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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Europe is heading in to the Great Unknown, as Monday’s post highlighted. The UK, The Netherlands and France are not the only political uncertainties that we face. Elections are also due in Italy and in Germany.
Italian elections. After premier Renzi’s referendum defeat last year, it seems like that Italy will hold elections this year, probably in the next few months. A the moment, the most likely winner is former comedian Beppe Grillo. As I have discussed before, his main policy is for a referendum to exit the euro, but stay in the EU. But, of course, it is also possible that the current Gentiloni government might survive until the scheduled election date in 2018.
If Grillo wins, the entire European banking system is likely to go bankrupt, as well as the European Central Bank (ECB). The reason is that leaving the euro, and returning to the lira, would inevitably lead to a major devaluation of at least 20%. As the ECB is the main owner of Italian government debt, thanks to its Quantitative Easing programme, it also would go bankrupt. As Astellon Capital note, the critical legal issue is that the Bank of Italy is privately owned by the Italian banks – not state owned. The ECB claims the government would still be responsible for the debt, but investors and other governments are unlikely to wait around for Italy’s slow-moving courts to reach a decision.
German elections. In October we then have the German elections, where Angela Merkel is seeking a fourth term. Her credibility has been badly damaged by her handling of the refugee crisis, although most polls suggest she is still the favourite. Germany also has a growing challenge from an anti-EU party, the Alternative für Deutschland (AfD). But her main opponent is the new pro-EU leader of the Social Democratic Party (SDP), Martin Schulz.
A win for Merkel would obviously be “business as usual”. But if Schulz wins, he would bring a new dimension to the political debates over the future of the EU, as he was the President of the European Parliament until he resigned to seek the leadership of the SDP. Whereas Merkel saw herself as a “safe pair of hands”, Schulz is likely to be a more activist Chancellor, if elected. His reputation at the Parliament was of “someone who got things done”. But his actual policy objectives are unclear at the moment.
COMPANIES AND INVESTORS NEED TO PREPARE FOR VERY DIFFERENT OUTCOMES
Voters have got tired of waiting for change to take place. As I noted in November, 69% of Germans, 82% of Italians and 89% of French feel their country is going in the wrong direction. So they are prepared to try different options, just to see what might happen. In turn, this means that Europe, and the world, is entering a Great Unknown. At least 4 quite different alternatives could therefore result from this year’s elections:
Business as Usual. Perhaps Rutte, Fillon and Merkel will win their elections, Gentiloni survive into 2018, and May get her Brexit deal. But this seems just a 10% probability today
A triumph for the Populists. Populist success could continue, with Wilders winning in The Netherlands, Le Pen in France and Grillo in Italy, whilst the AfD wins a strong position in Germany. This is a 25% probability
Smörgåsbord. Each country might go its own way, with Wilders winning in The Netherlands, Macron winnng in France, Gentiloni surviving into 2018 in Italy, and Merkel winning in Germany. This is also a 25% probability today
A New Broom. Wilders wins in The Netherlands and Grillo in Italy, whilst Macron and Schulz win in France and Germany. This is perhaps the most likely outcome, but has only a 40% probability
Each of these outcomes would have radically different implications for companies, investors and us as individuals. The Populist, Smörgåsbord and New Broom outcomes would also give very different outcomes for the Brexit process. It could easily become of only marginal importance for EU leaders, if “business as usual” options disappear. In turn, this would make May’s position back in the UK, very difficult indeed.
Nor can one ignore the potential impact of events, such as a Greek default, or of further interventions by Presidents Trump and Putin. Both would be happy to see the EU disappear. These widely differing alternatives highlight the dangers of continuing with a one-dimensional view of the world based on economics. Political risk has returned, and is likely to continue rising up the agenda for a long time.
We are entering the Great Unknown in Europe over the next 9 months. Everyone will have their own views of the probabilities. But the crucial point is that every country in the world is likely to feel the impact, in some way, if “business as usual” fails to occur. And it will then be too late, at the end of the year, to suddenly wake up to the implications for your business, and for you personally.
This week, the new UK premier, Theresa May, highlighted how the central banks have encouraged the populists’ rise:
“We have to acknowledge some of the bad side-effects. People with assets have got richer, people without have not.”
The problem, of course, goes wider than this. The continuing failure to recover from the 2008 Financial Crisis is one of the 3 major policy errors of recent years, along with the disaster of the Iraq War and its aftermath, and the seemingly uncontrolled growth in immigration. Collectively, these have undermined confidence in the Western political system.
In turn, this loss of confidence has led to the rise of the populists. The chart above, based on the insight of American psychologist Abraham Maslow, highlights why this has happened. Maslow’s research showed that people were motivated by a range of needs:
The most basic needs are for Safety and Security – if people are worried about possible dangers, or their ability to earn a living, they will become frightened and insecure
Social standing and Status are also critical – people want to understand their place in society, and be recognised for their role within it
Less tangible needs then develop, if these needs are being met – Self-actualisation, Self-development and Service
These focus on realising one’s own potential, developing new skills, and on helping others and serving society
This analysis makes it easy to see why the comfortable certainties of the SuperCycle are now history for an increasing number of people in the West.
The rise of terrorism, and the seeming inability of governments to respond successfully to domestic and international threats, naturally makes people uncertain and worried. Similarly, the rise of the “gig economy” has meant tens of millions of people are now dependent on temporary work and zero-hours contracts – often juggling several jobs in a day to earn enough to eat and pay the bills.
Equally important is that the seemingly inevitable “rise of the middle class” has ended. People are no longer confident that going to college will provide them with a steadily rising income, along with healthcare and the prospect of a comfortable retirement. Many Millennials have large tuition fee debts, and find it hard to believe that their generation will end up doing better than their parents. As Fortune magazine reported earlier this year:
“The vast majority of American workers expect to have less money at the end of their careers than their parents did—and that fear is highest among 20-something millennials”
This trend has been developing for some time, as Forbes reported in 2013 on a survey in Montreal and Vancouver:
“Somebody with the same degree, the same job and the same demographic profile is earning less today than they were in the 1980s”
And yet, despite all the growth of social media, it is clear that policymakers are not even listening to these concerns, let alone responding to them, as the Wall Street Journal noted last year:
“The biggest thing leaders don’t do now is listen. They no longer hear the voices of common people. Or they imitate what they think it is and it sounds backward and embarrassing. In this age we will see political leaders, and institutions, rock, shatter and fall due to that deafness.” (my emphasis)
Fortune, Forbes and the Wall Street Journal are not revolutionary media, keen to stir up unrest and incite social disorder. They are simply reporting facts. And yet, these facts have continued to be ignored – to the point where populists have a real chance of gaining power – if not this year, then perhaps next year or the year after.
As I noted recently, nearly two-thirds of Americans feel their country is headed in the wrong direction, and their views are widely shared across the West.
It really is long past time for policymakers to stop sheltering behind the fig-leaf of the central banks, and the absurd idea these can stimulate economic growth by creating more and more debt. The voters simply want straight-talking about the issues in the Hierarchy of Needs that concern them.
If today’s leaders continue to refuse to listen, they will inevitably find populists who will.
Markets 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.