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At Testing Time for US Democracy, Still Waters in Market-place Run Deep

Brendan Brown

How has the collapse of conservatism and rising tide of populism in the US influenced financial asset prices? Keen observers of daily action in markets admit that any hypothesised link is tentative only and hard to prove.

This does not mean that the state of mind in the market-place is the same as in the Republican Party which according to neo-conservative scholar Robert Kagan (Washington Post, 19/5) is “the attempt to treat Donald Trump as a normal political candidate who will soon mouth the party’s conservative principles”. In fact amongst a highly heterogeneous investing public many likely share Mr. Kagan’s fear that “this is how fascism comes to America”. The challenge for market analysts is to reconcile the outward calm in the market-place with the trepidation deeper down.

At one level there is no puzzle. The markets absorb election information well ahead of the news event. Many investors viewed a Trump win and the collapse of US conservatism as a virtual known (say more than 80% likely) well before the day of the Indiana primary (which brought the Republican race to an end). Even so, demonstration that market prices are acknowledging the political trends as they form in real time requires more than a comment on information absorption.

There is the additional difficult step of counterfactual price comparison. In particular, it is plausible that the US dollar and the US stock market are now lower in price and gold higher than if Reagan conservatives had triumphed in the US Republican primaries. But these hypothetical prices used in comparison are non-observable.

And in the case of equities plausibility is far from certainty. It is possible to imagine that the US equity market might have been lower now if the political pendulum had swung in favour of conservatism. The prospect of a really conservative President embracing sound money doctrine could have triggered some immediate fall of speculative temperatures albeit that asset prices would rise to a much higher level in the long-term as an age of economic prosperity dawned.

In principle the threat to US democracy from populism and “mobocracy” reduces the absolute attractiveness of US assets. But developments elsewhere in the world may detract simultaneously from the appeal of assets there. Paradoxically the rise of US isolationism in the guise of “American First” as articulated by the Republican presumptive nominee could mean even greater geo-political turbulence from which US assets might gain appeal. And whatever the outcome of the Brexit vote in Britain, European assets are under a dark cloud.

A vote against Brexit in the UK (June 23) would reinforce the European status quo of high taxes, high regulation, and a continued wild monetary experiment. This would hardly foster investor enthusiasm for European assets. Two images – first, Chancellor Merkel bowing before Turkey strongman Erdogan on the same weekend as he consummated dictatorial power in a way reminiscent of Hitler and the Reichstag fire (February 1933) and second, Bundesbank Chief Weidman defending ECB chief Draghi from attack by German politicians for his negative rate and money printing policies – reveal how sick the European project has become.

One can only imagine how strong US asset markets and the dollar might have been this year if they had not been losing their safe haven attributes due to domestic political events. By the same token one can only guess their impact on employment and business spending so far.

Some US market strategists remain optimistic, advising their clients that a Trump White House could cause the US stock market to blip higher for a quarter or two. They suggest that a budget deficit explosion coupled with tame monetary accommodation and dollar devaluation could give some fillip to US corporate earnings. Note, though, that ahead of this “fillip”, the US stock market and the US economy would have fallen to levels well below those of Spring 2016. Indeed the likelihood of Trump winning the White House gains from weakness of the economy and of the stock market between now and November.

Whatever political scenario translates into reality – Trump or Clinton – there is now no prospect of monetary reform in the US. Yet recent political trends illustrate that such reform is more important than ever for prosperity and liberty. Monetary instability is at the root of the populist danger to democracy.

Yes, Trump would replace Fed Chief Yellen with a Republican. But one thinks here of the Republican inflationists of the past, whether Arthur Burns or Ben Bernanke. Clinton would increase the “diversity” (by gender and race) of the Federal Reserve board whilst doubtless re-affirming Yellen who is backed crucially by powerful left-wing Democrats. Why would either Clinton or Trump turn on the beast which fed them?

There is nothing new under the sun – including the fall of a great civilization.

(Click below to view the article in Japanese.)(日本語の資料を表示するために、以下をクリックしてください。)

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