I was speaking to a financial adviser I know the other day.
He’s been in the business for more than 30 years. Yet in all that time, he said, “my job has never been affected as much by politics as it is right now”.
It’s true. When it comes to markets, you could have spent most of the 1990s and 2000s pretty much ignoring the government and you wouldn’t have been any worse off.
(Do note, I’m talking about the day-to-day of financial markets here. “Real” businesses coping with ever-changing legislation and people trying to navigate the unstable pensions system have never been able to ignore the government.)
But these days – well, it’s all about the politics…
Why politics matters again
This morning’s Money Morning is about politics and its effect on markets, so you might be expecting me to launch straight into the big US presidential debate last night.
I’ll get to that in a moment. But in fact, the most important political story, as far as markets went yesterday, was in Germany.
Deutsche Bank’s share price collapsed (yes, again) to yet another all-time low. Deutsche is currently the scariest bank in the world. It’s both the most-systemically important, and the one whose solvency is most in doubt.
Right now, the specific panic around Deutsche is that the US government has demanded it pay $14bn to settle claims that it mis-sold mortgage-backed securities.
Deutsche hopes it won’t have to pay that much. And it also says that it doesn’t need to raise more capital. But given the bank’s fragile financial position, the concern is that this would destabilise it.
One of the only real reasons to own a bank like that is if you think that the government has no intention of letting it go under, and therefore it could be a multi-bagger from where it is now.
That’s where the politics comes in. What drove Deutsche lower yesterday was a report in a German magazine that Angela Merkel had ruled out government help for the bank before the general election next September.
Bailing out banks is never politically popular and Europe made the mistake (as it does with everything else) of trying to brush the problem under the carpet, rather than acting under the cover of emergency. Now no one wants to cut the banks any slack, even although the chances are that they’ll have to if we reach another crisis point.
In any case, this whole incident neatly sums up why politics matters right now. Large chunks of our financial infrastructure are reliant on the ongoing indulgence or intervention of our politicians or other official institutions. And the entire global bond market is at the mercy of the world’s central banks.
What if Trump wins?
Which takes us to the US election. The US is the most important country in the world, and it’s about to have its populist moment in the sun. So who’s going to win and what does it mean for you?
I didn’t watch the debate between Donald Trump and Hillary Clinton last night. If I want to exhaust myself getting riled up watching a parade of half-truths and halfwits, I’ll tune into Question Time.
Reading the papers, it’s clear that neither landed a mortal blow. But markets seem to have decided that Clinton won the first round. The Mexican peso strengthened (the market reckons that Mexico stands to lose the most in terms of trade, if Trump wins).
But still, it’s anyone’s race to win. And given the other surprises we’ve seen this year, you shouldn’t be surprised if people vote for “something different”. So what happens if Trump wins?
First things first, forget all the loopy soundbites he comes out with. Wells Fargo points out that what the candidates say and what they do are two very different things.
Apparently, back in the days of Jimmy Carter, an average of 75% of campaign promises were kept during a president’s first term. “Yet, the average fell to 47% since 2001.”
I suspect that the average will fall even further after 2016. As far as I can see, Trump just says whatever he thinks will get a reaction at that particular point in time. This is electioneering as reality TV – and the approach is clearly effective as a tool for getting elected.
His governing style would presumably be different. That’s not to say that he would be a good president. Put bluntly, I don’t like him. But I doubt that he’d be quite as significant a departure from the norm as people might expect.
In short, I can see a Trump victory as being a bit like the Brexit vote. There’d be a lot of noise in the papers and a short-term gasp of horror from the markets. But the longer-term effect would take a while to unfold and, in the short run at least, things would calm down pretty quickly.
In terms of policies, the most obvious effect – whoever wins this election – is that the US is going to be spending more than it has. Whether that be through cutting taxes or spending more money on infrastructure, the effect on the bond market has to be considered.
Equally, a more protectionist approach to trade and globalisation – again, something that both candidates endorse to an extent, though Trump far more – will be inflationary, which also affects the bond market.
From that point of view, the big event to watch might not be the day of the election, it might be the US Federal Reserve meeting that follows in December. At that point, if Trump has won and is looking to swap Janet Yellen for someone more hawkish, we might see a turn in US monetary policy that shapes the markets for a long time to come.
But we’ll see what happens. Between now and then, my advice is to stay calm. This is one of those things that you can’t do much about, so don’t even think of changing your investment plan simply based on whether you think Trump or Clinton will win.
What if you don’t already have a plan? Well – get one.