Time for a caveat to my recent mea culpa. As a diehard Trump-phobic, I had assumed – and stated so publicly – that if the Twitter King was elected, US equities would tank. I wasn’t alone in that projection – billionaire Marc Cuban was also equally horrified at the prospect of the populist grabbing the White House. I was wrong (as was Mr Cuban) and since then I’ve become very cautious about connecting the political and financial dots. Populists can huff and puff as much as they like but the markets look at actions, not words/tweets. And on this score they seem to mostly like what they see about Trump – mistakenly I think but that’s another value judgement based matter. Anyway, so we need to be uber-cautious about letting populists of the left and right scare markets.
Now though for the caveat. As we’ve seen with the recent unfortunate case of Turkey, stupid words and even more idiotic actions can cause financial panic. For the record, I am still a long-term bull about Turkey but even I think much, much worse is to come. There is no other way of Turkey exiting this foolish situation unless Erdogan releases the Good Pastor. He will have to do this and when he does he’ll retreat into his conservative nationalist man cave with all the other alpha males like Putin and Xi and Turkey will be the poorer for it. But this is still a phenomenal gateway economy, with enterprising people and it will bounce back. But just not for a few years. Anyway, the point though is that stupid actions by populists have real world financial consequences.
This will be fully on display in Italy in the near future where the enormous tragedy of the Genoa Bridge disaster is turning into a populist exercise in blame diversion. Just as with the Grenfell Tower tragedy we need for the dust to settle and a forensic investigation into what wrong – as Andrew O’Hagan has recently done in the LRB. Instead of shouting out loud about confiscating empty luxury flats we might discover that the sensible next step is to tighten up lax building regs and reintroduce a more powerful building regs corps. But that isn’t good sound bite politics so we’ll have much blustering about confiscating the assets of private road operators. It’s quite possible that the PPP operators were negligent but one suspects it’s a good deal more complex than just capitalist corners being cut. But the point is that this is a textbook example of why infrastructure investors need to build more caution into their models. Bad stuff happens and the populists use the tragedies as political capital. This means, I think, that investors need to build a policy risk discount mechanism into their valuation models, and this should flash bright red when assets are trading at chunky premiums. At these prices, no one is allowing for the Black Swan/Genoa/Grenfell Tower. Paradoxically this might actually be good news over the long term for investors. Here’s why. It’s clear that throughout the West there’s a great deal of new infrastructure needed. Lots of old bridges need renewing. Governments can and should so some of the heavy lifting but they can[‘t do it alone. They’ll need private capital. But private capital will be frightened off by actions of the Italian government so will demand a heftier price for providing said money. Thus the extra discount for policy risk will materialise. Taxpayers and infra users will pay the price for this volatility but populists won’t care. They’ll be on to their next vote winner.
Which brings me nicely back to the UK. The one country that should be really fearful of populism is the UK. We are already living through the consequences of one part of the populist revival (Brexit) which I’m afraid is inflicting untold damage on the political system. I actually thought that the government’s recent proposals for Brexit made some sort of sense and probably represented a decent fudge. But it’s now clear that these proposals won’t survive the Eurocrat mauling they are experiencing. The UK will, I think, either be forced into an EEA/Norway style interregnum scenario or a Hard Brexit. My sense is that the popular will might actually favour a Hard Brexit, if only because it appeals to wounded national pride. It’s not what I would choose to happen but I think government ministers are being relatively honest when they say a hard Brexit is a growing likelihood. Unfortunately, such a scenario would be a political disaster of epic proportions for one simple reason – the UK’s administrative elite hasn’t really thought it through. There’ll be chaos at the ports and airports. Parliament will be in uproar and it will degenerate very quickly into a public blame game. Worryingly I think the government might fall – there is no majority in parliament for a hard Brexit – and we could see a repeat of the scenario where many moderate voters with remain tendencies vote Labour simply to stop it getting worse. Which would let Corbyn in by the back door – the ultimate irony being that a true Stalinist Brexiteer would then be leading a supposedly remain government. None of this bears thinking about and the effect on financial markets would be catastrophic.
As I’ve mentioned many times on these pages, UK assets boast a premium because of their perceived durability and safety. This premium will vanish in a puff of smoke once McDonnell is given the keys to Number 11. Sterling will test $1 and crumble below 1 euro. We’ll also see a dramatic tightening of FDI and inward capital mobility. But what’ll be worse is that this Labour government won’t even be remotely stable. There’s probably a good 50 MPs in the PLP who hate everything that Corbyn stands for. I think they have been rather cowardly in sitting tight so far and they’ll be quiet for the first period of government. But once unpopular stuff starts to happen – and it will very quickly – they’ll jump ship immediately. Inflation will start to rise aggressively and the BoE will be forced into raising interest rates whilst also experimenting with government inspired ideas such as People’s QE. But for me, the key consideration will be liquidity. The foreign capital we have relied upon will dry up and the government will turn to the BoE to rescue the country from a liquidity trap. The fiscal deficit will balloon and taxes will have to go up. The Corbynistas will try and fool people into believing only the rich and the corporates will need to pay up but they’ll quickly discover that the extra funding from their aggressive measures won’t yield anything like what they expected. The smart money will have stashed their money offshore within a week or two – which is exactly what I plan to do. So taxes for everyone will rise to pay for this Marxist lunacy (ignore all the rubbish that this is just good old-fashioned social democratic policies revived – Attlee and Gaitskill would be turning in their grave). Crucially I think Labour is right to war game because once they are in power they will be on the sharp end of the “Socialism in one Country” fallacy. They’ll either be forced to do a Syriza – and risk monumental unpopularity – or they’ll be brought down by their own right wing.
So, as an investor I would
a) start planning your capital exit process
b) make sure you have foreign accounts probably in the EU, best in dollars but Euros will do
c) start rethinking those infrastructure bets.
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