The Catalonia Effect

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Years ago I walked the Camino De Santiago, a holy pilgrimage across Spain that dates back to the 9th century. Not being Catholic I’m sure that a number of religious aspects of my month-long trek were lost on me, but what I did take away was a cursory understanding of Spain’s curious political instability. Everywhere I went there was graffiti calling for the independence of Catalonia, a movement that I had been completely ignorant of. In fact, other than the Basque region, it had never occurred to me to even question the essential makeup of the nation of Spain.

Last week Catalonia held a highly contentious referendum on its independence. Like Scotland and Wales, Catalonia has a devolved parliament and is a region with its own language and history distinct from (and forever tied to) Spain. Leading up to the referendum was a fair amount of heavy handedness from the government in Madrid that only made things worse. Strictly speaking the referendum is likely illegal, and the Spanish constitution does not recognize Catalonia’s decision to simply walk itself out the door on a whim. More puzzling has been the outcome of the vote, with the Catolinian government refusing to categorically claim independence. A deadline set for this Monday was meant to clarify Catalonia’s declaration of independence, but it seems to have lapsed without clarification.

In the universe of investing events like this seem poised to throw everything into chaos, and yet markets have shown themselves to be surprisingly resilient in the face of big political upheavals. Last year included a surprise win for the Brexit vote, which initially began with a market panic, but morphed into a prolonged rally for the British markets. The US too has had a surprising run in the Dow and S&P500 despite numerous concerns about the stability of the US government and its inability to pass any of it objectives.

So how should investors react when political chaos erupts? Is it a sign that we should hunt for safer shores, or should we simply brave the chaos?

One thing to consider is that we probably over estimate the importance of events as they unfold and assume that things that are bad in the real world are equally bad in the markets. War is bad objectively, but it isn’t necessarily bad for business. Protracted wars in Afghanistan and Iraq have been damaging to those involved but they haven’t slowed market rallies much, a depressing but necessary distinction.

Antifragile-bookOn the other hand chronic instability has a way of building in systems. One of the reasons that serious conflicts, political instability and angry populism haven’t done much to negate market optimism is because the nature of Western Liberal democracies is to be able to absorb a surprising amount of negative events. Our institutions and financial systems have been built (and re-built) precisely to be resilient and not fragile. Where as in the past bad news might have shut down lending practices or hamstrung the economy, we have endeavored to make our systems flexible and allow for our economies to continue even under difficult circumstances.

However there are limits. In isolation its easy to deal with large negative events, but over time institutions can be pushed to their breaking point. There are compelling arguments that the wave of reactionary populism that has captured elections over the past three years is a sign of how far stretched our institutions are. Central banks, democratic governments and the welfare state have been so badly stretched by a combination of forces; from a war on terror, a global financial crisis and extended economic malaise, that we shouldn’t find it surprising that 1 in 4 Austrians, 1 in 3 French and 1 in 8 Germans have all voted for a far right candidate in recent elections.

Equally we can see the presumed effects of Climate Change as large parts of the US have suffered under multiple hurricanes, torrential downpours, or raging forest fires. For how many years can a community or nation deal with the repeated destruction of a city before the economy or government can’t cope?

In this reading, markets have simply not caught up yet with the scope of the problems that we face and are too focused on corporate minutia to see the proverbial iceberg in our path.

While I believe there is some truth in such a view, I think we have to concede that it is us as citizens that are too focused on the minutia. The market tends to focus on things like earning reports, sales predictions and analyst takes on various companies before it considers major events in the valuation of stocks.

Consider, for instance, the election of Donald Trump. Trump rode a wave of dissatisfaction with free trade and promised to shake up the trade deals the US had with other nations. Superficially this threatens the future earnings of multinational firms that depend on trade deals like NAFTA. But how many people didn’t go and buy a car they had been intending to buy over the last year? As is often the case the immediacy of political craziness obscures the time it will take for those issues to become reality. Trump may end up canceling NAFTA, but that could be years away and has little impact on the price of companies now. That applies to events like Brexit and even the Catalonian vote. Yes, they create problems, but those problems are unlikely to be very immediate.

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The lesson for investors is to remain calm and conduct regular reviews of your portfolio with your financial advisor (if you don’t have a financial advisor you should give me a call), to ensure that the logic behind the investment decisions still makes sense. Nothing will be more likely to keep you on track with your investment goals and sidestepping bad decisions than making sure you and your investment advisor remain on the same page.

Burning It All Down – The Rise of Trump’s Conservatism

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Last August I wrote that Donald Trump was my pick for the Republican nominee, despite his incessant self-aggrandizing style and boorish behavior. I wrote that article because I saw something in Trump that reminded me of Rob Ford, a call back to an angry populism that favours the loud and obnoxious precisely because they are loud and obnoxious. Trump’s style of bombast is a snub to a political elite that adopt a façade of manners that suggest cordial rivalry, even while private donations and Super PACs flood the airways with crude, misleading and sometimes plain false advertising.

Despite a continued and coordinated assault on Trump by the core Republican establishment, Trump went from an outside contender to the leader of the pack. In fact the more that it seemed like the establishment was aligned against him the more support coalesced around him. And last night it seemed that enough of that support had come together to make him the presumptive nominee.

With Ted Cruz and John Kaisch now mathematically eliminated from any chance of a first round win, and the likelihood of a contested convention becoming more dubious as Trump narrows in on his needed delegates, it might be time for people to move past the look of Trump’s rhetoric and into what he’s actually saying. Because this election doesn’t bode well for anyone, but it is very much in keeping with the times.

The times, in case you’ve been hiding under a rock, are not being kind to the neoliberal world that has defined much of the 1990s and early 2000s. America’s foreign influence is waning, the middle class is shrinking, economies are floundering and the European Union is struggling to hold it all together. From a resurgent Russia to a migrant crises and angry middle class voters, this year is testing the resolve of political organizations and global partnerships to continue to do what they do; knock down borders, free up trade and move people across the planet. Citizens across much of the West now doubt many of the promises that have been made to them, notably that more free trade would make us all rich and that people from far flung lands are just like us with similar values.

That doubt about the modern world has been fueling the campaigns of both Bernie Sanders and Donald Trump, and a close look at their platforms shows some important overlap. But with Bernie Sanders also likely eliminated from any chance of the nomination the general election may come down to an establishment candidate in Hillary Clinton and the now (kind of) anti-establishment Donald Trump.

Donald Trump’s rhetoric is decidedly conservative in an old-school kind of way. His commitment to building a wall across the border with Mexico, to ignoring much of the Middle East and backing away from trade deals with China is reminiscent of a 1940s style conservativism and is a direct challenge to the current establishment view on all of these issues. I’m not convinced that Hillary Clinton, dragging her own varied and damning baggage with her, will be up to the challenge of convincing the voting public to continue to support the neoliberalism that she is so closely tied with. It seems even more unlikely that she could become the credible liberal standard bearer for an anti neoliberal platform at all.

I had initially said that Trump was my pick for nominee because the Republicans had become a tired shell of their former selves, squandering elections by ostracizing women, minorities and urban voters in favour of curmudgeonly racists, the science skeptics and the frighteningly devout. The election cycle, spent pandering to this shrinking group of largely social conservatives, was handing the democrats election after election. As I said in the summer, one party shouldn’t be electable and the other crazy. This election may indeed offer some real alternatives about the kind of world that Americans may want to live in.

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You don’t understand Picard! Trump became president in my timeline! Mars is overrun with casinos, and not the nice ones from Vegas, the kind from Atlantic City.

 

So rather than wring our hands at a Trump election has the end of all things, let’s cast this election to something akin to Brexit, another insurgency by an increasingly unhappy and dissatisfied middle class that has come to suspect that their leaders no longer work for them, but for larger more self-interested groups that tend to congregate in Swiss towns and busy themselves with networking and back patting. If Trump is successful in his Whitehouse bid we may be surprised at the kind of world that is ushered in to being; one that is increasingly isolated, protectionist and introverted. If that isn’t a wakeup call to TED Talk speaker’s circuit, I don’t know what will be.

 

*** I’ve taken some time off of writing our articles to focus on work and family, but I’m feeling rejuvenated now and will be back with our weekly outlook on the world. Sorry if you’ve missed us!***