BY JOHN FOLEY AND NEIL UNMACK

Few people would have disagreed at the beginning of the year that the nine-year-long bull market was reaching its end phase. That didn’t diminish the shock when it actually happened. Here is Breakingviews’ imagined account of how the good times came to an end in 2019.

Day 1 – The market opens on an unremarkable Monday. A mid-sized maker of car fan belts files for Chapter 11, blaming European tariffs levied in response to U.S. trade barriers. Three hours later, Facebook announces a data breach, which it attributes to alt-right Generation Z whiz-kids with possible links to Russia. Investors, jittery over the impact of trade war and tech-sector weakness, start to sell. The S&P 500 Index slumps 4 percent, financial and internet stocks bearing the brunt.

Day 2 – Tech stocks fall further and faster. That afternoon, President Donald Trump takes to Twitter to call Federal Reserve Chairman Jerome Powell an “ENEMY OF THE PEOPLE” for his reluctance to cut rates. Later at an event, Powell emphasizes that the Fed is not on a pre-set course, but stocks only slide further. Trump muses on replacing the Fed chief with wrestling promoter Vince McMahon. Despite confusion over whether such a thing is possible, the S&P slides 4 percent.

Day 3 – Two ratings agencies say they are downgrading a basket of BBB-rated bonds to junk status, expressing concern that a slowing economy will push up defaults. Spreads on high-yield bonds widen dramatically. Market-makers stop trading some exchange-traded funds exposed to corporate debt, and collateralized loan obligations, which buy and repackage junk-rated loans, start offloading assets. The S&P slips 3 percent.

Day 4 – Trump announces the formation of “Team America,” a group of U.S. plutocrats who pledge to invest their personal wealth in the U.S. stock market, including the chief executive of one of Wall Street’s biggest lenders and Treasury Secretary Steven Mnuchin. Within hours, Tesla chief Elon Musk, who had been named as one of the group, tweets that he is looking forward to taking America private “at 420.” Stocks dive a further 5 percent.

Day 5 – Warren Buffett, whose name did not appear on the Team America line-up, tells a CNBC interviewer that he sees no buying opportunities at current levels, and is minded to use his $100 billion cash pile buying back shares instead. Retail investors take fright. Stocks slump 3 percent. Facebook’s valuation has now fallen from $390 billion at the start of the year to just $200 billion.

Day 6 – Over the weekend, Chinese President Xi Jinping expresses concern that, as the holder of $1.2 trillion of U.S. debt, China’s feelings have been hurt by U.S. volatility. Starbucks branches immediately attract protests in second-tier Chinese cities, and rumors proliferate that the People’s Bank of China is preparing to sell Treasuries. Yields on 10-year debt hit 4 percent. The S&P has now fallen 20 percent in a week.

Day 7 – Talks over the acquisition of a large media company fall apart. The buyer blames uncertain markets, but reports emerge that the company’s bankers got cold feet, and withdrew a letter they had provided declaring themselves “highly confident” of arranging financing. Shares in dozens of putative takeover targets fall as much as 30 percent. Trump tells Fox News that Securities and Exchange Commission Chairman Jay Clayton could be doing more to help.

Day 8 – An open letter from Wall Street bank chief executives appears in the financial press, arguing that post-crisis banking reforms have made the meltdown worse. They argue that proprietary trading, which could have enabled banks to buy up stocks on their own account, would have stemmed losses, and call for a reconsideration of Basel 3 and Dodd-Frank Act rules. Financial stocks rise, but the S&P still ends the day down 2 percent.

Day 9 – Mnuchin announces he is standing down from the Treasury, but pledges his full support for the president. Trump says he will pick a replacement quickly, and declines to shut down reports that he is considering rapper Kanye West for the role. Stories emerge that the original selloff may have been triggered by hedge funds who had set up algorithms to trade automatically based on Trump’s tweets. Markets are flat.

Day 10 – Facebook says Buffett is investing $10 billion as a vote of confidence, taking voting shares and generously priced warrants. The slide in stocks has stopped, as abruptly as it began. The market closes up slightly but has lost almost a quarter in two weeks. Congress begins to discuss curbs on algorithm-based trading. After markets close, the White House announces its new pick for the Treasury: first daughter Ivanka Trump.

First published Dec. 18, 2018.

By PETE SWEENEY

Can Sino-American trade disputes be settled on the mat? Don’t expect Xi Jinping and Donald Trump to don tights for a Presidential SmackDown. But don’t be surprised to see Tencent, China’s $370 billion technology champion, tag up with World Wrestling Entertainment to bring more American professional brawlers like Triple H and The Undertaker to the People’s Republic, and build a Chinese league.

A deal with WWE would give Tencent boss Pony Ma some publicity, indirect access to the administration of U.S. President Donald Trump and the opportunity to teach millions of Chinese fans the science of the slingshot suplex. WWE finally gets a partner burly enough to pry open China’s market. It’s a trade-war cage match made in heaven.

WWE was founded by cabinet official Linda McMahon and her husband Vince, now its chief executive. He was famously tackled to the floor and shaved bald by Trump during the “Battle of the Billionaires” in 2007. Ridiculous, perhaps, but such scripted brawls between muscle-bound actor-thugs in spandex generated $657 million in revenue for WWE in the first nine months of 2018. Its shares were up nearly 150 percent for the year in early December, changing hands at around 60 times forward earnings. Ridiculous has won respect.

Dominant at home, WWE needs to grow abroad. It has been attacking the China market for years, bringing occasional “SmackDown” exhibitions through Shanghai and Shenzhen — Tencent’s hometown — and posting matches online. Despite cultural differences, WWE’s recipe of braggadocio and beatings could be copied straight out of a Chinese Qing dynasty Kung Fu television show, and has proven popular.

WWE’s streaming contract with local partner PPTV comes up in 2019. Tencent would make a better match for the next round. Its WeChat app alone boasts 1 billion monthly users. It’s China’s largest video-game company, an important money-making channel. Tencent Video broadcasts National Football League and National Basketball Association games; its sports division is moving into events management. It can help WWE build a local league, key to winning real market traction.

One obvious way to jackhammer the deal would be for Tencent to buy a stake in the $5 billion entertainment company. It won’t come cheaply. But good-humoured headlines about China acquiring dual-use smackdown technology will help Tencent’s international profile — even if a Xi-Trump cage match is out of the question.

First published Dec. 26, 2018.

BY ROB COX

Soon after relocating to Paris I met an entrepreneur with an extraordinary ambition to challenge the technological dominance of Microsoft and Google by creating an alternative digital operating system. I also encountered an angry protester in a yellow vest, or “gilet jaune”, who wanted to overthrow the government. Welcome to the two faces of the global centre of the resistance.

When cars are burning on the Champs-Elysées, it may sound odd for the editor of an English-language financial publication to leave New York to temporarily set up shop in France, bypassing London, Frankfurt and Hong Kong. But Paris is the place to be in 2019. For starters, the task of battling the illiberalism and nativist economic thought that permeates politics in the United States, Britain, Italy and beyond has fallen, through a process of elimination, to the French president.

Whether Emmanuel Macron is up to it will become clear in the coming year. Though riots like those of the “gilets jaunes” are a French tradition, they pose an immediate threat to Macron’s ability to push through more reforms. On Dec. 4 his government suspended planned increases to fuel taxes, the first major backtrack by Macron after 18 months in office. And the protests may not end here.

There will also be fresh challenges to Gallic capitalism, including the state’s role in guiding industrial policy, as activist investors from New York and London poke around some of the country’s biggest companies. Meantime, Britain’s messy divorce from Europe will hand Paris a golden economic opportunity that is France’s to win or lose.

There are other, more practical, reasons to choose Paris as a base. The time zone is suited to a global operation that stretches across Asia, Europe and the United States. From Paris, it’s possible to speak to colleagues in Singapore or Beijing without spoiling anyone’s dinner before tackling European business, and then pitching in on the New York day. The real challenge is knowing when to back away from the laptop.

It’s also far easier to travel. London is effectively an extension of the Paris Metro — no harder to reach than New Haven is from Manhattan. High-speed trains link the French capital from Amsterdam to Zurich. Air France may have its fiscal woes, but its network is hard to beat. Getting to the Middle East is a cinch, and the jet lag from a trip to China is negligible compared with the 13-hour nightmare accompanying a New York-Shanghai jaunt.

True, other European cities, like Frankfurt, Amsterdam or Brussels offer similar conveniences. And taxes in these countries are less liable to shift significantly when governments change. Yet none can match Paris as a cauldron where industry, finance, media, government and culture comingle. The ability to network across so many spheres makes Paris ideal. And the French bourse has the largest market cap on the continent, with some 850 listed companies, 30 of which rank among world leaders in their industries. This variety and heft is one reason Paris should benefit more than other European capitals from Brexit.

London will continue to be a leading global financial centre, but its current position as the hub for capital flows and information on European finance will weaken no matter how Britain executes its economically foolish split from the EU. Organisations that want to adapt could base more people in Paris to better glean insights into mergers and acquisitions and capital markets transactions. Enticing colleagues over from London for meetings with business leaders is easy from Paris. The offer of a fine French lunch works wonders.

Practical matters aside, I wouldn’t be here if it weren’t for Macron. In February 2017, during his campaign for president, he spoke to people like me tired of the toxicity of public discourse in the era of President Donald Trump: “I want all those who today embody innovation and excellence in the United States to hear what we say: from now on, from next May, you will have a new homeland, France.”

Granted, many in France are fed up with him — and not just people wearing yellow vests. Some of the first words I learned in French (it’s a work in progress), were “le président des riches”, taught to me by taxi drivers eager to share their politics. Nobody likes change, including higher fuel levies, especially when foisted upon them by a 40-year-old former Rothschild banker lacking the common touch. Telling an unemployed gardener to go wash dishes, for instance, may be intellectually correct, but goes down like a lead balloon with most voters.

Nonetheless, Macron deserves support for leading the charge against illiberalism and in favour of the multilateralism that has brought stability to the world, whether it’s drumming up pro-EU sentiment ahead of European parliament elections in 2019 or trying to hold together the Paris Agreement on climate change and the Joint Comprehensive Plan of Action with Iran.

At the same time, Macron’s challenge is to steer his country towards the kind of market-friendly policies that have long been anathema to France. That need not mean giving up on cherished benefits like universal healthcare or the right to a decent education. But he will have to work harder to assure the yellow-vested protester from the countryside that paying a bit more at the pump will help safeguard the French way of life for the next generation as well as ensure a cleaner planet.

That also means fostering a flexible labour market where entrepreneurs like Jean-Romain Lhomme, who after a successful career in the City is working with a French engineering team to take on the giants of Silicon Valley, can attract the highest-quality talent on the planet. Leading the resistance isn’t about favouring the rich or the poor, the globetrotting city-dweller or the rooted rural worker, but binding them to a shared pursuit of a common good for the nation, as well as the world. That is today’s biggest challenge, and there’s no better place to watch it unfold than Paris.

First published Dec. 4, 2018.

BY JEFFREY GOLDFARB

Looking for a good bet in 2019? Put some money down on a big U.S. sports scandal.

It has been nearly a century since eight Chicago White Sox players were banned from baseball after being accused of accepting money to intentionally lose the World Series in 1919. Though none were found guilty in court, it spawned the ignominious Black Sox nickname and the biggest black mark on American athletics. The odds are now improving for a similar sort of incident.

Legalised gambling on everything from college basketball to professional football is set to soar after the U.S. Supreme Court earlier in 2018 struck down a law that mostly blocked it. New Jersey and six more states already have made it kosher. Bringing such bets out of the shadows has merit, but also considerably raises the stakes — and temptations.

Some $150 billion is wagered illegally on sports every year in the United States, the American Gaming Association estimates. Online fantasy competitions have attracted new generations of punters. It stands to reason that more people also would give legal betting a whirl. At least one MGM casino executive predicts betting parlours could even turn up inside arenas.

Leagues will benefit from increased gambling, too. National Basketball Association Commissioner Adam Silver is among those demanding a cut of the wagers. Indirectly, more viewers tracking bets should translate into more broadcasting and advertising revenue.

With gambling expanding the whole athletic complex, cheating will be harder to control. Alleged point-shaving and other illicit behaviour already mar sports, including incidents at Tulane and Northwestern universities. Authorities will have to double down on oversight under the new wagering regime.

Even then, preventing corruption looks like a longshot. College athletes don’t get paid, making them more susceptible to monetary enticements. Their professional counterparts know their days are numbered. Most National Football League players, for example, finish their careers in just a few years and collect little in the way of severance or retirement.

Greed also doesn’t discriminate. The financial sector is littered with examples of handsomely compensated bankers and traders acting unethically and illegally for a few extra bucks. It’s one more reason to make book on a giant moral lapse in U.S. sports.

BY JOHN FOLEY

America’s cannabis growers will follow an unusual path to propriety. The subversive industry is feared by the establishment, with investors reliant on legal loopholes. Yet these companies are starting out much like China’s tech giants did. In the same fashion, as they create jobs and wealth, appetite for reining them in will wane. The budding sector is already a lesson in loopholes. Thirty-two states have legalized marijuana’s medical use even though it remains strictly taboo on a national level.

Federal authorities look the other way so long as producers stick to their home turf and list their shares abroad — usually in Canada, where recreational pot is legal and three companies have achieved 10-digit market capitalizations. Conventional outfits like MedMen and Scotts Miracle-Gro are getting in on the action even though doing business across state lines is forbidden and big banks won’t touch the industry. Former Attorney General Jeff Sessions once said “good people don’t smoke marijuana,” yet he did little to stunt its growth.

Existing in a legal limbo might sound like a red flag. There’s another industry, though, that exploited multiple loopholes on its path to greatness: Chinese tech. Alibaba, Weibo, Tencent and others grew up using structures of dubious legality and peddling products that aroused governmental anxiety. So-called variable interest entities, a way of structuring a company that is common in Chinese tech, are patently against the spirit of the law, but they enabled foreigners to invest in off-limits sectors like the internet. Without them, these online giants wouldn’t be what they are today.

That ruse could have been unwound at any time by Beijing. Yet as the tech firms got bigger — and more productive — the desire to stamp them out receded. Companies like Alibaba and Tencent are now among China’s best-known global brands, and some 76 percent of U.S.-listed Chinese concerns still use the variable interest entity, according to researcher Fredrik Oqvist. Alibaba founder Jack Ma is even a member of the Communist Party. At some point, governments decide it’s better to co-opt them than beat them.

Cannabis growers may never achieve Alibaba’s $400 billion market value. But the industry is on course to create half a million jobs by 2022, according to Arcview Market Research, the same number congressional researcher G. B. Granger estimated to be employed in the illicit alcohol trade before the United States ended prohibition in 1933.

It’s also about the same as work in the utilities sector. Politicians may not agree on weed, but they know an economic good when they see it.

BY EDWARD HADAS

The world economy is set to enjoy a very good year. In that, it will be much like 2018 and 2017 and most probably like 2020 and 2021. Economic growth will be fairly strong in most of the countries where such expansion does the most good. While rich countries worry about objectively tiny setbacks, poor people are overall gaining more of the dignity that comes with adequate material comfort.

Consider extreme poverty. The World Bank draws the line between the wretched of the earth and everyone else at daily consumption of goods and services worth $1.90.

The Our World in Data website at Oxford University estimates that 72 percent of the world’s population lived below that line in 1950. The World Bank’s preliminary estimate for 2018 is 8.6 percent, down from 10 percent in 2015.

Fewer very poor people means more are enjoying better lives. The proportion of the global population without access to electricity is declining by about 0.3 percentage points a year. The number of children not enrolled in school is shrinking by about 5 million annually. Almost every indicator of basic prosperity shows the same trend.

The good news is pretty much global. Even Africa, long the lagging continent, is starting to catch up. The proportion of African children that die before they turn five has declined from 21 percent in 1975 to 8 percent in 2015, the most recent year for which data is available. Better health comes from — and with — greater wealth. Real per person income in sub-Saharan Africa has increased by 40 percent in the last decade.

Not all the news is good. Due to war and civil conflict, primarily in Africa, the proportion of the world’s population that is undernourished has risen by 0.2 percentage points in the last two years. Still, at 11.9 percent, it is 2.2 percentage points lower than a decade ago.

The prediction of more global gains in 2019 is pretty solid. There are also good reasons to believe that 2029 will be fine. Economic growth in very poor countries is becoming a virtuous circle. More education and better health creates better workers, who support stronger institutions, which make larger and more effective investments, which produce the money needed to pay for even better schooling and health.

That pattern has held in country after country for at least two decades. Bad
governments do slow progress, but it takes war or total state failure, as in Venezuela, to reverse the progress.

The almost unstoppable global retreat of misery and ignorance is arguably the best news ever in economic history. For political history, however, the trends are far less clear. The old belief that greater wealth would naturally bring more open societies looks flawed. The populace of many countries, both richer and poorer, seem pretty happy with autocratic and extreme nationalist governments.

China is the prime example. The oppressive and fairly corrupt Communist Party has presided over rapid and widespread increases in prosperity. Its cross-border ambitions, both civil and military, have expanded as well.

That is worrying for many reasons. One of them is that war is probably the only force destructive enough to stop the upward march of global economic good news. The great question, for both 2019 and 2029, is whether progress will threaten prosperity by leading to the use of the world’s ever-larger supply of ever more deadly arms.

First published Dec. 24, 2018.