2016 was a watershed moment. The UK voted in favour of leaving the European Union and reality television star, Donald Trump, won the US presidential election – two events which were as unexpected to the ruling neoliberal order, as they were alarming.
Not only did they arguably galvanise the rise of nationalism, they produced thousands of column inches, questioning whether these pivotal moments merely represented a bump in the road, or complete change of driver.
Two years later, the jury remains out. But the election of a succession of populist leaders across Europe and South America – as well as a hardening of trading stances across the globe, have left few in doubt about the power of populism.
However, what has been less pored over, is what this all means for financial markets long term. True, Trump has been quick to ascribe the recent success of the US economy to his leadership and there is little doubt that the ratcheting-up of trade tensions between the US and China was a significant contributor to the slump in sentiment seen in the final quarter of 2018.
Equally, much has been written about the long-term impact of pulling the UK out of Europe. But there is arguably something more important to consider – the nature of populism itself, and how it could shape markets going forward.
As their intention is to appease voters, populist policies tend to be short-term. This is the first thing to focus on.
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Here again, the UK and the US provide good examples. In the US, the decision to increase its already large deficit to finance a trade war with China is not a long-term one. Likewise, in the UK, those calling for a hard Brexit typically disregard the potential ramifications of leaving the EU without an agreement.
Populism is also evident, in the increasingly broad embrace of de-globalisation. Higher tariffs and trade barriers are an old recipe, the ingredients of which we know can be detrimental to long-term economic growth.
We believe the combination of increasingly aggressive trade posturing and the trumpeting of short-term policies, will likely result in higher levels of market volatility, especially if the rise of the populism continues. And if volatility increases, so does the potential for a correction in markets.
This is of particular importance now, given the current economic cycle among the longest running in history, during which time vast quantities of capital have been pumped into the system by central banks.
In a normal environment, what generally characterises the end of the cycle, is the switch from the mature deceleration stage, towards recession.
However, while a possible recession may be on everyone’s lips, it’s stubbornly refusing to show up in the data. Here too, populism may well be playing a part because populist leaders have a vested interest in keeping the party going.
How long can the party last?
As everyone knows, if you can’t throw a good party, it is difficult to be popular. This is why, for example, Trump’s consistent calls for the US Federal Reserve to keep interest rates on hold – or even to take them lower – seemingly gives scant regard to the central bank’s desire to normalise monetary policy in order to ensure it has sufficient capacity to respond, should the current “economic miracle” falter. Instead the US President, in our view, seems more focused on prioritising quick wins and partisan one-upmanship.
On top of this, one of the typical go-to moves in the populist playbook, is the scorning of international institutions and globalism. And, while the significant levels of integration within the global financial system were part of the problem during the global financial crisis, it was only through co-ordinated efforts on the part of international institutions, that that the system was stabilised. But any future co-ordination could become much harder to implement, if everyone is out for themselves.
The problem, of course, is that the longer the cycle runs on fumes, the worse the hangover could end-up being, especially if stability is sacrificed. While many populist leaders seem happy to espouse the idea that sacrifices may be needed to return to a – arguably mythical – past wherein things were better, voters may be rather less willing to go along with it, once it actually starts to hit them where it hurts.
All of which, we believe, leaves the world in a rather precarious place. For populism to prevail, voters will have to see election promises fulfilled – something that many, including Trump, are already finding it difficult to do, and this in turn has seen market volatility rise. And, should these leaders fail, they are unlikely to go leave quietly, which will in turn possibly leave the world that less prepared for the end of the economic cycle and indeed, potentially, a lot closer to it.
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