People are angry. This is what polls tell us throughout the developed world. This dissension has allowed Trump and Saunders to emerge in the US; a raft of more extreme left and right wing politicians have come to prominence throughout southern Europe; and the anti-immigration party in Germany made dramatic gains in recent elections. It might also yet trigger Brexit.
What are the causes? What are the investment implications?
As we have said before, it is easy to get distracted by evolving headlines – 6 months ago it was all about China and oil prices, today it is Brexit and the Panama papers.
Is the growing voter revolt due to their being under-paid, under-appreciated, and over-regulated? Or is it that they sense impotence, as their destiny is decided way beyond their borders?
The immediate causes of citizens’ anger across the developed world are not new:
• They want what we’ve got and they can’t have it (anti-migrants throughout time)
• Them over there are telling us how to live our lives (Boston 1773, UK 2016)
• They’ve got what we want (bash the rich: France 1789; the world 2016)
• We’ve got what we stole worked hard for and we’re keeping it (it was ever thus ex Robin Hood)
Doubtless there are a few more.
Perhaps 19th century reformer William Cobbett got to the heart of the typical underlying cause:
“it is easy to agitate a man with an empty stomach”
In modern terms “an empty stomach” equates to a lack of economic growth, which triggers a sense of being under paid and under appreciated by the many, while the few flaunt their wealth and (allegedly!) don’t pay their way.
But no one writes an angry tweet proclaiming “I have a sense of being under appreciated”. Instead they will rant against migrants, “the rich”, “the establishment”, the EU, the Chinese, central bankers, and the mother in law. Angry people don’t often think about why they are angry – they just lash out at convenient targets.
Yet the evidence explaining that anger could not be more stark.
These two charts relate to the US economy since 1960, which reflects trends throughout the developed world. What they show is that as profits grew and grew, the share paid to workers fell and fell.
This growth in profits was possible because of high spending baby boomers, and the use of debt (whether by consumers or companies). Confidence grew, and financial markets boomed.
Then the baby boomers got older and started spending less, and they began retiring from around the turn of the millennium. But debt kept going up.
We can define good debt as that which finances a project which generates a stream of income to pay the interest and eventually repay the capital. But a lot of current debt is not just unproductive but counter-productive.
The best (worst?) example is the extent to which companies have borrowed money for what is politely termed “financial engineering” – less politely this is nothing more than senior executives lining their pockets.
According to Hoisington Investment Management, business debt increased by USD 793 billion last year, but only USD 93 billion was invested into the businesses to improve productivity and increase demand for labour. The other USD 700 billion went into lining executive pockets financial engineering, in particular share buybacks.
If a company buys back its own shares it increases the earnings per share – total earnings haven’t increased, but if there are fewer shares, the earnings per share go up. And would you be surprised if executive’s bonuses were based on the increase in earnings per share? No? You’re getting the picture.
That debt is increasingly unproductive is easily illustrated. From 1945-2000 it took USD 1.70 of debt to generate USD 1.00 of economic growth (GDP). Since 2000 it takes USD 3.30 of debt to do the same.
As debt piles up, so do the interest payments, and payments of interest act like oxygen being sucked out of the economy.
It isn’t just those nasty executives that are the problem. The central bankers are taking part in a vast financial experiment to keep markets afloat – not to keep economies afloat, but markets. A key, stated, objective of QE was to push markets higher, which is meaningless for the greatest number of voters and tax payers in the developed world.
As the ageing, less flush, voters and taxpayers realise this, they increasingly look for political solutions beyond the mainstream
To summarise, increasing anger is caused by lack of economic growth, which is caused by demographics and debt, an unpleasant cycle set out in the chart below.
At this point I link you off to Anatole Kaletsky for the long answer (Things Fall Apart).
As he points out, none of this is new. In the 1920s and 1930s, as in the late 1960s and 1970s, disillusionment gives birth to something new and positive. In our case that means abandoning the economic and political thinking that has prevailed since the 1980s, including the institutions which flourished during that period (such as the EU).
But that process of change has barely begun. In the US will the standard bearer of change be Trump or Saunders? And in the UK, Corbyn or Johnson (B)? Perhaps none of these. Let’s hope it isn’t “some rough beast, its hour come at last”. (Yeats, The Second Coming)
The usual apology
Sorry to dwell on all this, but we must keep an eye on these longer term trends, and underlying, fundamental weaknesses.
The main implication of the above is slow economic growth persisting into the future throughout most of the developed world; this means we have to ensure we look globally for investment solutions.
In pursuit of those opportunities we try and stay focused on our usual formula, which has stood us in good stead for many years:
• Buy assets/funds which are obviously cheap
• Buy assets/funds benefiting from positive long term trends
There is plenty of choice in both categories.
While debt grows, populations age, and politics polarise through most of the developed world, real people get on with their lives, and ongoing investment opportunities persist.