The rise of the new populism
Political outsiders on both sides of the Atlantic are making waves. Should you be concerned about your money? John Stepek reports.
The best investment of 2015? If the polls are right (yes, we all know that's a big 'if' these days), it may just turn out to have been a well-timed punt on Jeremy Corbyn tobecome Labour leader this weekend. When the rank outsider was nominated by his party in a part-joke, part-sop to the hard left, bookies put his odds of winning at 100/1.
Corbyn is far from the only political surprise we've had since the 2008 crash. In Britain, there was the coalition government (which no one thought would survive), the post-referendum rise of the Scottish Nationalist Party (SNP), and the popularity of Ukip. In the US, Barack Obama was an outsider before he became president. Now Donald Trump once little more than a pantomime billionaire in a bad wig is charging ahead among Republican supporters, while Bernie Sanders, the only socialist senator in America, is giving Hillary Clinton a run for her money. Whether ostensibly left-wing or right-wing, the people are fed up with the establishment and its supporters, and this discontent is only growing.
We've been here before
None of this is new. This is simply what happens after major economic shocks. In the US in the 1890s, for example, the People's Party, or Populist Party, sprang up, born of discontent among farming communities in the West and the South of America who had suffered during the Long Depression of the 1870s. A financial panic in 1893 only compounded their rage against the mainstream. Their complaints were very similar to those we hear today banks and businessmen (the railroad tycoons back then) had stitched them up. There were also calls for 'easier money' in the form of switching from the gold standard to a more relaxed system based on silver. The party was eventually subsumed by the Democrats who picked up many of its policies.
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The 1930s and the Great Depression also saw mass unrest, which again influenced the political agenda. As The Wall Street Journal put it, "populism in the 1930s was less organised but equally radical, with leaders like Huey Long pushing for a redistribution of wealth". Humourist and Democrat Will Rogers quipped at the time: "All the feed is going into one manger and the stock on the other side of the stall ain't getting a thing We got it, but we don't know how to split it up."
What these events had in common is that a significant chunk of the population felt left behind by an economic crash and its aftermath. They believed rightly or wrongly that the system was no longer working for them, and that the dominant political parties had been hijacked by special interests, mainly financiers and businessmen. In many cases there was an undercurrent of suspicion about "international" forces and a desire to turn inwards and focus on the domestic population. The movements were also tricky to define in traditional left- or right-wing terms. The main thing they had in common is that they opposed the elites and promised an alternative to the mainstream. Sound familiar?
Change you can believe in
It's easy to overlook the fact that, since 2007/2008, people around the world have already opted for change. Few of the politicians and parties who were in power during the crisis remain there today. Obama was elected on the promise of "hope and change", while the coalition government in the UK promised a different kind of politics. But as far as many are concerned, things haven't changed enough. So now they are turning to alternatives.
The likes of Corbyn, Trump, Sanders, Ukip's Nigel Farage and the SNP (to a lesser extent, given that they've held power in Scotland for so long) are untainted by the 'system'. This isn't just about politicians and bankers it's the whole establishment, including the media. It's no coincidence that Trump has picked fights with Fox News, the Republican mouthpiece, or that some of the most vociferous criticism of Corbyn is to be found in The Guardian. As Canadian blogger Ian Welsh put it rather pithily: "Anyone who feels like a run-of-the-mill' politician loses big points in the current environment, because people feel like normal politicians are why we're here, in this sh*thole economy, with no end in sight and plenty of reason to believe it could get a lot worse."
The 'dread' factor
This "it could get a lot worse" leads onto another important factor at work here psychology. Bank of England economist Andy Haldane gave an interesting speech on this topic earlier this year. 'Dread risk' is the name given to a psychological phenomenon associated with catastrophes such as plane crashes or terror attacks that result in large losses that affect many people, all at the same time. In the aftermath of such events, rare as they are, people overestimate the chances of them happening again and adjust their behaviour accordingly.
Haldane argues that the same thing happens after an economic 'dread event', such as the Great Depression or the 2008 crash. The fallout from these events is an exaggerated desire to seek safety.So interest rates are driven lower (amid a clamour for 'safe' government bonds) and companies rein in investment as entrepreneurial, risk-taking activity is 'blunted'.
In short, it takes a long time maybe a generation for people to get over an economic shock and to stop feeling insecure. That helps to explain our thus-far lacklustre recovery. Haldane uses this as an argument to say that interest rates should remain where they are for longer. But what he doesn't explore is the notion that central banks might in fact be making this psychological problem and the political backlash worse.
Monetary policy has always played a significant role in depressions and their aftermaths. But this time around, politicians have increasingly delegated responsibility for spurring growthand offsetting the pain of thecrash to unelected central bankers. More than a few of these officials have expressed disquiet (usually behind closed doors) at the fact that they are essentially conducting 'fiscal policy' ie, redistributing money from one section of society to another rather than pure monetary policy.
The former should be done at the behest of the people, via the government, rather than through unelected officials. This has, of course, been particularly acutely felt in the eurozone, where national governments have no control over monetary policy, and, as Greece shows, little control over fiscal policy either. But the principle applies across the board.
The problem is that while loose monetary policy might have saved many people from losing their homes or their jobs or their savings, it has also propped up asset prices and the financial sector, and thus made the rich richer while others feel left behind. Put it this way there's no way that a dense tome (one of the least-finished books on Kindle, according to Amazon) like Thomas Piketty's treatise on inequality would have become a bestseller in any other environment.
In Britain, the housing market is perhaps the biggest focus of this frustration.In the US, it's more a sense that the Wall Street elites are back to business as usual while small-town America goes hungry and the middle-classes run to stand still. Pre-crisis, most people seemed to be getting richer, and everyone aspired to a better standard of living. Post-crisis, the wealth of many proved an illusion based on credit, and now they see a better life as being too far out of reach, and despair of ever getting one. The system doesn't work the way they thought it did, and they want it to change.
Meanwhile, the fact that interest rates remain at near-zero, house prices are insanely high, and nearly everything is overvalued is a constant reminder that we live on thin ice. It's hard to get over a dread event when all the conditions that led to the last one still seem to be in place.
What's next?
In the UK, even if Corbyn becomes leader of the Labour party, it remains unlikely (though far from impossible) that he'll be the next prime minister. However, he is likely to pull the debate further in his direction, and that will influence public policy in unpredictable ways. We can't underestimate the power of headlines and a perceived groundswell of emotion to shift policy.
Consider this. At the start of last week, David Cameron's view on migrants was to take as few as possible. It took just one widely circulated, heartbreaking photograph of a body among thousands who have died attempting to cross into Europe this year for all that to change, overnight. Our politicians are now outbidding each other on the number of refugees to take in, and drone strikes have been authorised on IS.
This is the new political reality and investors would do well to pay attention. As investment researcher CrossBorder Capital notes, in the aftermath of the Great Depression we saw "imperialism, trade protection, migration quotas,re-armament, currency volatility, inflation and overhyped stockmarkets". We've already seen many of those this time around and the upheaval is likely to continue.
Buy gold, quit buy-to-let and ditch tax-avoidance schemes
History suggests that, while populist movements rarely get their hands on actual political positions, they do drag the political conversation their way. We can already see this happening. Imagine that someone had told you, five years ago, that in 2015, the British chancellor would legislate for a double-digit rise in the minimum wage, and for a reduction in tax breaks for buy-to-let landlords. You'd have sworn blind that it could only happen under a Labour government, not an arch-Tory like George Osborne. And you'd have been wrong.
Some argue that a Corbyn victory might be good for markets it would render Labour unelectable and virtually guarantee a Conservative win in the 2020 election, so the argument goes. But that seems a rather optimistic take. For one thing, Corbyn is not the only populist out there if the SNP shores up its Holyrood majority after the Scottish elections in 2016, we can expect to see arguments for another independence referendum erupting even as the eurozone referendum is dividing the Conservative party. Equally, while Corbyn might not win a general election, even the outside threat of it could be enough to rattle bond markets, the pound and UK business in general, given his extreme policies.
Meanwhile, conversations on policy that might have seemed settled only a few years ago such as the notion that lower taxes were a good thing in theory (even though, in practice, stealth taxes kept rising) are up for grabs again. With the gap between the haves and have-nots made far more visible by the side-effects of central-bank policies, more attention is being paid to the question of overpaid chief executives and their underpaid workers minimum wages have been on the rise in the US too.
This isn't necessarily a bad thing if the economy is to have a durable recovery, the labour force needs to see wages rise in real (after-inflation) terms. And you don't have to be a communist to see that chief executives are indeed overpaid, due to badly skewed incentive systems for all involved this is an argument we've been making for years.
However, it does mean that you should expect and be prepared for anything that looks like a tax loophole to be closed. From a personal-finance point of view, that means avoiding anything that smells like an avoidance scheme (film funding and the like). And from an investor's perspective, it's potentially tricky for the 'safe' multinational companies that many investors have flocked to in recent years they may see their effective global tax rates rise. And don't be surprised to see further tax moves on the property market, particularly at the high end and onbuy-to-let as the most visible epicentre of inequality in the UK, it's an easy target, particularly as landlords make up a relatively small proportion of the electorate.
As for how central banks will react to all this, the prevailing view among central bankers and academics is that tightening the monetary supply prematurely is a bigger risk than leaving it too late. The World Bank's chief economist made that very clear this week. That means two things.
Firstly, it's unlikely interest rates will rise if there's any excuse for them not to. Secondly, the next time we are hit by a 'normal' cyclical recession (as opposed to a 2008-style collapse), rates are likely still to be too low for cutting them to make much difference. At that point, we can probably expect more money printing. It might take some time, but as CrossBorder Capital suggests, the ultimate solution to 'huge Western debt accumulation' is inflation. "Gold, history's unchallenged store of value, looks again the outright winner."
New populism: the Donald versus the socialist
'The Donald' now leads Republican polls, both nationally and in the key states of Iowa and New Hampshire. But experts think he is still unlikely to become the Republican nominee for president. Fringe candidates often do well in the summer, then fall back as the contest progresses. Also, rule changes in the past six years make it far harder for a candidate to build unstoppable momentum through a string of early victories.
Bernie Sanders faces an even tougher challenge. He is ahead of Hillary Clinton in New Hampshire, but trails her in Iowa. And unlike Trump, who can self-fund his campaign, Sanders lacks Clinton's wealth and support network. His hope has to be that his momentum can continue and that Clinton's reputation also remains under fire over her controversial use of a private email address for government business while she was US secretaryof state.
What does Jeremy Corbyn stand for?
Jeremy Corbyn agrees that the UK's budget deficit should be eliminated but he hasn't specified a date, writes Matthew Partridge. Given that he also wants to "end austerity" by reversing cuts in public spending, that's going to be tricky. So to meet both goals, Corbyn has promised to increase taxes.
The main measures would be a 50% top rate of income tax, plus an additional 7% rise in national insurance for those earning more than £50,000 a year, and a 2.5% rise in the rate of corporation tax. He also pledges further to increase tax revenue by clamping down on tax evasion, which he via tax adviser Richard Murphy estimates costs up to £120bn a year. That compares to a £35bn estimate from the tax office itself.
Corbyn would renationalise both the energy sector (a move estimated by analysts at Jefferies to cost as much as £185bn) and the railways, and repurchase the private shares in the Royal Bank of Scotland. He would also impose a limit on the wages of top executives. In the public sector he wants to repurchase contracts under the private finance initiative (where private-sector firms build schools and hospitals and then get paid large sums for maintaining and leasing them to the public sector). He supports rent controls and even a possible extension of "right to buy" for those in private rented accommodation (thus building on Conservative plans to allow housing association tenants to buy their houses at discounted rates).
Another key potential policy is 'people's quantitative easing'. This would involve the Bank of England (BoE) printing money to fund a 'National Investment Bank' that would fund infrastructure projects and hi-tech industry.
This would not be entirely unprecedented, since the BoE provided backing to the largely unsuccessful Bankers' Industrial Development Corporation in the 1930s. But such a policy would almost certainly involve ending the Bank's independence, not to mention the fact that putting a hard-left government in charge of Britain's money-printing presses might just rattle investors somewhat more than "ordinary" QE has so far.
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