A Change Is Gonna Come

It’s all too easy to suggest that market participants will continue to ignore the social unrest rippling across American cities.

Outside of knee-jerk reactions to adverse headlines, durable price adjustments usually only occur when there’s a clear link between political turmoil and the factors that impact the fundamentals for a given asset class.

The link between politics and prices is arguably strongest in oil markets, where supply is directly affected by the vagaries of Mideast power struggles and some key producers suffer from intractable domestic instability.

The capacity for geopolitics to impact markets has been muted in the post-financial crisis world by central bank forward guidance and accommodation. This was evident throughout 2015, 2016, and 2017, when the market shrugged off a procession of potentially destabilizing developments, including Russia’s intervention in Syria, the EU migrant crisis and the populist wave that swept western democracies.

Note that were it not for the August 2015 yuan devaluation and concurrent deflation scare (which culminated in oil prices collapsing early in 2016), that period would have been almost entirely docile.

Even as volatility spiked around the yuan dramatics, the Shanghai Accord and trust in central banks’ capacity to tamp down market-based measures of volatility, encouraged investors and traders to pile into various manifestations of the short vol. trade, a one-way dynamic that eventually inflated one of history’s more epic bubbles.

Now, post-COVID, central banks are more determined than ever to suppress volatility and as we’ve seen over the past two months, doubting their capacity to do just that has been a fool’s errand.

But the events that unfolded on live television Saturday evening in Atlanta underscored the extent to which the world’s foremost democracy is at a breaking point.

Protesters blocked an interstate then burned down a Wendy’s out of frustration with yet another episode of police killing a young African American.

Most readers are probably apprised of the backstory. Officers attempted to arrest an African American male who had seemingly fallen asleep behind the wheel in a drive-thru line. He was initially cooperative, unarmed and submitted to a field sobriety test as well as a breathalyzer, which he apparently failed.

When one of the officers attempted to handcuff the young man, a struggle ensued. He ultimately escaped, and attempted to flee on foot with one of the officer’s TASERs. The officers pursued him. In an apparent effort to secure a lead in the unfolding foot race, the man looked over his shoulder and pointed the TASER at one of the officers as he ran away. The officer then pulled out his service pistol and shot the man to death in the middle of the parking lot.

The entire episode was captured on multiple cameras (including the officers’ body cameras) and from multiple angles.

In addition to being highly unfortunate all the way around, this debacle has breathed new life into the protest movement across the US. That movement really hadn’t dissipated, so perhaps it’s more accurate to say it received an adrenaline shot.

Over the weekend, the US embassy in Seoul, South Korea, unfurled a giant “Black Lives Matter” banner – on the side of the building.

It seems clear that one way or another, change is coming to the US. Any and all manifestations of systemic inequality are now personae non gratae, as is anyone associated with them, including historical figures.

The risk of being perceived by the public as falling on the “wrong” side of this debate is a chance that seemingly nobody outside the Beltway is willing to take. From corporate America to sports leagues to hedge fund managers to state and local politicians, the message is clear, and it goes something like this: “Irrespective of what we actually believe, we’re taking no chances – we support the fight against inequality as long as it’s peaceful”.

You’ll forgive me for being cynical, but I doubt if all that support is genuine. For example, I doubt NASCAR’s commitment to erasing the legacy of the Confederacy (they banned displays of the confederate flag last week). I also have doubts as to whether the likes of Paul Tudor Jones are really “ashamed and full of guilt” as “white males” (as Jones declared during an online event hosted by The Economic Club of New York). Further, I doubt if all the major corporations currently working overtime to emphasize their commitment to battling inequality via internal and external initiatives, would be doing anything of the sort were it not for the fact that people are literally setting the streets on fire.

The point is, this change is being decreed by the masses. And assuming the masses don’t become complacent, “a change is gonna come”. That’s likely to take the form of sweeping efforts to rewrite the rules, not just of policing in major metropolitan areas (the current hot-button issue) but of American capitalism, given how glaringly obvious it is that the protests are not just a product of racial injustice, but of a broken system more generally.

Here at the outset, I said durable asset price adjustments usually only occur when there’s a clear link between political turmoil and the factors that impact the fundamentals for a given asset class.

Well, if the rules of American capitalism are on the way to being rewritten, and if it dawns on market participants that the protests across the country represent society finally saying “we’re not going to take no for an answer this time”, there will be a day (or a week or a month) of reckoning, when investors attempt to reprice US-related assets to reflect the new rule book.

I’ve consistently been skeptical about the prospects for real, meaningful change in the country. I discussed that at length in “There Can Be No Change“.

I’m still dubious. But, as a keen observer of markets (and an even keener observer of society), I’d be remiss not to take note when the tide is so clearly turning, just as anyone who neglected to take serious the populist wave in 2015 and 2016 ended up looking hopelessly out of touch.

Corporate America has certainly noticed, and that in and of itself could accelerate the process. Corporate interests have consistently posed an obstacle to real change given that change usually entails policy initiatives with the potential to curtail their influence and/or squeeze their bottom lines.

Now, though, corporate management teams are faced with the prospect of being ostracized by huge numbers of consumers if they don’t at least pay lip service to the cause. Needless to say, sweeping changes at the corporate level could well affect equity prices depending on what steps are taken to convince the public (i.e., consumers) that a given management team is determined to be on the “right” side of history.

From a macroeconomic perspective, there is little doubt that the old way of thinking is in serious jeopardy. Stephanie Kelton’s “The Deficit Myth” occupied three of the top 10 slots on Amazon’s best seller list in the Economics category as of Sunday (the hardcover was #2, the audio book was #4, and the Kindle edition was #6). At one point late last week, Kelton was #1, #2, and #3 in Amazon’s Economics category.

Finally, it’s important to note that there are politicians out there who are on board with this type of change who are not pushing 80 years old (i.e., who are not Bernie Sanders). Given the celebrity status enjoyed by some of those politicians, it is unlikely that their voices will be silenced even if they aren’t reelected to Congress.

I have long argued that the biggest risk for the GOP in the Trump era is underestimating the backlash in the opposite direction. Most commentators contend that Republicans should fear how they’ll be judged in the history books, or, more germane, how they’ll eventually fare in the polls once the “Trump effect” is gone. That’s probably true for GOP lawmakers whose raison d’être is self-preservation (arguably most of them).

But for Republicans who care about the party and its influence on American politics, the outcome is increasingly binary, and the risk on the downside is existential for the GOP as an institution.

One possibility is that Trump succeeds in convincing the public that the choice is between “anarchy” and “law and order” — that the protests are just a manifestation of the “radical left” as opposed to an expression of what Vladimir Putin (no doubt with a sly grin) on Sunday called “a sign of deep internal crises” in the US.

If, on the other hand, the Americans who comprise the “bottom 90%” of the economic totem pole finally come around to the reality that if they can get past racial prejudices, they have much more in common with each other than they do with the political establishment as it currently exists, well then you can kiss that establishment goodbye, and say hello to a new paradigm.

The road to that new paradigm will be bumpy to say the least, regardless of who holds the White House and Congress. The establishment (Democrat and Republican alike) won’t “go gentle into that good night”, a point Trump has incorporated into his “deep state” narrative.

The irony, of course, is that Trump is (and always was), a part of the establishment. If ever there were a living embodiment of “the Man” in the phrase “the Man is keeping me down”, it’s Donald Trump in all his various incarnations, from billionaire tycoon to overbearing executive.


 

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25 thoughts on “A Change Is Gonna Come

  1. The elites have been masterful in controlling the messaging for decades. It’s been astounding to watch. Their control rests on this not happening: “Americans who comprise the “bottom 90%” of the economic totem pole finally come around to the reality that if they can get past racial prejudices, they have much more in common with each other than they do with the political establishment.”

    Let’s hope this time is it.

    1. Yep. I’m not hopeful, though.

      As soon as the top 40-10% realise they might be put to contribution/have to give up something on their way to a better world, they’ll side with the the top 0.01% and nothing will change much.

  2. I believe that it has been Trumps rhetoric implying that police should manhandle defendants which has backfired. Middle class deniability of possible institutional brutality in law enforcement is removed when the leader of the land is a sponsor. The unintended consequence.
    Riots were coming and the plan was to make it socialists.
    The losers of our last civil war think they have a winning hand this time through. This is what is beginning to play out. A good part of the U.S. is waiting for Jerry Jones to make his statement. I tried to see if anyone has new numbers of the Cowboys market value. He has left himself open bigly.Along with some other owners.
    Many Trump flags have come down where I live. Just maybe some bumper stickers. Love affairs often end badly.
    Yes Mr. H, the perfect storm has turned into a Hurricane, the eye seemed pleasant enough and now it is coming from the other direction.

    1. As someone living in a county that went strongly for Trump in the 2016 election, I have noticed fewer Trump signs this year but the signs that are out there are huge. I wonder if they think they just have to shout louder.

  3. “We know through painful experience that freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed” Martin Luther King Jr. Letter from a Birmingham Jail April 16, 1963. That time has arrived.

    1. I thought the time arrived during Watts. I was wrong then, at least, Frankly, other than sloganeering, the right voices aren’t serious yet. Where the hell are Al Sharpton and Jesse Jackson? MLK would have been all over this.

  4. What happened in Atlanta is not good for the BLM movement. What happened with George Floyd was SOO obvious and undeniable. Many people will see the Atlanta incident and consider it justifiable, then they’ll point to the burned down Wendy’s and call the movement a bunch of hoodlems and thugs. Their short attention spans and recency bias will give them reason and cover not to support the BLM movement. Fox News unfortunately is going to have a field day over this one.

    1. I don’t disagree with your assessment of how some people will view it, but just so we’re clear: There is nothing “justifiable” about shooting a man in the back with a 9mm because he aimed a taser at you. That wouldn’t even be justifiable in a war zone, let alone in the parking lot of a Wendy’s. The whole episode was tragically absurd. They could have simply offered to drive the guy home, for example. After all, it’s not exactly like he was speeding down the freeway at 100mph. He was asleep waiting to order a burger.

      1. Thanks H, sorry for not making it more clear, I couldn’t agree more that it was completely unjustifiable. I just know how a lot of people I grew up with and work with will view this and it’s totally unfortunate.

  5. We can and should expect our government to embody values that are better than each of us individually.

    We all know if a white man did the same thing he would be alive today.

    BTW my skin is white as snow.

  6. Change always come through violence, not without. Those who form the top 10% will not give up anything, they will just give “support”. It’s only fear that can force them to give up something.

  7. You really give Trump too much credibility. He is a circus freak show on a short leash. His is not important except in his own mind and isnt even worth listening to or speaking too much about.

    1. I’ve learned over the past three years that if I’m going to separate Heisenberg Report from all of the other places folks go to read daily content on markets, economics and politics, the best approach is to avoid bombast in favor of an approach based on real analysis and quality content. Admittedly, that comes at the expense of humor in some cases, but the problem with resorting to outright insults with no real analytical purpose is that it ostracizes even some readers who agree with the sentiment. People are bombarded all day, every day with, at best, mean-spirited sarcasm and at worst, outright vitriol. It’s not so much that I want to provide a “shelter from the storm” as much as it is that I want to make sure that when people read something here, they always feel like it was worth their time, irrespective of whether they agree with it — that goes for markets, economics and politics. It’s easy to adopt an “edgy” pseudonym and churn out provocative, somewhat witty, tabloid content all day. What’s far more difficult is to make each and every post something that readers will truly be glad they read, even if, again, they don’t agree with it. It’s also far more rewarding, which is why I took the site firmly in that direction starting two years ago.

      All of that said, there are a couple of brilliant political and market satirists that I’d love to hire — who knows, maybe I will.

      1. I am a subscriber for a reason. While I appreciate the occasional reasonable snark, I do more appreciate the analysis.

  8. But for Republicans who care about the party and its influence on American politics, the outcome is increasingly binary, and the risk on the downside is existential for the GOP as an institution.

    Trump has wrecked everything he has ever come close to; he will wreck the GOP as well. And it’ll be well-deserved.

    1. Just a new, and even viler GOP. First came the geniuses in the Tea Party, now comes the MAGA dudes, each incrementally worse than the other..

  9. “And assuming the masses don’t become complacent…”

    I believe the great philosopher Felix Unger’s trenchant analysis of what occurs when you make operating decisions on the basis of assumptions remains relevant here.

    The good news for those invested in what was until recently the status quo is, if Biden wins in November, we can expect the entire “radical left” (today’s apparent preferred parlance for the just-left-of-center-right through the just-left-of-center-left) to roll over and get complacent again.

    I don’t mean to imply that I doubt the Democrats’ ability to lose a second time to the least qualified candidate in modern history, and at this point wouldn’t myself even hazard a guess as to what might happen in November, but I’m certain that if they manage to pull through, we’ll see societal repeat of 2008-2016: a bit of virtue-signaling through prominent Administration support on superficial but divisive social issues, and beyond that, an entire nation of Democrats rolling over and looking the other way on traditional neoconservative policy moves, and Republicans attacking same as if they’d never heard of anything so foul and dangerous during the 40 or 50 previous years when they espoused those same policies.

    And the “winds of change” will blow over. Maybe we’ll see some incremental change linger, as we did from the Occupy movement. But overall, “we” will have “won”, and the enthusiasm will wane once the Oval Office is occupied by someone who doesn’t broadcast their repugnance quite so flagrantly. Rachel Maddow will go back to telling everybody how great everything the President does is. (Although Bill Maher may not.)

    Honestly? I wonder if it wouldn’t be better in the longer run for America for Sideshow Bob to win again. Keep the outrage front and center. They haven’t been outraged long enough yet to ensure the momentum of it can survive a Democrat administration. And it needs to.

  10. Timing is everything. A slightly more progressive democratic candidate might have been able to ride this wave had they not gotten ahead of it. Progressive meaningful change might be “breaking up the big corporations,” e.g. reversing the last 40 years of corporate consolidation (as described by Tepper) with anti-trust action and a return to serious competition.

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