I’m in the tunnel under Grand Central on the Harlem Line and I’m thinking the same thing I always am as the train starts to creak forward into around nine minutes of uninterrupted darkness that not even Verizon’s LTE can penetrate.
“What if one of these didn’t shift correctly?,” I ask myself, looking down out the window at the ancient maze of rusty tracks that each day divert commuter trains and keep them from plowing headfirst into one another, a tragedy that would hastily be turned into political fodder on both sides of the aisle – thousands of martyrs to thank for an excuse to implement fiscal spending.
What happens next is always interesting and it’s another great sociological experiment – a fantastic opportunity to watch people squirm. Without our smartphones and tablets we are all Linus without his blanket. After around eight minutes and forty-five seconds, there’s a perceptible (if inaudible) sigh of relief as the train barrels out of the tunnel and into Harlem. In unison everyone pulls their phones out. It’s like “the wave” at a basbeball game only accompanied by a cacophony of tweets, buzzing, ringing, and dinging. From my seat: the crisp crack and fizz that comes from opening a single serve craft beer.
It’s eery in the winter because if you catch the 4:35 Harlem line out of the city, it’s light when you walk into Grand Central and dark when you exit the tunnel. The first stop is always Harlem 125 and after that it depends on whether you knew what you were doing when you boarded. If you did, you might be able to skip some stops on an express to White Plains. If you got the local, you best get comfortable and enjoy the Bronx skyline.
So this particular night I’m headed to Bronxville, a kind of Hobbit-ish enclave nestled between the Bronx and Yonkers. There are some nice places to eat there and I’m meeting an old friend. I always get a seat by the window. Having finished today’s WSJ, I’m looking casually around at what other riders are entertaining themselves with. In front of me is a 50-something white lady streaming a Trump rally. To my left, a 20-something African American kid watching what I can only assume is a fairly new rap video (I base by carbon dating there on the fact that heretofore I have never seen jeans that tight on a man).
I can hear both Trump and the music and it strikes me that they have something rather interesting in common. Both Trump and the rapper are winning adherents by insulting the audience.
This has long been the case with rap music and it’s something I’ve looked upon as a kind of sociological marvel for years. If you listen, the artist is almost always hurling threats and insults and the peculiar thing is, they are directed at “you.”
Now “you” of course are supposed to then recite those lyrics in the shower or in your car or wherever and pretend like you are saying them to your detractors. Then whomever you are directing your pawned lyrics at will hear the same song you did and recite those same lyrics “at” you while they’re alone in the car.
Trump does the same thing. “We’re so stupid, folks,” Trump will say. “We’re so weak, so naive.” “Our country is in shambles, our leaders are clueless,” and on and on. It’s an appeal to the same phenomenon that has helped rap music (and I’m not generalizing to all rap music) succeed. It’s this message that if you’ll just listen, you’ll understand that you are beneath me, but if you’ll just download my single on iTunes or cast your ballot for me on Novemeber 8), you don’t have to be weak and pathetic. You’ll be rich and strong – well, maybe not the first part, but at least you’ll be intimidating.
As you’re all well aware, a perfect storm has emerged when it comes to stoking nationalist, far-right sentiment from Washington to Berlin. The most emblematic personalities of this global shift are Donald Trump in the US, Frauke Petry in Germany, and Geert Wilders in the Netherlands. The “collateral damage” (as it were) will be the citizens of those very same countries who have been brainwashed into believing assimilation isn’t possible for refugees. And no, I’ve not strayed from the economic/finance beaten path here. Consider the following from Barclays (and this is a rather long block quote, but bear with me):
Rage is all the rage these days. Global media have taken notice of “voter rage” directed at the centre-right/centre-left establishment.1 What appears less well understood is that this voter rebellion, “the Politics of Rage”, spans nearly all advanced economies, has been taking place for more than a decade, is unparalleled in modern history, and is deeply entrenched. This is not just about Brexit or the US election; it is about a global political movement.
More troubling, from a market perspective, is that its roots may be misunderstood. Misperceptions in politics tend to lead to volatile surprises, such as Brexit, or to misdiagnoses and to policy mis-prescriptions that imply even worse outcomes for asset prices.
We find that a deeper cause is a perception among “ordinary citizens” that political and institutional “elites” do not accurately represent their preferences amid a growing cultural and economic divide. These frustrations appear to be validated, with many caveats, by the data: median earners in advanced economies seem to have been the relative losers of globalisation, both within their own countries and relative to their emerging market peers.
Our findings have mostly strategic implications for asset markets, but they are not happy. Our research seems to support the late Harvard political scientist Samuel Huntington’s forecast of continued political upheaval and highlights the trilemma of incompatibility among democracy, sovereignty and globalisation postulated by the economist Dani Rodrik.
Having thus set the stage, Barclays launches into a lengthy discussion that speaks to all of the points excerpted above. For the sake of brevity, I won’t post the entire missive, but I did want to include the points on the economy and asset prices:
The economic implications of the Policies of Rage ‘
Even mild de-globalisation likely will slow the pace of trend global growth by reducing specialisation and productivity growth. Emerging markets also likely would suffer from a slower pace of technology transfer.
Steeper Phillips Curves and higher cycle-average inflation in advanced economies likely would result from policies that de-globalise; emerging economies, in contrast, may face even greater disinflationary pressures.
Fiscal policy is ambiguous under the Policies of Rage, as evidence suggests greater use of direct democracy lowers fiscal expenditure, but centrist parties in advanced economies likely will try to use fiscal policy to fight the Politics of Rage. Emerging market fiscal policy is more likely to lean in the direction of expansion.
Ironically, savings and investment balances likely would evolve to decrease advanced economy current account balances relative to EM balances. Global savings rates should fall, putting upward pressure on global real interest rates to equate global investment.
The financial market implications of the Policies of Rage
Rising real interest rates and firming inflation pressures imply higher core nominal interest rates. But the rise is unlikely to be uniform; it should be higher in those economies instituting direct de-globalisation. Additionally, the existential threat to the EU of demands for greater sovereignty may increase periphery spreads.
EM rates likely will rise less, both in real and nominal terms, as inflation pressures likely will be lower. But, greater differentiation is likely due to differing institutions, policy reaction functions and reliance on external demand.
We expect FX outcomes to closely mirror rates, with outperformance by advanced economies and wide dispersion. Currencies of countries instituting anti-globalisation policies, however, may not benefit from higher interest rates if they are seen as undermining long-term growth. European currencies may underperform if the credibility of the EMU is undermined. The JPY looks set to be an outperformer, given Japan’s relative immunity to the Politics of Rage and external growth concerns, but commodity exporters may derive only temporary benefit.
Demand effects of slower global growth likely will dominate the impact on commodity prices, but that is relative to a bullish supply backdrop and depends somewhat on the extent of government infrastructure programs.
We believe the outlook for aggregate global equity and credit prices is poorer given slower revenue growth and a likely compression of margins as the labour share of GDP increases. But, they also offer a high degree of differentiation in performance, both across countries and sectors. EM likely will underperform advanced economies. Economies that choose de- globalisation should underperform on average, but likely will see significant outperformance in protected industries.
Sectors that can better arbitrage regulatory differences through price discrimination should outperform, while sectors that rely more on harmonised rules or transfer pricing may underperform.
“Fat tail” events may be more likely in the transition phase of the Politics of Rage as markets evolve to understand it; but the Policies of Rage do not necessarily suggest a higher rate of trend volatility.
Note that this is exactly what the world does not need right now. We’re already seeing depressed global growth and an increased incidence of tail events which are becoming harder and harder to hedge thanks to rising cross-asset correlations.
Large swaths of the electorate seem to have been made to believe that the world has undergone an epochal shift and can now definitively be characterized as “us” versus “them”; “you” versus “me.” Candidates like Trump and Petry are more than happy to lend credence to that poisonous ideology, which is why ballots in the US and Europe should carry a big red “caveat emptor” stamp.
I’ll have much more on this in the days to come but for now I’ll leave you with a rather disturbing quote from Petry wherein the AfD leader appears to compare migrants to mulch.
“What should we make of the campaign ‘Germany is colourful’? A compost heap is colourful, too.”