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Politicians - the greatest investment risk?

Posted by: Sam Lees
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For most of the time since the 1980s we have been able to avoid trying to understand political shenanigans. That changed from 2008 because politicians in developed economies took on vast amounts of debt with, in most cases, no mandate from voters to do so.
 
Following major recessions in earlier decades, renewed economic growth (and inflation) typically rescued politicians, central bankers, and regulators. Not this time. Growth is feeble and new methods for keeping economies growing will be needed (see our recent piece on helicopter money).
 
To try and reduce these debts, governments introduced austerity measures, raising taxes, cutting benefits, cutting pensions and salaries, sacking State workers while also printing money to shore up the banking system in its broadest sense. These austerity plans advanced a long way in places like Greece and Ireland, and real pain is being felt by voters and taxpayers.
 
In 2010, we highlighted a new dimension to the problem – ageing voters who disproportionately rely on State benefits. This is where the “two D’s” collide - Government debt or deficits and demographics.
 
To get Government deficits down effectively requires cutting the benefits and pensions of the retired and soon-to-be-retired. But demographics are such that this hits the most significant phalanx of ageing voters - are the politicians going to commit suicide? There should have been some very grown-up conversations with voters. Did that happen?
 
Once the crisis was over you might think that Governments, with a little nudging from the central banks, would have then begun to address the problem which had been growing for many years – a still inflating debt bubble, which, in the case of government debt, was supporting an unsustainable State structure – Western democracies were living beyond their means, day after day.  But they didn’t.  Debt is now higher around the globe than in 2008. Hmmm.
 
This is the profile of the wealthier developed economies. In many emerging markets it is the opposite problem, with many countries having 40-50% of their populations aged under 25. In contrast, Italy’s birth rate has dropped to its lowest since the country was formed (150 years ago). It’s now the second oldest country in the world, behind Japan.
 
This year we’ve witnessed the biggest exercise in democracy in the world, as India voted (see more here). Contrast that with the recent European murky horse-trading behind closed doors to select individuals for the top jobs in the European Commission. Hardly a beacon of democracy.
 
Many European MPs (MEPs) are understandably less-than-thrilled with the continuation of a Franco-German lock-out of the top jobs at the centre of EU decision-making. Germany’s defence minister Ursula von der Leyen is on course for the commission presidency and Christine Lagarde aiming for leadership of the European Central Bank (ECB).
 
Throughout Europe, mainstream parties are already in retreat following successes for populist parties in the May elections but it seems like no-one in Brussels can read the writing on the wall. 
 
In the US, voters and taxpayers are not just increasingly aware that the boom years since the 1990s were a fiction built on debt, but also that there was little benefit to most of them. For example, after allowing for inflation, the average worker has not had a pay rise in almost 15 years - in fact from 2000 to 2010 they lost 5%! Yet they will now be required to pick up the tab (through benefits being cut, expiring tax breaks, persistent public sector redundancies).
 
Churchill said: “You can always count on the Americans to do the right thing - after they have tried everything else.”
 
After a few wrong turns and huffing and puffing are Americans on course to sort themselves out? Will Trump’s relations with North Korea’s Kim Yong Un bear fruit or will his sabre-rattling with Iran secure him a second term?  No-one knows.
 
Closer to home, unless the new batch of EU leaders acknowledge and deal with the problems in front of them, they will do no more than further disconnect the EU leadership from voters and reality and prop up institutions that seem increasingly to be built on sand.
 
Perhaps nothing says “don’t try and predict politics” more than Jean Claude Juncker’s quote: “When things get serious you have to know how to lie”.
 
As we said before: no spreadsheet can adequately quantify a self-interested politician’s tendency to stupidity.
 
Far better to stick to what you can control.  Your investment plan and your plunge protection (your stop-loss strategy).
 
FURTHER READING
Topic: Market commentary


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