The rising risks

How much political risk is there to your wealth?

Actually, lots. Thia could end up being a nothingburger. It could get gnarly. So be careful making bets on an outcome which is unfathomable.

Like France.

The surge of the far-right Marine Le Pen party and her 29-year-old boy toy anti-immigrant, antisemitic, inexperienced rad sidekick TikToker (Jordan Bardella) has been halted. In yesterday’s runoff elections a coalition of lefties stopped the righties in their tracks. That was a surprise. A welcome one. But the country is left in an ungovernable state. President Macron laid an egg in calking a snap election his guys could not win.

So are the populists taking over Europe? Not today.

Why did the financial markets fear Le Pen and her rabble?

The movement is xenophobic and anti-immigrant. So the market worries about the impact on the labour force, impairing its growth. The populists are nationalist, opposing free trade and the European Union (like the UK’s Brexit disaster, which just helped tank the Tories). In the past Le Pen’s campaigns have been financed by a Russian bank with ties to Putin. She opposes Ukraine joining NATO. Her party would massively increase government sending, cut sales taxes, increase taxes, restore pensions, inflate the deficit and bring in a wealth tax. All this is enough to make Mr. Market gag. A Le Pen win yesterday – with Bardella becoming the new government leader – would have rocked Europe and asset values.

Of course, if Macron had not rolled the dice with a dumb election call, none of this would have come to a boil. Ditto for Rishi Sunak in Britain, just smoked in a vote that was also unnecessary and disruptive. His party was defeated. He’s leaving. The UK will likely see a shift left and a financial squeeze.

But wait. The US is worse.

Economists are reasonably tight on the implications of a Trump win. More tariffs, more economic interference, more manipulation of the Fed, more spending, tax cuts, higher debt, a global trade war, higher inflation and ultimately rising interest rates. Canada, says Scotiabank’s chief economist, would be especially whacked. Rates here would increase 190 beeps (almost 2%) while the economy would be lurched into recession.

These are market risks. And now the guy with the best chance of keeping Trump out of office is on the ropes – weakened at precisely the wrong moment. Joe Biden’s debate disaster fed into Trump’s relentless allegation he’s too old and impaired to govern. Whether that’s true or not is irrelevant when a majority believe it – as polling shows. So will Biden step down? Be taken down? Or – as he insists – refuse to budge?

Source: Bloomberg

Mr. Market thinks leaders in the UK and France screwed up by escalating political risk just when the world is coming off an inflation/rate crunch that turned voters angry and ugly. In the US, political risk is rising rapidly now that clouds of doubt swirl over Biden, and Trump sounds more unhinged. Against this backdrop, the Israeli leadership seems out of control and the Putin-Kim-Xi bromance brings the West face-to-face with the unchecked power of dictatorship.

Okay, what to do about all of this?

First, understand markets are apolitical. They just don’t care who wins. It’s all about making bank. Trump, if he scends, will likely cut the corporate tax rate, force interest rates lower in the short-term, loosen regulations on financial services, energy and environmental protection and take the S&P 500 as a proxy for his success.

But he’ll also upset global trade, weaken NATO, sow the seeds of inflation, weaken the US on the global stage and set the scene for troubles ahead. Biden (or whomever) would continue to expand the scope, cost and reach of government, target corporate profits, tax personal wealth more heavily and extend the commitment to fund the Ukraine and maintain America’s global reach.

Stocks would feed off Trump. But they have also soared under Biden’s rule. The basic message is that Mr. Market cares a lot more about corporate profits and interest rates than who’s in charge.

But I found this comment by American (NYT) business columnist Jeff Sommer of interest. He’s a tad worried:

“This time is different” is rarely true in investing. But every so often, things really are different.

My assumptions about the markets and investing are based on a central premise: that the legal, economic, social and political system that has prevailed until now will continue, with some evolution but without a major break, well into the future. Mr. Trump has promised to “undo foundations of American democracy and to rule as authoritarians in other countries have,” as my colleague David Leonhardt has written.

Hedging against that possibility isn’t merely a financial issue, of course. Holding some gold, which I don’t do now, might be wise if the foundations of American democracy are shaken. Holding stocks and bonds from other countries in low-cost index funds, which I always do to further diversify my portfolio, might be urgent in a U.S. crisis. Holding extra cash might be a smart move.

But, oddly, because the United States is so important globally, past crises here have shaken up foreign markets, too, and in times of trouble, where are you going to go for safety? Invariably, since World War II, it’s been the United States, strengthening U.S. Treasuries and the dollar, not weakening them.

Up to a point, that dynamic can be expected again. But only up to a point. I’m hoping we won’t find out where that point is.”

We don’t know what Biden will do. What the populists in Europe will do. What Putin will do. What Trump does next. Or the outcome in November. Risks are growing and with them the need for sanity. Invest in a balanced and diversified way. Resist the urge to time the market, run to cash or do something nuts with crypto. This is probably not the moment to borrow a heap of money or get into a real estate bidding war.

We told you 2024 would be volatile. This is unreal.

About the picture: “Here are our two Lagottos enjoying some afternoon sun and a nap,” writes Max. “Thanks for the advice you provide. I’ve been reading since 2017. In that time we fled the overpriced Victoria, bought a home in Calgary (before it went crazy) and have been aggressively saving with your sage advice.”

To be in touch or send a pictire of your beast, email to ‘garth@garth.ca’.