Behold the bonfire of the certainties. In combination with June’s
Brexit vote, the political reaction that many assumed would hit in 2009 has finally come to pass. The US wants to reverse
globalisation, as does the UK, while France, Germany and Italy all have a chance to upend the status quo at the ballot box in the coming months.
The certainties that had reassured the investors and financiers since the era of Thatcher and Reagan and that are now in question include a global commitment to free trade, independent central banks, a financialised version of capitalism, and relatively limited social safety nets. Although many of those voting for British exit from the EU, and for a
Donald Trump presidency, have a deep distrust of governments, the likely result is more interventionist governments.
Mr Trump’s unpredictable character adds a layer of uncertainty. As President Barack Obama argued, to no avail, it is worrying when someone who will now have control of the nuclear codes cannot be trusted with their own Twitter account. This uncertainty will itself damage securities prices and shake confidence.
In the broader picture, the result should not have been a surprise. Back in 2008, as the financial crisis broke, many thought a political crisis would ensue within months. The surprise is that the denouement has been so long delayed.
Blaming central bankers, as many of the people behind the UK and US populist revolts tend to do, misses the point. The loose monetary policies of the last eight years helped deepen inequality by raising the wealth of those who already had assets, without breathing sufficient life into the US or UK economy.
But central bankers were following these policies to buy time for politicians. Necessary action — whether it was a big programme of infrastructure investment or a painful structural reform — has not been forthcoming. Central banks have looked increasingly uncomfortable with their new role.
For the next few days, we can expect to follow the “Brexit playbook”. A big sell-off of US assets is a given, as is a subsequent bounce. Emerging markets will be a particular victim due to their dependence on trade. They appeared to be at the beginning of a renaissance; that is now in question. Markets tend to overshoot, and this will produce some buying opportunities and bargains.
Only once Mr Trump is in office will a clear direction be set. The first item on the agenda is the
Federal Reserve. The market sell-off should force the Fed not to go through with raising rates next month. A move to curb the Fed’s independence, or an exit by chairwoman Janet Yellen, could create alarm.
After that, it is over to President Trump. The range of outcomes is huge. An aggressive fiscal expansion — such as slashing corporate tax — would presumably pass the
Republican House. That could raise inflation, but might well cheer asset markets.
Meanwhile, the tariff war he often promised in the campaign would be unalloyedly negative for capital markets — and this is an area where the president has relatively great freedom to act, without reference to Congress.
So in historical terms, the range of possibilities goes from the early Reagan years (when a great bull market took root), to the disastrous Smoot-Hawley tariffs that followed the 1929 crash. Extreme volatility is certain.
What is undeniable is a deep pessimism and anger within the electorate. A famous work of stock market history is called
Triumph of the Optimists; it argues that the second half of the 20th century, with the rebirth of Germany and Japan, the peaceful end of the cold war, and widening free trade, was a triumph for those who looked to the future optimistically at mid-century.
Markets peaked at the end of 1999. The advances from 1950 to 2000 then taken for granted are now in doubt. As certainties disappear, this election marks the triumph of the market pessimists.
