alone taking that position, but behind the curtains several other Senators agreed with his proposal that healtheare should be reformed with participation of the entire Congress. ‘The House tax bill will not gain Senate approval. Itis also increasingly likely that 2 or more Republican Senators will vote against any Senate tax reduction bill before the end of this year. {In particular, itis highly likely that Senator McCain will again call for an end to use of, Budget Reconciliation as a means to alter the tax laws, and urge turning tax legislation cover to the full Senate under Regular Order. This would not kill any tax changes. Instead, it would mean that a Senate tax bill would be crafted in the frst half of 2018 on. bipartisan basis. ‘That bill would also have to be considered by the House, and quite possibly the House would also shift to Regular Order as eleetions come closer. One inevitable result of a shift to Regular Order would be to reduce the size of tax cuts for corporations and high income individuals and increase tax cuts for the majority of voters with 2018 elections in mind. Put simply, the fate of the corporate rate of taxation and other incentives for investment will remain unknown for several more months as the Senate likely rejects the House bill and enaets one of its own. The likely end point will not be as low as 20%, more likely settling as 25%. Europe: Ilusions and Reality ‘The time has come for investors to become more wary of Europe's ‘economic and political future. French President Macron has put great energy into ‘proposals to intensify integration ofthe EU member states into a common framework of governance. He has even called for a common security effort backed by a EU military. ‘Malmgren Global LLC ‘The Malmgren GroupSoten@gmaitcom ‘Macron's proposals have had strong backing ftom the European Commission, which sees itself as the likely governing body in a more fully integrated European Union. ‘The Commission is also busy devising a wide range of initiatives that it might take that ‘would reduce or eliminate remaining rights of member governments to ignore or overrule EU Commission regulations and mandates. What Macron seeks for the EU is not very diferent from what previous French governments have been secking for many years, namely consolidation of budgets into a single EU budget, with debt sharing among members. Tt has long been Germany's position that debt sharing remains ‘legal under existing BU treaties, as well as under the German Constitution. ‘Tobe cynical, Macron wants to distract French voters from focus on internal needs for ‘economic and labor market reforms, and instead shift focus to consolidation of the EU or Eurozone financial structure. On the one hand, Maeron seeks greater French budget ‘lexibilty than the Maastricht Treay provides, and hopes that a new German coalition would be less resistant to some form of debt sharing among all EU governments. ‘The timing of these new ideas for KU unification is inconsistent with what is happening, politically and economically at the EU national and local levels. Brexit opened a huge crack in BU cohesion, but itis not the only erack to be found. An ‘an array of lesser eracks are appearing both between and within the member states. ‘There has been litte media attention to Belgium, which has long been engaged in the formulation ofa divorce agreement, with settlement of assets and future obligations, ‘between Flanders and French-speaking Walonia. With separate budgets already ‘operational, Belgium has one flag flying over two separate societies, Keeping for now the ilusion of one nation, Historical differences played a role in the peaceful separation of the Czech Republic from Slovakia less than 25 years ago. Rifts are emerging in several places: Catalonia vs, the Spanish central government; regional governments in Italy seeking greater autonomy from Rome; Scots from the UK. Merke!’s open border policy for refugees hi ‘even generated strains between Bavaria and Berl Merkel’s open borders policy resulted in hordes of refugees migrating from the Middle East to EU countries. Many of the refugees any form of legal or social assimilation, insisting on their owt forms of waintaining social ordes. They continue resistant to conformity to the laws of nations to which they have fled. The sanetity of Schengen rules within the EU has broken, resulting in a widening gap between some of the Eastern European members and the rest ofthe EU. ‘This refugee crisis has also intensified increasing political pressures for pushback on Brussels “overreach” in its scemingly relentless effort to enlarge its regulatory grip on member states and even local governments. The EU Commission in practice has 7 ‘Malmgren Global LLC ‘The Malmgren Group{iaten@gmaitcom become the maker of European laws, by promulgating directives and then sending national appeals to those direetives to the European Court of Tustice (ECI) for review. In turn, the ECJ routinely upholds the EU directives and overrules national objections, effectively establishing laws ‘without parliamentary consideration. Spain's Constitution was written to bring an end to the vestiges of Franeo and his, followers. ‘The Constitution included powers forthe central government to prevent any {orm of separation of regions of Spain trom the central government. When the Catalonia referendum was called, PM Rajoy reacted with thuggish physical force to disrupt the referendum. When independence was declared, Rajoy acted not only to oust the Catalonia elected government, but ordered arrest of elected Catalonia legislators and. officials under charges of sedition and treason. Although acting within his Constitutional rights, Rajoy sought to suppress freedom of speech by charges of sedition and treason. His actions drew silence from the EU Commission and Donald Tusk, President of the European Council, even though Rajoy’s actions appeared to violate human rights provisions of the Lisbon Treaty of the EU. Rajoy’s actions to coerce compliance by use of police and court powers to suppress independent political views now pose hard questions about the credibility of the Lisbon. ‘Treaty o any other BU treaty. ‘Tho big anti-BU and anti-Euro push by Le Pen and her FN (National Front) party failed in France, but the extreme nationalism sentiments remain, lke hot embers, ready to flare up again in France as Macron’s Presidency continues to lose popular support. The 5 Star movement is still strong in Italy, and now even Berlusconi is secking to retuen to es and capitalize on growing anti-EU politcal sentiment in Italy together win regional unrest and pressures to restore greter autonomy tothe local governments. ‘Macron and the EU Commission are effectively discussing the future ofthe BU without regard to secarity issues, except to talk positively about the idea of an EU army which is beyond the financial means of most EU member states. Anew “cluster” of European nations with a common security objective has quietly emerged recently in the form of focused military cooperation and coordination among the Nordie nations, Poland, the Baltie States, and the UK. This cluster is operating in close cooperation with the US military. For the time being the cluster is known as Nordie Defense Cooperation, or NORDEFCO. NORDEFCO has become a self-contained, separate security cluster within, ut not Integral to NATO. Itis.a response to fears of Russian incursions which are not new, but have roots in centuries of Russian interaction with Northern Europe. Itisalso a i Malmgren Global LLC The Malmgren Group,{jaten2gmaitcom response to the weak defonse and seeutity policies of most of the est of Europe, notably ‘the emasculation of any meaningful German military by the German government. NORDEFCO js not just a framework for meetings. Itis adopting the concepts of warfare pursued by the US military in its new focus on conflict ina fally integrated battle space operating in high intensity and at high speed. At the heart ofthis integrated approach to building a eredible deterrent to Russian “adventurisms” and territorial ‘incursions ae the 5 generation F35 aircraft capable of coordinating and applying, firepower from land, sea an ir simultaneously. Several of the NORDEFCO ‘governments have acquired their own Fs. The plots in this assemblage of Fs are all trained in the same locations in the UK and the US, and are able to fly each other's aircraft without adaptation. It should be noted that Italy's military wants to find a way ‘to interact with NORDEFCO and is acquiring F5s fr itself to enable participation on short notice. Will other political or security clusters appear elsewhere in Europe? Fundamental divisions are emerging among Eurozone members regarding monetary and economic policies. Countries like Austria, Slovenia, the Netherlands and the Baltie States are aligning with Germany and its Bundesbank, against the continuous pressure from Italy, France and Spain for greater flexibility in dealing with their erumbling banking structure, Much of the mainstream media ignores the pervasive sickness of the Eurozone banking system, rarely giving brief recognition to problems of non-performing loans. The reality isthat hardly anyone knows the scope and depth ofthe bad loans of the Eurozone banks, because mark to market was long ago suspended, ‘There is no broad municipal bond market similar to that of the US, Most local governments in Europe operate ‘within financing arrangements with banks. ‘One is reminded that the first European Banking Authority stress tests a few years ago declared Dexia, a Belgian-Luxembourg bank, as the safest of all major European banks. ‘When the Great Financial Crisis took effect, Dexia was one of the first to fall. Most noteworthy, the Federal Reserve and Treasury became actively engaged inthe rescue of Dexia, and Dexia became one of the largest beneficiaries of Treasury funding for ‘troubled banks. The reason was that Dexia had developed specialization in financing of local governments, and in doing so had even become an important supplier of funding for the US municipal bond market. Dexia had sleo become the principal funder for ‘much of northern France, Belgium and Luxembourg. ‘Most of the European banking system is exposed to risks that are not readily visible, ‘support of local governments being but one. All ofthe Eurozone banks are dependent ‘on “Eurodollar” funding, and from time to time short-term funding shortages of liquid dollar denominated assets erupt. The European Central Bank was only able to keep its ‘Malmgren Global LLC ‘The Malmgren Group{jaten@gmaitcom ‘banking system alive at the peak of the post-Lehman crisis withthe support of Federal Reserve swap lines to overcome insufficient dollar liquidity. ‘The fragility of the Eurozone banking system has not been repaired since 2008. Instead, the ECB has used its QE to buy up sovereign debt and corporate debt in order to compress risk spreads and ereate the appearance ofa functioning financial market, ‘The ECB, operating as a kind of gigantic waste management facility has transferred trash from all ver Europe to the ECB's balance sheet. The ECB can postpone ‘unwinding that balance sheet a few more years, but eventually the pale of trash will have tobe dealt with. In the meantime, financial markets operate as ifthe ECB had actually cured the Eurozone debt market sicknesses and revitalized Eurozone banks, when in reality the shifting ownership of trash from one owner to another, with Germany the ultimate backer, has simply created an illusion of stability. ‘As a result of the most recent elections, German polities looks to be turning towards ‘greater nationalism and growing unhappiness with the EMS, the ECB, the European ‘Commission ambitious overreach, and even the weakness of the European Council. Apparent weakening of Merkel's grip on German polities suggests that the ‘oceasional finaneial reseue summits under leadership of Merkel and Schauble are unlikely to recur in future Eurozone crises. Nearing the end of 2017 Italy looks likely to be the ground zero for a financial earthquake thatiis likely to shake all of the Eurozone. ‘The European Union has turned a corner and is now likely to experience disintegration, at first slowly, but then rapidly when financial markets become stressed. Like bankruptcy, the process of decay develops slowly, and then alll at once. Global Financial Mar} Mm “Xi Jinping is now the Constitutional successor to Mao. He is not only the ultimate ‘political decision maker; but he carries the separate ttle of Supreme Military Commander. His power over a nation of 13 billion people dwarfs the power of lenders like Putin or Trump. Moreover, it appears he expects to remain in power long after most other world leaders world have gone and successors takon their place. Xi Jinping’s address to the 19! Party Congress highlighted his concern that ‘co-existence of immense wealth and abject poverty throughout China was unsustainable. He spoke of rejuvenation of the nation and its economy. However, his use of the term rejuvenation did not mean boosting economic growth, but rather seeking a means to redistribute the wealth and debts of China and to revitalize social stability. 10 ‘Malmgren Global LLC ‘The Malmgren Group{jaten@>gmalicom In the background, the soon-to-retire Chairman of the People's Bank of China, Zhou ‘Xiaochuan, has been giving a series of addresses publicly laying out vulnerabilities not ‘only of China's financial markets, but larger vulnerabilities in global financial markets. He is emphasizing the both Chinese and global financial market leverage have reached unsustainable levels and that financial erises are now virtually inevitable. Tn a context where high officials rarely ay out dramatic challenges and risks, seeking instead to provide assurances that everything is in order, he has been confounding conventional _ractice with warnings of enormous financial stresses likely to be experienced soon, Coming from a high-ranking Chinese official, his public warnings must have had quiet ‘support from other prominent leadership personalities. Markets should not be ‘surprised ifXi, supported by his PLA, sets in motion bold steps that may generate painful consequences in key segments of China's economy and financial structure. Bold actions inside China will inevitably have disruptive effects on global markets. (© Harald Malmgren Ermail: hmn@malmgrenslobal.com | Ta: +-§40-270-2300 | Twitter: @halarsthink Although the information herein has been obtained from sources belived tobe reliable, we do ‘not guarantee its accuracy, completeness or fairness. This report isnot intended as an offer or solicitation, or asthe bass for any contract, for the purchase or sae ofany security, loan or other instrument. This report may not be reproduced or circulated without our written ‘authority. We or our Associated Persons may act upon or use material in this report prior to ‘publication. ‘Malmgren Global LLC ‘The Malmgren GroupMeet the Malmgrens: the extraordinary family US presidents turned to (irishtimes.com nowswordinaet-the-maimrens.the-e-aorcinany-family-us-presidents turned 1o-1.9264559 Hany Meco ‘sc017 ‘Mot the Maimgrens. You might not have heard of them but they are membere of an extrardinary family Harald Malmgren was a senior adviser to four consecutive US presidents beginning with John F Kennedy Inthe early 19605, an academic and policy high-yer while stil virtually a youth Pippa, the eldest daughter of his sic children, folowed him into the White House and was appointed a senior adviser on financial markets to Goorge W Bush when he became president in 2001 Father and daughter wil be speaking at Kikenorics, the festival in Kikenny that combines two Improbable dcitinas, comedy and economies. The Malmgren wil defintely ba majoring on economics but wth @ soupcon of humour. They hold broadly similar views on alt of things including the Trump presidency. But thay are very differentin other ways, ‘most notably in thal respective economic prognoses forthe nex! few years Harald e now 82 but he has a bach a hight sinae his 202, He inal atudled physica but sitehed to economics and «after graduating fst in his cass in Yale, was awarded his doctorate from Oxford Universy at age 27. Ho bogan lecturing in Comell University but was head hunted by the Kennedy administration, JFK wanted to shake things up after the inertia of the Eisenhower years and bringin fresh talent, We were fold not to tel the generals what we were doing just Keep asking them questions and get them to rethink “Iwas a superstar academic in those days. was lke being somebody wino was the number one draft for the NFA. Of course, Idd nat think of myself that way but they decided they needed ma,”swnsao07 Mec he Msgr corr oily UB restr hnadta Harald worked inthe Pentagon where he became part ofa group known as the "whizz Kids.” “We were thar to bing fresh thinking. We were told not to tel the generals what we were doing, lust keep asking thorn ‘questions and get them to rethink, We were just coming out othe Cold war and lt of tings had gone stale before our rival Harald was what he calls utlty player. For example during the Cuban missle criss, they tackled such hypothetical siluations as America stking Moscow with a missile. If Moscow wanted to stop fighting, who could America tak to iit hhad taken out the Russian leadrership? Or fAmerca told Moscow it woulda’ hit Moscow, would the Russians reciprocate by nat iting Washington? ‘Mixon asked me, are you are a Republican or Democrat and | said ‘Yes! \When Lyndon Johnston took over, he also hired Malmgrom as a senior aide because Harald was not partisan, “He said to me: You don't ake sides. you area fit kind of person.” ‘That kind of practical appeoach saw him cross the poltical vide to become an adviser to Richard Nixon and then to Gerald Foe. “Nixon asked me, are you are @ Republican or Democrat and| sald "Yes. sid | am a problem solver and | don't lake ides. wil ga0k consensus and that wl involve compromise was an academic wh had bean put ino the role of power and poltics. Iwas super fascinating but nothing to do with ‘math. had to do with human interaction and how you can get control and move something and make something happen.” ‘Allof this happened in his late 20s and earty 30s. In protocol terms he had the rank of ambassador, the youngest since Benjamin Frank ‘And hs expertise. It extended form miltary to trade to economies to world rade agreements to finance to systems. For a while it seemed inconceivable that Pippa would follow hor father's career path, When she was younger she ‘stuggled academically. But she too has a doctorate, from the London School of Economics and works in exactly the ‘same areas as her father, advising onthe global economy and ances. | became the person wi could expan itn plan English in a way that would not make them ‘embarrassed “1had a German style apprenticeship, My father thought me what he knew" Pippa’ “I started to be eskod by politicians and policy makers to explain what was going on inthe markets anc the world ‘economy. | became the person who coulé expan tin plain English in a way that would not make them embarrassed. | bbocame a trusted goto person, stength was not only her understanding of finance but her ably to communicate it clearly.ssa0%r et Mangan be xara fami US pao odo i | Philippa "Pigpa' Malmgren, a former special assistant for economic pole to George W. Bush, speaking at ‘an American Chamber of Commerce in Ireland function in Dublin in 2004, Photograph Moya Nolanswise0r7 Meo th Maire earaorinary tty US pases umes to ‘Buther approach tothe markets was also slightly ferent, "Everybody els inthe market was realy a mathematician ‘crunching numbers. My approach was to have a conversation with those runing the biggest business and in charge of policy. tand to focus on the risk you cant quantify (mathematically) and that woul include geopoliie, and poical tisk “My whole career tols me Ifyou ty to get to an answer using @ purely numerical appreach you will get it wrong.” “Ike to.connect the dots and see patterns. look at things that are forward looking, data is yesterday." ‘So what she looks ats called ‘signals’ and she has even writen a book about it, withthe eponymous te. She says she ‘nticipatad the 2007 financial criss, the slowdowin in China, the election of Tiump and the possibilty of Brexit ‘She instances powertl signals coming from the fashion industry where factories in China were churing out so much ‘cheap cothing. As pattems got more garish and loud, they were producing tops that would not survive a wash. While it ‘seemed cheap, she concluded consumers were spending more than they could afford on disposable clothing, which to ber was a bg signal ofan imminent correction. ‘She began working with Bush In 1999 when he was Governor of Texas and was in charge of financial markets during his frst term. coineded with seven of the largest bankruptcies in US history, a wall as 9-11. The prossure and responsibilty were enormous, “They say that working n the White house i Ike trying to crnk from a fie hydrant,” she recalls. ‘My dad worked in that environment. You have to lear to pace yours as nobody gets enough rest or sleep. 1s the age of narcissism in politics Harald knew how to pace himself. Ihelped thatthe atmosphere was more bipartisan, He sai the advent of TV ‘overage polarised poitics and also points to the big migration of southem States from being Democratic to being Republican, There was alsa increasing indvidualisation. "We are inthe poak ofthat with big egos in Washington talking directly tothe publc and clashing with each other but ot lstening to each other ata “Personal varies have fragmented the pares... i's very disordely I's the age of narcissism in politics.” [And nto that vod stepped Donald Trump. While Obama had focused on te increasingly powerul cites, Trump went for rural and rust-belt America, the forgtion “Tyover America” ast called. He likens Trump's success tothe rse of populism in Europe. ‘They want a leader doing outrageous things an breaking © traaivons which ne does. may seem ineffective in terms of polly change but Ne Is having @ gooa ume tacking the establishment and pushing key members into a positon where they have to resign.” But Trump has not succeeded in making good on key promises on health and tax. “Trump is very disorganised. He does rot do organised consensus-buldng.” Going into the White House must have been ike walking into stat jacket By that Harald means he was a deal-maker who did not work ina team. And getting things done in Washington means ‘support-bulting and consensus bulding with Congress,sussoas stn gras early US pont a Pippa's opinion is broadly sina, espetealy becasuse of the very diferent environment For him, going into the White House must have been ike walking into staitjacket. He has to deal wih other branches of government, confer with ‘ther partes, the Executive has to have relationship with the ther arms of government. | have had a very posiive outlook on Ireland since the ancial vais Like Obama, he has promised change, she says, but has struggled to deliver. "The problem is that all he things he ‘wants to do take time. Fundamental tax reform Is a tree-year process. You can say allot but cant delver alot uti time [passes. Also this kind of really big reform of tx poley requires working wih Congress, which he has not been doing. (On relana's prospects, Pippa is optimistic. “Ihave had a very postive outook on Ireland since the financial criss. One Issue that|am watching clesely isthe EU positon on hsh tax policy. The rsh view i that this is nt negotiable, The EU. thinks it is nogotiabe.” Harald also homes in onthe issue of rland's much lower corporate tax rat.’ a paln for the bureaueracy in Brussels, which wants to conto everything and cant get a grip on what's going on. “Ireland has handled it vey well an resisted the pressure from the rest of Europe. Brexi creates some complexity but there are many theories about what will happens and how it affects Ireland. I's onthe global economy that both part ways Harald says immediately he is not as upbeat as Pippa ison the US and global economy. “The economy ita is over-extended. The stock market is way ahead of reality. The majority of new jobs in the US are parttime jobs, Thece are almost no fulltime jobs in the monthly numbers. The realty is we are shifting towards a gig ‘economy He sees problems for the American car industry which will have implications for other Industries such bes steel. Overall he sees slowdown, perhaps even a recession within a year. By contvast, Pippa says she has been ‘very opimistic about stock markels and continue to be. “Lhave been saying that infation is real forthe past six years and will keep picking up. That's an important event. Lam ‘not saying it will go crazy butts a significant move ftom almost nothing to something” “Overall, ma bit more optimistic than dad on growth and stock marks.” + The Maimgrens wil appear at Kikenomics, the festival of economics & comedy, on Thursday, November Sth ikonomies.com