Political and economic risks rise as US mid-term elections near

This is the Labor Day weekend in the USA – the traditional start of the mid-term election campaign.  And just as in September 2016, the Real Clear Politics poll shows that most voters feel their country is going in the wrong direction.  The demographic influences that I highlighted then are also becoming ever-more important with time:

Demographics, as in 1960 and 1980, are therefore likely to be a critical influence in November’s election:

  • Median age in 1960 was just 30, and 29 in 1964. Young people are by nature optimistic about the future, believing anything can be achieved – and their support was critical for the Great Society project
  • Median age was still only 30 years in 1980. The Boomers were joining the Wealth Creator 25 – 54 generation in large numbers. They were keen to join the Reagan revolution and eliminate barriers
  • Today, however, median age is nearly 50% higher at 38 years, and the average Boomer is aged 61.. The candidates are not mirroring Kennedy/Johnson and Reagan/Bush in focusing on the need to remove barriers. Indeed, Trump’s signature policy is to build a wall”

2 years later, the median age is still increasing, and the average Boomer is aged 63.

But there is one major change from 2 years ago.  Then, President Obama had a positive approval rating at 50.7%.  But today, President Trump has a negative approval rate of 53.9%.

This has clear consequences for the likely outcome of the mid-terms, with the latest FiveThirtyEight poll suggesting the Democrats have a 3 in 4 chance of winning control of the House.  In turn, of course, this increases the risk of impeachment for Trump and makes it even more difficult for him to stop the Mueller investigation.  We therefore have to assume that Trump will do everything he can to reduce this risk over the next few weeks.

Americans are not alone in feeling that their country is heading in the wrong direction, as the latest survey (above) for IPSOS Mori confirms.  And they have been feeling this for a long time – as I noted back in November 2016:

  • China, Saudi Arabia, India, Argentina, Peru, Canada and Russia are the only countries to record a positive feeling
  • The other 18 are increasingly desperate for change

Today Malaysia, S Korea, Serbia and Chile have moved into the positive camp.  But Argentina, Peru and Russia have gone negative.  And if we narrow down to the world’s ‘Top 10’ economies:

  • 7 of them are negative – 53% of Italians, 59% of Americans, 63% of Japanese, 66% of Germans, 67% of British, 73% of French and 85% of Brazilians
  • Only 3 are positive – 91% of Chinese, 67% of Indians and 52% of Canadians

There is a clear message here, as the median ages of the ‘Unhappy 7’ are also continuing to rise:

  • Median Japanese age is 47.3 years; Italy is 45.5; Germany is 43.8; France is 41.4, Britain is 40.5; US is 38.1, (Brazil is unhappy because of economic/political chaos, and is the exception that proves the rule at 32 years)
  • By contrast, China’s media age is 37.4 years, India is 27.9 (Canada is the exception at 42.2 years)

The key issue is summarised in the 3rd slide from a BBC poll, which shows that 3 out of 4 people in the world believe their country has become divided.  More than half believe it is more divided than 10 years ago.

There is also a clear correlation with the demographic data:

  • 35% of Japanese, 67% of Italians, 66% of Germans, 54% of French, 65% of British, 57% of Americans and 46% of Brazilians see their country as more divided than 10 years ago
  • Only 10% of Chinese, 13% of Indians and 35% of Canadians feel this way

POLITICIANS ARE INCREASINGLY FOCUSED ON ‘DIVIDE AND RULE’
One might have expected that politicians would be working to remove these barriers.  But the trend since 2016 has been in the opposite direction.  Older people have historically always been less optimistic about the future than the young.  And the Populists from both the left and right have been ruthless in exploiting this fact.

This trend has major implications for companies and investors. As long-standing readers will remember, very few people agreed with my suggestion in September 2015 that Trump could win the US Presidency and that political risk was moving up the agenda.  As one normally friendly commentator wrote:

“Hodges’ predictions are relevant to companies, he says, because of the likelihood of political change leading to political risk:

  • The economic success of the BabyBoomer-led SuperCycle meant that politics as such took a back seat. People no longer needed to argue over “who got what” as there seemed to be plenty for everyone. But today, those happy days are receding into history – hence the growing arguments over inequality and relative income levels
  • Companies and investors have had little experience of how such debates can impact them in recent decades. They now need to move quickly up the learning curve. Political risk is becoming a major issue, as it was before the 1990s

“Of course a prediction skeptic like me would say this, but I have a very, very, very difficult time imagining that populist movements could have significant traction in the U.S. Congress in passing legislation that would seriously affect companies and investors.” (my emphasis)

Yet 3 years later, this has now happened on a major scale – impacting a growing range of industries and countries.

As the mid-term campaigning moves into its final weeks, we must therefore assume that Trump will focus on further consolidating his base vote.  Further tariffs on China, and the completion of the pull-out from the Iran nuclear deal are almost certain as a result.  Canada is being threatened in the NAFTA talks, and it would be no surprise if he increases the economic pressure against the US’s other key allies in the G7 countries, given the major row at June’s G7 Summit.

Anyone who still hope that Trump might be bluffing, and that the world will soon return to “business as usual”, is likely to have an unpleasant shock in the weeks ahead.

 

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Markets struggle with political risk as populist momentum gains

Populists Sept15Markets have forgotten how to price political uncertainty in recent decades, as I discussed on Monday.  They have become dependent on central bank handouts, and assumed that globalisation and trade agreements are permanent features of the economic landscape.  Today, they are having to relearn, very quickly, what has been forgotten.

My post a year ago on the rise of the populists aimed to highlight the paradigm shift underway.  I argued that outsiders such as Trump and Sanders would probably play a major role in the US Presidential Election, and that this political development would have economic impact:

“The economic success of the BabyBoomer-led SuperCycle meant that politics as such took a back seat.  People no longer needed to argue over “who got what” as there seemed to be plenty for everyone.  But today, those happy days are receding into history – hence the growing arguments over inequality and relative income levels.

“Companies and  investors have had little experience of how such debates can impact them in recent decades.  They now need to move quickly up the learning curve.  Political risk is becoming a major issue, as it was before the 1990s”.

Perhaps unsurprisingly, many readers were amazed at my suggestion that Trump could become the Republican nominee.  They were also somewhat shocked by the idea that populism might start to have a major impact on trade agreements.  Yet last week’s presidential debate featured Trump as the nominee, and both candidates argued for major changes on trade policy, as the New York Times reported:

“That neither candidate came to the defense of trade and trade agreements underscored a remarkable feature of this presidential election: Both major parties’ nominees are running against such pacts, despite the long pro-trade tradition of the Republican Party, and Mrs. Clinton’s past endorsement of the signature trade agreements of her husband and her former boss, Mr. Obama”.

More recently, my suggestion in March that a Brexit vote “was becoming more likely”, also surprised some readers. But today, many companies and investors are becoming uncomfortably aware that the Brexiteer demand for immigration controls make it likely that the UK is heading for a “hard Brexit” in Q1 2019 – where it leaves the Single Market and maybe even the Customs Union.

It is, of course, difficult to envisage a world where populists rule.  But the Brexit result highlights that “business as usual” is no longer the only Scenario that needs to be considered:

  Even though Sanders did not win the Democrat nomination, he is still a very powerful figure, and a Clinton presidency would no doubt be far more radical in certain areas as a result
  A Trump presidency would almost certainly be very different from the Reagan-Bush-Clinton-Bush-Obama continuum of the past 35 years, with major policy changes – such as the renegotiation or scrapping of many trade agreements and a possible withdrawal from NATO
  Similarly, Europeans and others need to consider what might happen in Italy if premier Matteo Renzi loses his December referendum and resigns; or in France if Marine le Pen becomes President next year; or in Germany if the Alternative für Deutschland does well in next October’s national elections – where they might gain enough seats to make a continuation of the current “Grand Coalition” between the CDU/CSU/SDP impossible.
  Even in the UK, where most pundits regard the populist Labour Party leader, Jeremy Corbyn, as unelectable due to his radical socialist and pacifist  agenda, it would only take a breakdown in the Brexit negotiations for his chances of gaining power to rapidly improve.

The key conclusion is that we are living in very uncertain times.

Companies and investors therefore need to prepare very carefully for every possible outcome – even if these seem unlikely today.  For example, most investors today assume that the Federal Reserve will always support US stock markets. But if Trump were to win next month, it is likely that this policy would change very quickly. 

On Friday, I will discuss why these developments are taking place.