Saturday 23 February 2019

A conman and a phoney

Global markets are betting that neither Trump nor May will address the issues that shot them to power

FOLLOW THE MONEY: The markets are wagering that Trump and May will betray poorer voters
FOLLOW THE MONEY: The markets are wagering that Trump and May will betray poorer voters

Andrew Rawnsley

So you thought 2016 was an unpredictable bastard? Now meet 2017, his wilder sister. This is the year that the Irish economic recovery is set to get bumpy, as Brexit turns from conjecture into trajectory.

The process of departure will start to happen when the UK delivers its 'Dear Jean' letter to the EU - the piece of paper that formally notifies the commission that Britain wants a divorce.

It is conceivable that this could be delayed by various internal processes in London - but Article 50 is going to be triggered in the next 12 months, with consequences that the best minds in politics, diplomacy and trade can only guess at.

Before that, in less than three weeks' time, Donald Trump gets his fat fingers on the nuclear biscuit. One of the most inexperienced and erratic personalities ever to occupy the Oval Office (and that's the charitable version of his character) will take office at a time of severe geopolitical turbulence.

The agonies of Syria are part of a wider proxy war in the Middle East in which Russia, Turkey, Iran, Saudi Arabia and the Gulf states are all participants. North Korea has nuclear warheads and ambitions to be able to land one on mainland United States.

As if that wasn't a sufficiency of unpredictability, there will be critical elections in the EU's two most significant actors - Germany and France. Voters in the Netherlands and probably Italy will also have an opportunity to join the insurrection against the status quo that delivered the Brexit vote and the Trumpquake. In the most apocalyptic scenario for Europe, the eurozone begins to disintegrate, followed soon afterwards by the EU itself.

The conventional wisdom still maintains that this won't happen because Marine Le Pen will be defeated in the final round of voting for the presidency of France. The consensus view also tips Angela Merkel to receive a favourable answer when she seeks a fourth term from German voters.

Optimists will be expecting to arrive at the end of 2017 to find columnists debating the unexpected resilience of European liberal democracy and pronouncing that we have passed "peak populism". This is likelier to be the case if the nasty economic side-effects of Brexit become palpable to Britons and President Trump starts to get unpopular with those who put him in office. After all, he is already wildly unpopular with the larger number of Americans who never wanted him in the White House.

Whether your forecast of the future leans to the optimistic or the pessimistic probably says more about your personality than it does about what is going to happen. Let's be honest. No one should be terribly confident that they know anything after a 2016 that confounded the expectations of pundits, pollsters, financial markets and the voters themselves. The only truly robust prediction I make about 2017 is that sensible people are going to be a lot more cautious about making predictions. Pundits have been marking the turn of the year by listing their forecasting turkeys. Pollsters are conducting another round of postmortems about what went wrong for them. Mainstream politicians are agonising about the lessons to be learned from their failures.

There is one exception to this nervousness. Stock markets, especially those in London and New York, are celebrating. While most of us look anxiously upon stormy waters, markets apparently see only tranquil seas ahead. The FTSE-100 ended the year at a new high. The US indices have been anticipating President Trump by surging to record levels.

A most remarkable signal is coming from the VIX Index, sometimes called the "Fear Index" - because it is a gauge of how much investors are prepared to pay to insure themselves against shocks. The hoariest of the cliches about financial markets is that they hate uncertainty. Yet we begin a year pregnant with perils with the Fear Index at exceptionally low levels.

Stock markets are not buoyant because they have a superior window into the future. Their predictive powers were among the most useless in 2016. Markets bet that Hillary Clinton would become the 45th president of the US of A. The night of the Brexit referendum began with the value of sterling rising against the dollar, so convinced were most traders that Britons would vote to stick with the EU.

When these "unthinkables" then happened, markets responded with an instant panic plunge before bouncing back. The "Trump trade" powering Wall Street is based on an assumption that he will do all of the semi-sensible things he has suggested to boost the US economy, while fulfilling none of the reckless campaign promises that would derail it.

Share prices are also being driven by salivation that he will deliver the lavish tax breaks he promised corporate America. A man who ran against Wall Street - and painted his opponent as a creature of the financial elite - is now being loved by Wall Street. It is not a coincidence, as old Marxists used to say, that his proposed cuts to personal taxation would shower cash on the already wealthy.

You will have spotted the contradiction between what markets expect and what he promised. He secured the White House by harvesting the discontent of working and middle-class Americans, whose living standards have fallen or been frozen in the past decade. Similar things are happening in Italy. And in the UK Theresa May finds herself in Number 10 for not dissimilar reasons.

Many people are using their votes to express their anger that the economy is not working for them. There are myriad accounts of why large segments of the electorate in many developed democracies are rebelling against the status quo. Nearly all place economic grievances at the heart of it. More sophisticated accounts recognise other factors. Discontent about levels of migration. Distrust of mainstream politicians. Fear of terrorism. A reaction against the cosmopolitan complexity of the early 21st Century. The inability of lacklustre centrists to find a vision or language that could compete with the potency of cheap tunes such as "Take Back Control!" and "Make America Great Again!".

There are many sources of what I have called the Age of Rage, but the other discontents are entangled with or sharpened by the fundamental one. People feel worse off. Since the financial crisis, the most important fact of political life has been anaemic growth in most western countries, accompanied by wages that have stagnated, declined or improved only feebly for millions. This discontent has spread to quite a lot of those who have actually done okay since the Great Crash of 2007-09. They have nevertheless felt worse off, because the rewards of prosperity have been disproportionately and conspicuously enjoyed by the very top slice of society.

In the UK there are many ways of dissecting the Brexit vote - the starkest is by income. In every income group in Britain bar the most affluent ABs, there was a majority for leaving the EU. Donald Trump would not have acquired the White House had not an important section of the working-class vote withheld its support from his opponent or transferred it to him. The biggest shift of ex-Obama voters to Trump came among those earning less than $30,000 a year.

Donald Trump knows this. He used his victory speech to acclaim what he called "the forgotten men and women of our country" and vowed that his presidency would ensure that they "will be forgotten no longer".

Theresa May knows it, too. She has spent a lot of the time since she moved into Number 10 talking about the reform of capitalism. "A change is going to come," she declared at the Tory party conference. In a more recent speech, to the City at Mansion House, she defined her task as ensuring that the profits from globalisation were spread more widely and fairly.

In both cases, the implied promise is that there will be a reordering of the distribution of profits. Those who own and manage assets will be obliged to take a diminished share so that a greater slice of the rewards can be enjoyed by workers.

What are stock markets telling us when they respond to Trump and May by sending share prices to record highs? They are telling us that they think that the UK prime minister is a phoney and the next US president is a conman. They are wagering that Trump will betray the poorer voters who helped put him in the White House. They are betting May will not deliver for poorer Britons whose Brexit votes helped her to Number 10.

That's what the cash is saying. The "forgotten men and women" of America will be no better remembered in the Trump cabinet of tycoons. May's fans will find out she is all jam tomorrow, never today.

Just remember this: the money temples are in the business of getting these calls right. Their lives depend on it. And you know, so do ours.

© Observer

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