Trump, Democracy, Populism and Markets? Who Wins?

Blain’s Morning Porridge – 5^th April 2023: Trump, Democracy, Populism and Markets? Who Wins?

“Never was a government that was not composed of liars, malefactors and thieves.”

This morning – The Chinese must be delighted, but Donald J Trump is not the problem, just a symptom of crisis within Democracy. The issue is how it plays out for markets in terms of future global alliances, trade, economic growth and prosperity – the signs are not looking good.

Apologies for the late porridge this morning, but I had an early morning call, had to drop the boss off at the railway station so she could get to London, then Dee-Jay (our cockapoo) took me for a long walk… I had time to consider the world while answering his questions about “Spring?”. Fantastic. The bluebells will be out next week.

Back to bleak reality:

My aim writing the Morning Porridge most mornings is to examine and consider aspects and factors likely to influence the long and short-term moves within markets. I enjoy writing about trials and tribulations of companies, the inadequacies and inherent stupidity of many financial instruments, the challenges upon central banks and monetary consequences, or why a particular set of economic numbers has been misunderstood by the market.

I would really prefer to be writing this morning about possibly the worst CEO performance during a Radio 4 corporate interview I’ve ever heard as the CoOp’s chief Shirine Khoury-Haq was asked about the challenges facing the retailer. It was a masterclass in not hearing the question. Did she think she was speaking to a shareholder meeting as she recited the annual result numbers rather than explain anything? That would have been fun to write about.

Instead, I feel a sense of trepidation as I am impelled to write about Politics, especially what now passes for the political process in the US. Inevitably I will be trolled and told something along the lines of “stick to the macro – you know nothing.” Unfortunately, like it or lump it, politics effects markets. So let’s dive in:

Donald Trump is not the problem – he is a symptom.

The multiple trials of Donald J Trump will noisy, full of irrelevant what-about-isms, and largely pointless as Americans argue about the number of angels that can sit on a pin head. Did Trump commit a misdemeanour or a felony by fiddling his business reporting to hide pay-offs to porn-stars? Really? He is either guilty or he isn’t. You can’t be a little bit pregnant. You can’t be a little bit guilty… (Ask Boris.)

It will set a very dangerous precedent if any politician successfully establishes the principle by which they not guilty of anything because any charge against them is political – which is essentially what Putin has done in Russia. Around the world bad governments use the courts to stifle opposition, while good governments use them to ensure the rule of law and justice. Burying politics in judicial treacle is a risk. Whatever happens will happen. Markets will deal with the consequences.

Trump’s coming trial, and the subsequent 2024 elections could have tremendous effects on global power structures and how the global economy develops for the new 50 years. Or he might just become a footnote in the list of also-rans. I hope the latter, I fear the former.

My guess is Trump’s trials will end in triumph for the Democrats – whatever the court outcomes.  He will galvanise the support of his MAGA fans across the USA. They will ensure Trump wins the Republican nomination – but will equally that he loses the 2024 election as moderate right-wing voters and independents are alienated and vote against him and the raft of candidates he will seek to impose on the party. That’s probably good for the West and Global Markets who fear a vengeful Trump will unravel the West versus Russia, forcing Europe into a new accommodation with China and the increasingly important power brokers in the Middle East. It will reset global alliances. These would all be bad outcomes for the US and great for China – bad for the global economy.

Trump v2.2 is the great fear of the Republican leadership – they know he’s a wrong un, that he will herald economic isolationism and recession. They desperately want shot of him and replace him with a more biddable, reasonable candidate. They want to get back to the pork barrelling of the Washington Swamp, by which the deals get done between the parties to ensure the US remains the most successful and leading nation on the planet, driving global growth, etc, etc, etc….

There are crisis points coming up – like the debt ceiling. How resolvable these are depends on how polarising the trials become.

The problem is… following Trump can the US ever go back to consensual politics? That is debatable. If the GOP leadership think putting Trump back in the box solves populism – then they are wrong. The next raft of Presidential wantabees will likely be just as bad. They will see their route to the top defined by Trumps appeal to populist politics rather than a lifetime of political service. I don’t know enough about Trump challenger Ron DeSantis – but I’m not encouraged by the way he leapt on to the bandwagon saying he would refuse to extradite Trump to New York, undermining the rule of law by claiming justice had been politicised to get the former president.

The biggest danger to the US economy is that the GOP panders to Trump – just like the Labour Party did for Jeremy Corbyn during his misguided tenure on the left of UK politics. How they do that is the problem when there is no real party machine to impose discipline, but the direct appeal of candidates to voters and ability to attract funding from them?

US politics – like politics everywhere – is imperfect, but it’s functioned for 247 years, which is pretty good. It’s clearly worked – the USA has become a rich, inventive, innovative, entrepreneurial nation, surpassing all others in terms of strength and power projection, becoming the global hegemon for nearly a century (despite an inbuilt genetic reluctance to be so).

But, the tripartite structure of the state: the Executive, Legislature and Judiciary, is breaking down and the political participants it attracts become more and more opportunistic. Politics has become dysfunctional and broken because it now attracts players who don’t fear the consequences of testing it to destruction. They court conflict and are willing to break politics down into polarised factions (just like the ERG anti-Europe hard-Tory right in the UK). Demagoguery has always circled close to the surface in the US, (Huey Long, Arron Burr, and Joseph McCarthy). Trump is the first to have risen to the surface. Others will follow.

Historically, the freedom of the press made it the main method to settle US political scores – now it’s increasingly out of control as social media, QAnon and others have opened the Pandora Box of Fake News, leaving only truth and hope behind. AI will only increase the ability of political bad actors to seed dissent and influence political outcomes.

From the historical perspective, what is happening to Trump is hardly unusual – it’s the way democracy dies. Julius Caesar crossed the Rubicon, triggering the Civil Wars that ended the Roman Republic and initiated the Empire, to avoid show-trials connected to his time in Gaul. (And that is why this morning’s quote is from Cicero, the great Roman jurist.) Most Roman consuls spent their later years in court battles. The original Demos of Greece had no issue exiling leaders following their periods in power – through the courts.  The US is proving no different. Political grudges are no longer settled at the dispatch box, but in the courts.

Meanwhile, no matter how much we kid ourselves, the UK is not a long-established democracy. The UK’s  Government has evolved alongside the changing role of the constitutional monarchy – which has acted as a break on populisim to a declining extent. Today, the UK is nearly as dysfunctional as the US, for largely the same reasons. The rise of political demagogues has been constrained by the power of the party machines – although both parties can effectively be taken hostage by right or left respectively.

Emperor Xi of China will be the beneficiary of the increasing instability of the Western democracies as populism mounts. Authoritarianism works if you keep the people happy – hence the rapid dismantling of the Covid state surveillance systems when the people began to lose patience. Otherwise, all he has to do is sit back and let politics continue to evolve negatively in the West, and the inevitable consequential outcomes.  There is so much more to write about this – including the role of corporates in consensus politics and inequality, but my time this morning is running out!

Where does this end? Not positively I expect. Will Trump or the next populist lead the US across the Rubicon and end its democracy? Not a great outcome for markets.

No time for five things…

Out of time, back to the day job, and unlikely to be a comment tomorrow due to early meetings in London.

Bill Blain

Strategist – Shard Capital