By Aaron Brown
Home Editors' Picks Populism may be losing its influence over markets
Populism may be losing its influence over markets
A POPULAR tenet of investing wisdom is to focus on the long-term. This is usually applied to quantitative methods of investing, such as considering historical 10- and 20-year returns of global asset classes rather than looking at what specific sectors or companies did last year, and what analysts guess they will do next year.
A new report from the UK’s Cambridge University Centre for the Future of Democracy offers investors a rare chance to think about the overall economy over the next decade. The authors compiled a large global dataset that suggests some not-often-heard claims, such as that the tide of populism, nationalism and inequality has turned, and is rapidly receding in favor of a more prosperous, peaceful, egalitarian and cohesive globe in the next decade.
I am no starry-eyed optimist rebalancing my entire portfolio on the expectation of 10 years of peace, love and understanding. But a major focus of the last 10 years has been protecting against populism, war, depression and nationalism, so perhaps it’s time to broaden my attention. I don’t think the report’s authors, or anyone else, have a crystal ball. But they present us with a plausible, data-driven scenario. I know the post-pandemic economy will be very different from 2019, so thinking about what might happen is important.
Back in 2007–2009, when the financial world was collapsing, the story seemed to be governments seizing vast new powers. Central banks invented ad hoc rationales for inflating their balance sheets beyond anything contemplated in the past and choosing winners and losers, without clear legal authority. Governments disregarded budget constraints and claimed near war-time emergency powers. Courts mostly deferred to the changes. At that time, populist uprisings such as the Tea Party movement and Occupy Wall Street seemed to be sideshows to crisis management by top officials.
Key populist ideas are that the world is divided into ordinary people and a corrupt elite (the “deep state” for the right, “white supremacists” for the left), the will of the people trumps established norms and rule of law, and that the people’s will is revealed by protests and street battles rather than elections. Populists blame secretive special interests for blocking natural progress and think important information is deliberately concealed from the people.
Looking back, populism, not government actions, was the big story. Throughout the world, nationalism soared and globalism entered defensive retreat. People stopped quoting Sun Tzu, “The supreme art of war is to subdue the enemy without fighting,” because Carl von Clausewitz’s “War is the continuation of politics by other means” seemed more relevant. The major political shifts of the time — gay marriage, #MeToo, Black Lives Matter, defund the police — all bubbled up from below, catching established politicians by surprise. In both the Republican and Democratic parties, central planks starkly contradicted past policy positions and the long-published opinions of their partisan experts. Similar things were happening in democracies around the globe.
Government actions in response to the pandemic in 2020 and 2021 resembled the 2007–2009 power grab. But according to the Cambridge report, they seemed to have had the opposite effect. Rather than inciting a populist backlash, they may have killed populism. For all the criticism of public health officials, the pandemic seems to be rallying people around a common human cause. Populist leaders are perceived to have mismanaged things. Traditional elite leaders are seen as flailing and often failing, but to be doing the best they can and deserving of support.
It’s hard to see this reading US headlines about anti-vaxxers, “Stop the Steal” and intensely partisan gridlock in Washington, but worldwide surveys rigorously comparing to 2019 attitudes suggests those things are the death throes of the past, not the future. As in 2007–2009, the headlines can be misleading and the sideshows the important indicators.
Other headlines suggest that the pandemic has increased inequality. While that seems to be true according to some metrics, populists can only exploit inequality between cohesive groups — rural farmers versus urban manufacturing workers, workers versus owners, tenants versus landlords, one racial or ethnic group versus another. The pandemic seems to have made these more equal on average over the entire world. Other inequalities measured on statistical categories rather than groups with strong social identities may be increasing, but they cannot be used to acquire political power.
The Cambridge report is not entirely optimistic. Along with the decline of populism seems to be an increasing taste for authoritarian leaders and reduced respect for civil rights and democracy. While that’s directionally bad, it will take some years — if ever — for that to develop into a problem as big as the fully mature raging populism of the 2010s. And much of it may fade away if the pandemic eases and military confrontations cool.
The scenario laid out by the report seems like a good one for bonds and currencies, less so for stocks. For all the economic damage of populist policies like tariffs, immigration restrictions and anti-bank policies, the 2010s was a great time for the stock market. War, and threat of war, means weapons. Defanging the elite is a form of deregulation. Partisan gridlock makes raising taxes difficult and increases the voice of big companies. An authoritarian elite consensus is likely to impose medicine such as higher taxes, especially on investors and companies, strong environmental controls, increased pay and benefits for workers and more constraints on creditors and landlords. While those policies have benefits for some groups, they’re generally negative ones for equity investors.
Most investors today are focused on protecting themselves from the consequences of populism and partisanship: inflation, confiscation, government default, war and trade restrictions. Those are real risks, but so is the opposite, an authoritarian global consensus with little respect for rights and elections. Investors have to be careful not to fight the last war.