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May 23, 2016

Indulge us for a moment because we are about to go off topic from what we normally publish. We’ve received enough inquiries from our client advisors concerning this year’s elections and the investment implications of possible outcomes. However, rather than speculating on who will prevail this November (and whether Britain will vote to exit the European Union in late June), we thought it be more worthwhile to offer a broader perspective on the populist waves sweeping across the Western developed world (and even parts of Asia). It seems this latest bout of populist fervor has caught much of the established cadre of political pundits, strategists, economists, and professional investors by surprise (although not this pundit who had correctly predicted Donald Trump’s rise back in August 2015).

The fact that a divide exists between the professional punditry class and populist sentiment should be of no surprise since populist waves typically start when the general populations feels they’re being ignored by the established political order. Generally, the former tends to be ignored by the latter but the problem becomes acute following some large negative shock to the system in the form of a deep market crash, panic, and/or great recession. With respect to 2016, what is more surprising is that it took such a long time for a populist wave to form following the 2008 Great Recession given the history of “crash politics” (more on this below).

It is a testament to the current political and monetary establishment that the two major U.S. political parties have largely stayed intact with the same coalitions despite enduring two market crashes (2000, 2008) that resulted in deep recessions. However, the rise of global populism threatens to undermine the détente that has existed between center-left and center-right politics since the 1980s. In this year’s election, voters from both major parties have swung heavily in favor of the anti-establishment candidates. This year’s election may reflect the last gasp of the current political order in favor of…well, I’m not sure what, as populism seems to take a life on its own.

So, what exactly inspired this article? Apart from the investment implications stemming from global populism, I am writing this in reaction to a recent strategist presentation I attended discussing the current state of the economy. The strategist gave some compelling points on how the current state of affairs are far better than what is generally perceived and certainly not a state that would justify the anger and frustration expressed by the populist movements. Yet, we are seeing populist candidates and formerly fringe parties taking political share away from the mainstream political establishment. In between the exposition of supporting exhibits and data, the strategist could not hide the frustration and bewilderment as to why the western world is being swept up by populism in spite of stronger economic data. At one point the strategist made this observation:

“We spoke with many of our foreign investors and they were incredulous as to what is happening here in the United States (meaning Trump and Sanders).”

To which my reply was these investors are clearly not paying attention to what is happening in their own backyard (at least in Europe but populism is spreading to Asia as well). Consider what is happening in Europe:

  • On June 23, Great Britain will hold a referendum on whether to remain in the European Union. Most believe the referendum will be rejected, but considering the projected economic and social costs of exiting (versus the costs borne by remaining), the tight polling clearly points towards anti-European sentiment within the UK. Brexit opponents must not only prevail on June 23 but prevail with a wide margin or this issue will keep festering.
  • Austria may become the first European country to elect a president (largely ceremonial post) from an anti-immigrant far right political party.
  • The rise of anti-immigrant and populist parties across much of the Europe such as the AfD in Germany, the Party for Freedom in the Netherlands, the populist Five Star Movement in Italy, the French Front National. 

The populist movement in the U.S. is not an isolated phenomenon as signs of populism are emerging in Asia given that much of the region desires political stability over abrupt changes. As much as the political establishment seeks to dismiss these movements, the Wall Street Journal succinctly explains the general frustration expressed by voters:

“The voters speak of sovereignty lost to Washington, Wall Street or Berlin. They cite news from Facebook pages and YouTube channels, dismissing traditional news media as agents of government and big business. They voice fears of crime and cultural change brought by Europe’s refugee influx. And many, fuming at the political class, say they simply want change.”

In other words, the institutions that have led us through the post-war period have become too sclerotic and are in dire need of reform (what that exactly looks like remains to be seen).

What has the establishment done in response to the movements? Largely dismiss the anxieties as ill-founded, ill-informed, or even racist. On the economic front, Keynesian pundits believe the worldwide aggregate demand remains anemic because consumers and governments are not spending enough (see these opinion pieces from Jon Hilsenrath and Paul Samuelson). If anything, the establishment now feels it has a duty to weed out the ignorant voters from the political process.

Let Them Eat Data

Based on what I heard from this presentation, a divide exists between the ‘crass elitism’ embodying the political/investment establishment versus the ‘unwashed, ignorant, ill-informed’ masses caught up in the populist wave. The data would suggest that the U.S. economic situation is much better than perceived and that were it not for the drag from a stingy consumer and U.S. fiscal policy, the situation would be much rosier. Here is a highlight of the data from the presentation:

  • Exports and business equipment have led the U.S. out of recession.
  • The U.S. needs to spend more on public infrastructure and education, which may be bringing down our longer-term productivity.
  • Job gains have been more robust in recent months although it took a while for the U.S. to return to pre-crisis levels.
  • The unemployment rate for highly educated workforce ranges from 2-4% but 6-8% for the less educated. The unemployment rate for the younger workforce is higher than the older workforce but this has been the case for a while and the former is seeing more recent improvement than the latter.
  • Median household income is trending down but this can be partly explained by a decline in female labor force participation.
  • When compared to other industrialized nations, the U.S. remains at the top in R&D spending, innovation, and capital market funding.

Now real GDP of 1.5-2.5% is not a real barn burner, but it should be enough to keep the populace at bay while the world recovers from the 2008 financial crisis. And from the perspective of this strategist, the data does not point to deep-seeded discontent that is feeding the anger and frustration underlying these populist movements.

Crash Politics – A Historical Retrospective

A book I highly recommend is “A Nation of Deadbeats” authored by Scott Reynolds Nelson. Although Nelson brings a classic Keynesian perspective on the causes of asset bubbles and prescriptions for dealing with the aftermath (in addition to sympathizing with leftist insurgent movements such as Occupy Wall Street), he actually provides one of the more profound retrospectives on how this nation has fostered asset bubbles and how it responded following the crashes. In particular, he writes of “crash politics” where new political movements emerge from the market and economic rubble.

From the book, we can observe a consistent pattern: asset prices feed on each other in classic boom and bust cycles. In the pre-war economies, rising agricultural prices fed land price speculation until some exogenous event caused the entire virtuous cycle to suddenly crash. Typically, the established institutional powers helped create the credit to expand the capacity for the asset in demand, the politicians would personally benefit from the demand, speculative fervor would drive markets out of hand, some exogenous event would lead to a crash, and the political process would purge those responsible for the crash in favor of a new established order.

Here is a brief synopsis of what form crash politics took shape from prior market crashes:

  • Panic of 1792: The Democratic party was born out of the 1792 panic and the failure of Colonel William Duer. The party of Jefferson arose in opposition to a powerful national government and central bank (Bank of the United States which monopolized credit and concentrated considerable power among the federalists). 
  • Panic of 1819: The panic saw the collapse of wheat prices following heightening trade conflicts between America and Britain. The collapse in wheat and flour prices led to a new prominent political power: the cotton growers of the emerging Southwest led by Andrew Jackson. Cotton exports and the rise of slavery politics resulted in a four-way regional split among the Democrats who differed on taxation (tariffs) and fiscal stimulus. The “corrupt bargain” saw the election of John Quincy Adams by Congress despite Andrew Jackson winning the popular vote. Jackson would use this theme of corruption to help him win in 1828. 
  • Crash of 1837 and the collapse of the cotton commodity credit chain. Jackson’s critics formed the Whig party, a coalition of wealthy cotton planters (whose credit was cut off when Jackson successfully shut down the Second Bank of the United States) and nationalistic Missouri merchants such as Mark Twain’s father, John Marshal Clemens. “Tippecanoe and Tyler too” would topple a federal government dominated by Jacksonian democrats. 
  • Panic of 1857: The Republican party (a party containing “Free-Soilers, Barnburners, Hard Shells, and Know-Nothings”) was born out of the Panic of 1857 and the crash of railroad speculation following the 1857 Swamp Act. The Swamp Act is what helped tip the nation into Civil War.
  • Crash of 1873: Due to the increased abundance of cheap American wheat exports, the crash started in Vienna and Russia (who had difficulty competing with cheap American wheat exports) and also contributed to a decline in coal prices. The Bank of England, unsure of which institutions were most exposed to central Europe, raised the discount lending rate. The price of gold rose and the circulation of money dropped. The 1873 crash pitted Western inflationists against Eastern deflationists and resulted in the handover of Congress to the Democrats. It also brought about the first national strike and the seeds of the populist movement (i.e. Christian temperance movements). 
  • The Panic of 1893 was brought on by sugar politics and the breakdown of the monetary mechanisms due to the export of gold that resembled the sequence of a capital flight, balance of payments crisis, and credit crunch similar to Mexico in 1994 and Asia in 1997. Many Republicans defected to the newly-formed Populist Party. Yet the Pullman strike brought about the largest shift in congressional power in American history from Democrats to Republicans. Third party politics blossomed just as it had in previous panics; Americans blamed both parties for formulaic responses to real suffering. The main target: the monopolistic families and trusts that held a large concentration of power. The populist surge saw reform movements within both parties.
  • The Market Crash of 1929 and the Great Depression saw the emergence of the modern Democratic party that combined two disparate groups (multi-ethnic coalition started by Anton Cermak in Chicago and traditional southern democrats) which has only come under pressure in the recent modern era.

What is amazing about the post-mortem of the 2008 Great Recession is that the current political order, largely responsible for the buildup of the prior asset bubble, has withstood the natural forces and anti-establishment rage. Sure there is the Tea Party Movement and Occupy Wall Street, but the Democratic and Republican parties (not to mention Angela Merkel in Germany, the Liberal Democrat Party in Japan, and the Communist Party in China) seem intact with the coalitions that have buttressed their respective powers. Yes, there was anger at the establishment following the 2008 Great Recession, but no major political upheavals of the kind seen in prior market crashes. So pundits were caught off guard with the rise of Donald Trump and Bernie Sanders as well as populist movements in Europe and Asia, although one could argue that the underlying frustration finally boiled to the surface in this year’s election.

It could be that all this populism is for naught, that people will come to their senses and vote for stability and order that comes with the establishment rather than the abrupt changes that come from populism. Scottish voters stared down the precipice and opted for the safety of remaining in the U.K. Yet what should not be dismissed is that the movements we’re witnessing today are somehow unprecedented and irrational. The Western world has seen far greater disruptions in the past versus what is happening today yet today’s populist sentiment has immense investment implications, primary of which is high uncertainty.

Finding the Roots of Today’s Populism

For what it’s worth, I have one final piece of advice for the strategists and pundits scratching their heads on what is driving the latest populist wave. Rather than speaking with other like-minded stakeholders (i.e. client investors), move beyond the establishment setting that encompasses your immediate world and speak directly with the disaffected who are aligning themselves with these movements. I’m sure much of what you’ll receive will be regurgitated rhetoric, but hidden underneath is an explanatory kernel that will help bridge the divide between the pundits and the populace.


The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. Neither the author nor the firm openly endorse any of the political candidates, parties, movements, etc. referenced in this article. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. It is not a recommendation, offer or solicitation to buy or sell any securities or implement any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes and opinions of others are assumed to be true and accurate; however, 3D Asset Management does not warrant the accuracy of any of these. There is also no assurance that any of the above is all inclusive or complete. Past performance is no guarantee of future results. None of the services offered by 3D Asset Management are insured by the FDIC, and the reader is reminded that all investments contain risk. The opinions offered above are as of May 23, 2016, and are subject to change as influencing factors change. More detail regarding 3D Asset Management, its products, services, personnel, fees and investment methodologies are available in the firm’s Form ADV Part 2, which is available upon request by calling (860) 291-1998, option 2, or emailing or visiting 3D’s website at