Populism and Markets
by George Hatjoullis
Populism is the cynics dream made real. Politicians do whatever it takes to get elected and remain in power. The result is a dictatorship of the lowest common denominator. It is a crude form of democracy. It spells the end of pluralism whereby the elected government considers also the interests of significant minorities. It results in soundbite policies which lack coherence and structure. Populist politicians will say and do whatever it takes without thought for the consequences.
Markets can handle uncertainty. Indeed, they thrive on uncertainty. However, the uncertainty needs to be bounded and contained within a coherent and understood framework. If, quite literally, anything can happen, then the markets shut down and become very risk averse. Economic agents take whatever constitutes the least risky option for them. Markets become illiquid and fractured. In a market economy, this is not a good situation. This appears to be the direction in which we are headed.
In the US there is a serious prospect of Trump being elected. No one has any idea how he will behave once in office, not even the Republican party. Trump certainly has no idea! He is the quintessential populist. He says whatever gets the loudest cheer. He may well do much the same. We have seen populism undermine the Governor of the Bank of England. It is very likely that Trump in power will undermine the Federal Reserve. This is not a positive development. Trump in the White House may trigger some serious risk aversion though what constitutes ‘safe’ in this context is unclear. I am leaning towards gold! The S&P 500 has already broken below a uptrend and is sitting just above important support at 2115. It is vulnerable to an outbreak of risk aversion.
In the UK the Populists have already seized power. They have attacked the Governor of the Bank of England, undermining BoE independence. They have declared anyone that disagrees with anything they say as ‘unpatriotic’. They paint a picture of a panglossian future for the UK economy and contradict their own vision by writing blank cheques to Japanese car companies to stop them fleeing the country. They present a picture of ‘being in the driving seat’ in negotiating with the EU when anyone with half a brain knows this is not the case. They try to draw parallels with Canada, Norway, Switzerland and Turkey when looking at potential relationships yet anyone with the other half of the brain knows the UK is not in the position of any of these countries. None of these were EU members that chose to leave! None of these have industries and sectors that individual EU members covet.
The UK economy and UK stock markets have yet to reflect this unbounded uncertainty. In part this is because sterling took all the initial strain. It basically priced in a 20% loss of competitiveness almost immediately. This has proved a short-term boon for export/import substitute sectors as the UK is still in the EU. It has also boosted the share price of the many companies listed in the UK but that are global. Unless sterling rallies this boon will be with us until March 2019, at least, and may go some way to offsetting the slowdown in investment as the outcome of the negotiation is awaited (further blank cheques from the government notwithstanding).
The collapse of sterling will however soon start to weigh on domestic demand as import price increases feed through and impact domestic incomes. Morrisons has already raised the price of a 250g jar of Marmite by 12.5%. It is not true, as some populists have asserted, that the sterling decline does not affect anyone. It affects everyone through inflation. This is likely to jump sharply and certainly faster than incomes. The worst hit are those ‘just managing’, the populist constituency. The populists will now need to conjure up some ‘conspiracy’ to explain the inflation and deflect attention away from their own culpability (you think I jest?). It may also result in more populist policies.
The decline in sterling provides an important macroeconomic offset to the Brexit uncertainty. However, this offset will fade with every step closer to Brexit. It will also be overwhelmed by the unstructured and often contradictory policies typical of populist governments. In the short-term sterling could bounce. Longer term the outlook looks less rosy even from these levels. One major problem is that the UK government is not the only one that can write blank cheques and many EU states covet industries that at the moment are based in the UK. These states have no incentive to give the UK a deal that will encourage these industries to stay in the UK. For populists to assert they are in the driving seat is a barefaced lie.