Shock to the system
His supporters take him seriously, but not literally. His detractors take him literally, but not seriously.
2016’s favourite analysis of the rise of Donald Trump seems, in hindsight, misguided. 10 days in and the imposition of a ‘Muslim Ban’, brashly guaranteed in 2016 but never truly acknowledged as genuine, proves – disconcertingly – that Trump intends his words to be taken both literally and seriously.
The reality of Trump’s seriousness broke light on a new day for global markets; a day that begins with the President’s sunrise news binge, followed by a tweet or two. Recent targets have varied – Boeing, Lockheed, Toyota – and volatility strikes. Grounded in the chase for an already achieved political victory, many are calling this needless damage on the company of the day. Stocks plunge, CEOs grovel, investors panic, PR teams rouse, statements come forth, and eventually the storm passes.
Trump’s tweets are becoming a staple in corporate risk evaluations, Trump’s policies are perilously protectionist, Trump’s views on monetary policy appear hawkish, and yet since his inauguration we’ve been celebrating all-time highs for the Dow, Daq, FTSE and S&P. Is he really President Business?
The tweet, 140 characters of a known unknown, is a microcosm of instability mirroring a subtle – but distinct – change in the global risk environment. It now appears that political, not institutional, risk factors pose the greatest systemic risk to global financial markets. Emerging markets have always dealt with political risk as a major consideration for investors; the market has priced that risk accordingly.
In 2017 however, the political systems of developed markets can no longer be portrayed as displaying superior levels of stability, effectiveness, and predictability – yet asset prices remain unwilling to account for the change. Having recently been shocked by Brexit and Trump – and the unpredictability of politicians staring down the barrel of populism – financial markets ought to reevaluate their assessment.
Investors discount western political risk thanks in part to the efficacy and reliability of our central bankers. For the best part of a decade since the financial crisis, financial markets have been unnaturally stimulated by monetary policy seeking to meet political objectives and asset prices have risen to record levels. Forget the ‘independence’ of central banks – when technocrats are instructed to meet political goals, independence is a myth.
Thanks to a decade of ultra-loose monetary policy, markets have reached a point where political risk is grossly undervalued. Look at your timelines, the streets and protests, political systems festering –politics on both sides of the aisle has become deeply dysfunctional. Were an emerging market to experience this level of political uncertainty, capital outflows would be extraordinary – yet the bull market continues.
Where might the shock come? It’s complicated. Italy’s banks are amid a slow-motion capital flight. Germany is undoubtedly overbanked. The entire Eurozone has a problem with Germany’s current account surplus. Britain is gearing up for an almighty spat with the EU. And then there’s Trump - who wants to see the EU disintegrate, and could literally do anything at the drop of a hat.
Almost by definition systemic risk requires a degree of obscurity and unpredictability. We can’t tell where the shock might originate, but the absurdity of politics in 2017 is an indicator we ought to be wary of one.