Close Encounters.

We should have known it was coming and indeed we did. We just didn’t know it would be as outrageous as it turned out to be.

Donald Trump’s address to the United Nations General Assembly on Tuesday was a spectacle. It was almost as if he spent the entire morning watching YouTube videos of dictators and autocrats in preparation, the way you might watch Wimbledon before playing tennis in hopes of absorbing something through waking osmosis that might find expression in that backhand you’ve been trying to master.

He wasn’t speaking as much to the world as he was directly to his base. The entire speech seemed designed solely to resurrect Donald Trump the populist demagogue and put to rest the idea that the bipartisan effort to raise the debt ceiling represented some kind of capitulation to a political reality the President has spent the last nine nine months denying. If that was the plan, then it makes sense that Trump described the speech as having gone “really well.”

One person who did not share his enthusiasm was John Kelly, captured in these two truly epic pictures, seen brimming with pride:

So pleased was Trump with himself that he even tweeted a video of the most outrageous moment, an apparent effort to ensure that no one who follows his insane Twitter account missed out on the part where he got into the open court and did a 360 tomahawk that shattered the backboard and tore the rim down:

The??has great strength & patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy #NoKo. pic.twitter.com/P4vAanXvgm

— Donald J. Trump (@realDonaldTrump) September 19, 2017

Suffice to say the rest of the world was not amused but again, that’s fine because Trump wasn’t speaking to them anyway. Recall what we said earlier about how Trump characterized Iran:

Trump painted a picture of Iran as a dusty, uncivilized backwater run by barbarians and populated by oppressed peasants. That’s completely ridiculous.

The irony is that Iran now sees America as descending rapidly into the dark ages:

TRUMP’S SPEECH BELONGS IN MEDIEVAL TIMES, IRAN’S ZARIF SAYS

For their part, markets didn’t seem to care. “It’s a testament to how static (some might even say dull?) the market was in the U.S. session that even a threat by Donald Trump to wipe out another country failed to stir some traders from their slumber,” Bloomberg’s Camila Russo wrote on Tuesday evening, adding that although the VIX “snapped a six-day decline, it only advanced 0.3% to 10.18, and the S&P 500 nudged to another all-time high.”

But how long will it be before markets wake up to the reality of what’s unfolding? What Trump did on Tuesday was breathe new life into the populist uprising that brought us Brexit and two near-misses with Geert Wilders and Marine Le Pen. Central banks managed to paper over the epochal political shifts but if we continue down this road, we’ll eventually hit some kind of tipping point. With that in mind, consider the following from Deutsche Bank:

The Rise of Populism

As has been well documented, post the GFC, populism has exploded across the globe. In the last 15 months alone we’ve seen a vote for Brexit (discussed elsewhere), a vote for Mr Trump and a market friendly but still antiestablishment vote in France. Within the next 9 months we’ll also have elections in Italy where the anti-establishment “Five Star Movement” have been neck and neck with the ruling PD party in the opinion polls for the last 14 months. Whilst it will be difficult to meet their long standing pledge for Italy to leave the Euro, if they do manage to gain some foothold of power it will certainly increase the risk of a major destabilising event across the continent at some point over their tenure in office. A financial crisis is obviously a risk under such a scenario.

Outside of these countries populist movements have been commonplace in many major economies post GFC with the risk that at some point it leads to a break with the current world financial order. So far Brexit and Mr Trump have yet to cause such a scenario but there are still risks from both.

Figure 56 below shows an aggregated index of populism in seven large countries over the last century weighted by populist votes and population size. We include the lower house elections in France, Italy, Spain, United Kingdom, Japan and Germany in addition to presidential elections within the United States. While the definition of populism is inherently subjective, the criteria used were as follows:

Parties that espouse communist policy positions.

Parties that espouse nationalist tendencies with regards to immigration and militarism.

Parties led by leaders with dominating, charismatic personalities rather than well-defined policy positions.

Regarding Europe, generally parties that display euro-sceptic or anti-Nato tendencies.

Anti-Corporate Progressive Presidential candidates in US Elections whose political ideologies fell outside the political mainstream were also included.

So while the consequence of the recent rise in populism hasn’t yet destabilised financial markets, the level of uncertainty will surely remain high while such parties remain realistic power brokers in major national elections.

Prior to the last decade, the only comparable rise in populism started in the 1920s and culminated in WWII. So although populism has proved unpredictable in recent years, the rise surely increases the risks to the current world order and could set off a financial crisis at some point soon.