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Market Commentary

The Politics Game: Tough Theresa vs Mad Dog vs French Farce

By April 18, 2017No Comments

Just as the world of politics around the world appears to have lost the plot, up pops Theresa May and says “politics is not a game”. Before the parochial UK media loses sight of the wider world for the next two months, let’s focus on the much bigger, global, concerns.

You can’t make this up.  A gameshow host becomes US President, and a man nick-named “Mad Dog” is put in charge of US defence.  Of course “defence” is a bit of a misnomer as “Mad Dog” (AKA General James Mattis) was at the helm when around $50m worth of missiles were launched against a Syrian airfield, the Mother Of All Bombs was dropped in Afghanistan, and North Korea was put on notice of a pre-emptive strike by American forces.

While there are very plausible reasons for each of the latter, they occurred in quick succession just as the gameshow host-property tycoon-President was losing traction after the vote against his flaky reform of ObamaCare.

When you come under pressure domestically it is very old school to begin foreign adventures, to try and galvanise domestic support, in this case within the US legislature rather than on the street.

Meantime Europe remains on a knife-edge.  The immediate focus is the French election, the first round of which is this weekend.  The polls are extraordinarily tight, and the two winners who will proceed to the second round are a toss of a coin right now.

There are two anti-Eurozone candidates (right wing Le Pen and left wing Melenchon, who has come up fast in the polls).  The worst outcome is these two in the final round of voting (on 7th May).

Even if one of these becomes President, the French political system puts such a range of obstacles in their way before they could exit the eurozone that this remains very unlikely, at least any time soon.  But it is another hole not just in the great European experiment but also in the post-Second World War consensus and stability – it would be a much bigger hole than either Trump or Brexit caused, because the French electorate would appear to be putting limited value on the peaceful Franco-German alliance at the core of Europe.

Now for some perspective.  None of this means the end of the world is nigh, but it is a world going through fundamental adjustments which will take years more to unfold and have already been years in the making (preceding the 2008/9 crisis on which so many talking heads focus).

The 1970s liberalisation of banking began the inflating of the debt bubble which is now a serious impediment to growth – paying interest is like sucking oxygen out of the economy, and cheap debt allows poor businesses to survive.  Before that time the sensible Captain Mannering-style of banking prevailed – you could only lend out what you got in by way of deposits.

When the guys came home from the war in 1945 the seeds of the demographic crisis were sown – there are now not enough young people paying tax to support a system which has become unsustainable due to retiring post-war babies.

The inexorable march of human ingenuity and new technology no longer appears to create sufficient new jobs to replace those which it destroys in old industries – at least not in the developed world.  Smart business owners employ new technologies, keep staff numbers low, improve their margins and profits, but little benefit seems to flow through to increased salaries.  And smart multi-national business can avoid huge tax bills by banking profits in very low tax jurisdictions.

Where new industries and new technologies do emerge globalisation means that an entrepreneur in (say) the US can build an exciting new product anywhere in the world and then import it to the US.  This is precisely what Apple do, amongst others.

For example, in 2011 Apple employed 700,000 foreigners overseas and 43,000 Americans in the US.  They sold 70 million iPhones in the US that year, and not one was made in the US.  There is no migration problem here, as many rabble-rousers would have it – but for some there is clearly a problem derived from the relatively free global movement of ideas and capital and products.

Even if Donald Trump amongst his many talents was also a magician, he cannot change the two big underlying problems of debt and demographics – so the negative impact of these will persist for a couple of decades to come.  (Having said that there is one more, positive, card to play in the debt deck – “helicopter money” as we explored previously.)

It is difficult but not impossible to slow technological change.  This will be more widely debated once robots and artificial intelligence threaten sweeping job losses – not this year, but not too many years away.

And free trade?  The EU is not a free trade area but a conditional trade area – you have to agree to the Four Freedoms of capital, goods, services, and people.  It is also a protected area – so the antithesis of global free trade, evidence of which is no free trade agreement with the three biggest global economies (US, China, and Japan) and the soon to be most populous country, India.  This is not EU intransigence (though getting all members to agree to any deal is inherently difficult) as all countries have industries and services they wish to protect – and this is a big issue for Donal Trump.

But ultimately it is businesses that trade not countries – it is just made less or more difficult by governments.  It is also the case that dynamic businesses who wish to trade will work hard to increase efficiencies (including technological innovation) because of increased costs of trade (whether regulation or tariffs).

To summarise, there are intractable problems for the ageing, indebted, developed world – and a UK general election is not one of them.

But the world will not stop spinning, people will still go to work, companies will trade, bright people will research and innovate, and there will continue to be a world of opportunities.  There are some markets and sectors which hold out great potential right now – you just need to hold steady in the face of a barrage of scary headlines (and perhaps one or two genuinely scary events yet to unfold).


Further Reading: What does snap election mean for investors – Tanya Jefferies, This is Money

Dennehy Wealth