Via Ray Dalio
I believe that a) most realities happen over and over again in slightly different forms, b) good principles are effective ways of dealing with one’s realities, and c) politics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes but in a manner that is broadly similar to 1937.
I’m essentially an economic mechanic who focuses on how reality works by studying the cause:effect relations and how they played out in history to help me bet on what’s likely to occur. For reasons previously explained in “Populism…” it seems to me that we are now economically and socially divided and burdened in ways that are broadly analogous to 1937.During such times conflicts (both internal and external) increase, populism emerges, democracies are threatened and wars can occur. I can’t say how bad this time around will get. I’m watching how conflict is being handled as a guide, and I’m not encouraged.
History has shown that democracies are healthy when the principles that bind people are stronger than those that divide them, when the rule of law governs disputes, and when compromises are made for the good of the whole—and that democracies are threatened when the principles that divide people are more strongly held than those that bind them and when divided people are more inclined to fight than work to resolve their differences. Conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation.
Average numbers hide the depths of the divisions. For example, by looking at average figures, one might conclude that the United States economy is doing just fine, yet when one looks at the numbers that comprise those averages, it’s clear that some are doing extraordinarily well and others are doing terribly, with gaps in wealth and income being the greatest since the 1930s.
Largely as a function of these economic differences and differences in the principles that people believe most deeply in, we are seeing large and increasingly firm political differences, which are apparent only by looking below the averages. For example, Donald Trump’s approval rating of 35% is a result of 79% support among Republicans and 7% among Democrats (Gallup). Of those who approve of President Donald Trump, 61% say they can’t think of anything Trump could do that would make them disapprove of his job as President, and 57% who disapprove of Trump say they are never going to change their minds on the President’s job performance (Monmouth). Similarly 40% of those polled (PRRI) would favor Donald Trump’s impeachment, which consists of 72% of Democrats and 7% of Republicans, and most of them won’t change their minds.
In other words, the majority of Americans appear to be strongly and intransigently in disagreement about our leadership and the direction of our country. They appear more inclined to fight for what they believe than to try to figure out how to get beyond their disagreements to work productively based on shared principles.
So, where does that leave us?
While I see no important economic risks on the horizon, I am concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies) and other conflicts.
I of course hope that the principles that bind us together are stronger than the ones that divide us. I believe that this is a time when it is especially important for us a) to be explicit about what our principles are in order to be clear about what we agree and disagree on, b) to practice the art of thoughtful disagreement, and c) to respect our ways of getting past our disagreements so we can start rowing in the same direction. I believe that how well this is done will have a greater effect on the economy, markets and our overall well-being than classic monetary and fiscal policies, so I continue to closely watch how conflict is handled while tactically reducing our risk to it not being handled well.
For those who missed Dalio’s previous musings on populism, you can find our post with excerpts from the relevant letter below….
Back in January, at the World Economic Forum in Davos (or, as the populists call it, “the Global Elite Conspiracy Forum”), Bridgewater’s Ray Dalio weighed in on the populist uprising that threatens to upend Western Democracy. Here are the bullet point highlights for those who missed it:
BRIDGEWATER’S DALIO: POPULISM MOST IMPORTANT ISSUE GLOBALLY
BRIDGEWATER’S DALIO: CENTRAL BANKS DON’T MATTER AS MUCH
DALIO: POPULISM IS BY DEFINITION NATIONALIST
DALIO: POPULISM IS POLAR OPPOSITE OF DAVOS
DALIO: POPULISM IS AN EXPRESSION OF `FED-UP-ISM’
DALIO: WE’LL SEE MORE PROTECTIONISM, REVERSAL OF GLOBALISM
DALIO: WE MAY BE AT END OF GLOBALIZATION
DALIO: `NATIONALIZATION, PROVINCIALIZATION MAY TAKE HOLD’
DALIO: GLOBALIZATION HELPED REDUCE WEALTH GAPS INTERNATIONALLY
DALIO: DEREGULATION HAS CONS BUT ALSO PROS; GETS THINGS GOING
DALIO: CAN MIDDLE BE COHESIVE ENOUGH TO CURB EXTREMISM?
DALIO: TECHNOLOGY, GLOBALIZATION CAUSING INCOME DIFFERENCES
DALIO: POPULISM SCARES ME
DALIO: POPULISM WILL MORE LIKELY THAN NOT BECOME EXTREMISM
Needless to say, those comments/stark warnings were summarily dismissed as the angry rantings of a man desperately clinging to a system that serves him and his ilk at the expense of the developed market Middle Class which, according to the (objectively false) narrative being pushed by the Donald Trumps, Marine Le Pens, Nigel Farages, Frauke Petrys, and Gilt Wilders’ of the world, is being relegated to the dustbin of history by the evil forces of progressivism, multiculturalism, and globalization.
Well, in a Daily Observations bulletin dated March 22 , Bridgewater takes an expansive look at the populist phenomenon. Here are some quick excerpts.
Populism is not well understood because, over the past several decades, it has been infrequent in emerging countries (e.g., Chávez’s Venezuela, Duterte’s Philippines, etc.) and virtually nonexistent in developed countries. It is one of those phenomena that comes along in a big way about once a lifetime—like pandemics, depressions, or wars. The last time that it existed as a major force in the world was in the 1930s, when most countries became populist. Over the last year, it has again emerged as a major force.
To help get a sense of how the level of populist support today compares to populism in the past, we created an index of the share of votes received by populist/anti-establishment parties or candidates in national elections, for all the major developed countries (covering the US, UK, Japan, Germany, France, Italy, and Spain) all the way back to 1900, weighting the countries by their population shares. We sought to identify parties/candidates who made attacking the political/corporate establishment their key political cause. Obviously, the exercise is inherently rough, so don’t squint too much at particular wiggles. But the broad trends are clear. Populism has surged in recent years and is currently at its highest level since the late 1930s (though the ideology of the populists today is much less extreme compared to the 1930s).
Given the extent of it now, over the next year populism will certainly play a greater role in shaping economic policies. In fact, we believe that populism’s role in shaping economic conditions will probably be more powerful than classic monetary and fiscal policies (as well as a big influence on fiscal policies). It will also be important in driving international relations. Exactly how important we can’t yet say. We will learn a lot more over the next year or so as those populists now in office will signal how classically populist they will be and a number of elections will determine how many more populists enter office.
In any case, we think now is the time to brush up on our understandings of populism and what to watch out for. While we’re not experts in politics, we wanted to share our research to understand the phenomenon.
In this report, we describe what we see as the “archetypical populist template,” which we built out through studying 14 past populist leaders in 10 different countries. In that way, we can show their similarities and differences. While no two cases are identical, most cases are similar—so much so that one might say that there is a “populist playbook.” By knowing these historical cases well, we will then be able to compare the developments of contemporary cases with those of the past, both to better understand the phenomenon and to better visualize how it might develop.
The Economy, Asset Markets, and Wealth
To gather support among industrialists, Hitler presented himself as an alternative to the looming threat of communism. Immediately after becoming chancellor, Hitler invited the wealthiest Germans to a meeting where he made the case that “private enterprise cannot be maintained in a democracy” and that only by supporting him could they protect their property claims.
The Nazis inherited a business landscape that was already somewhat centralized. Almost all commercial banks had been nationalized after the crisis in 1932, and many industries were organized into cartels that enabled broad cooperation. To further cement their power, the Nazis took four main steps:
- Centralize labor power: In May 1933, the SA raided all union offices and forcibly replaced their leadership with Nazi Party members. They were reorganized into a single union, the National Labor Front, which was later given the power to set wages and working hours, as well as blacklist workers.
- Increase cartelization of industry: In July 1933, the government encouraged industries without cartels to form them. This worked without notable coercion, with the government promoting the benefits of increased efficiency and improved production techniques.
- Print money and create demand: Hitler began an expansive infrastructure program to create employment—first railways, waterways, and highways, and later rapid military rearmament—financed by money printing and budget deficits. This supported private industry. Equity prices rose more than 15% in both 1933 and 1934. Additionally, through the passage of the German Credit Act in 1934, the government was given broad jurisdiction over all credit institutions, having the authority to set rates, commissions, fees, and other business terms. In this way, the government could provide both funding and demand for production and steer industry in whatever direction it desired.
- Implement foreign-exchange controls and price controls on raw materials: With strong domestic demand and falling unemployment, the government needed to prevent inflation from overheating as well as manage balance of payments pressures. By March 1934, companies were banned from using raw materials for nonessential purposes, and price caps were implemented. By September, Reichsbank President Hjalmar Schacht created a plan to implement foreign-exchange controls. All flows of goods and foreign currency were closely monitored. Incoming payments were transferred to the Reichsbank or approved commercial banks. Exporters were required to report the value and type of all commodities traded. Importers were required to report every transaction in detail (quantity, price, credit terms, trading partner) to supervisory agencies, which evaluated and approved them. There were severe penalties for noncompliance. These controls were broadly effective, and Germany was able to maintain its currency’s value without raising interest rates, even while other countries devalued. Germany primarily managed its exchange rate by selling reserves.
In addition to these steps, the government defaulted on much of its external obligations by stopping reparation payments in the summer of 1932, and defaulted on its US debts in the summer of 1934. While it didn’t shut down asset markets per se, it did tightly control them and generally had broad legal cover for whatever actions the bureaucracy saw fit to take. Later, closer to the beginning to World War II, Germany did outright nationalize warrelated industries (the main state-owned conglomerate Reichswerke Hermann Göring was probably the largest company in the world at the beginning of WWII).
Capital flight was most widespread among persecuted minorities. Those who attempted to leave Germany with their assets were subject to harsh fines. The Reich Flight Tax was enacted before Hitler took power. It assessed a tax on wealthy individuals who attempted to leave and applied retroactively to those who left years earlier. The Nazis expanded the scope of the tax (raising its rate from 25% initially to 65% in 1934 and over 80% in 1936) and its enforcement mechanism. The tax authority worked in conjunction with the Gestapo to monitor individuals who were considered flight risks and could require citizens to surrender a security deposit if they seemed suspicious. In this way, Jews and other minorities who were able to leave Germany had most of their wealth confiscated. At its peak in 1938, the tax earned the government 340 million Reichsmarks, equivalent to 1% of German GDP.
Populism-Related Quotes by Hitler
- “I only acknowledge one nobility—that of labor.” (1936)
- “What matters is to emphasize the fundamental idea in my party’s economic program clearly; the idea of authority. I want the authority; I want everyone to keep the property he has acquired for himself according to the principle: ‘Benefit to the community precedes benefit to the individual.’ But the state should retain supervision and each property owner should consider himself appointed by the state.” (1931)
- “Whenever I stand up for the German peasant, it is for the sake of the Volk. I have neither ancestral estate nor manor.” (1936)
- “The main plank in the National Socialist program is to abolish the liberalistic concept of the individual and the Marxist concept of humanity and to substitute therefore the folk community, rooted in the soil and bound together by the bond of its common blood.” (1937)
- “And numerous people whose families belong to the peasantry and working classes are now filling prominent positions in this National Socialist State.” (1937)
Make no mistake, this is a long report. 61 pages long. But it’s worth reading. Bridgewater reviews multiple cases of populism throughout history and documents the concurrent moves in asset prices and evolution of economic variables.
I couldn’t possibly do it justice, so I’ll leave it to readers to peruse (link above). I’ll simply close here with the firm’s summary of populism and an accompanying visual.
In summary, populism is…
- Power to the common man…
- …Through the tactic of attacking the establishment, the elites, and the powerful…
- …Brought about by wealth and opportunity gaps, xenophobia, and people being fed up with government not working effectively, which leads to:
- …The emergence of the strong leader to serve the common man and make the system run more efficiently…
- …Greater conflict, and…
- …Greater attempts to influence or control the media.
Does that sound like something you want to be a part of?