What leftist politics could mean for US equities
Most of our readers will know that the most recent incarnation of Chinese economic development has been self-termed as “Capitalism with Chinese characteristics”. If one looks all the way back to when the CCP took official power on October 1st 1949, Mao himself called for “Socialism with Chinese characteristics”. So our title today was originally very provocatively called “Socialism with American characteristics” mainly because it was too good to resist. In reality, however, the current landscape in America is suggesting simply a possible move left of centre, but certainly further than we have seen for some time at least.
Our idea this week was to write a very focused piece on what would happen if the United States had a more “socalist” leaning government than we’ve seen in a very long time, if not ever and examine the sequence of events that could lead up to it. So we started with our title idea and then it led us down a rabbit hole and we began talking about the merits of democracy vs socialism vs communism. We spoke about China and the US and everywhere in between. As we have team members from all over the world in our business the views were very widespread and the debate very heated! Eugene grew up in one-party-state, Singapore. Lupo grew up in a welfare country (Denmark) as well as a divided (literally) Germany. David C and David K grew up both in pre and post apartheid South Africa and Emad, Ed R and Ed P grew up in 80s - 90s Britain.
It became quite clear that this was a topic we simply couldn't (nor wanted to) squeeze into one note about the implications of more leftward policies on asset prices in the US. So we’ve elected to keep the scope of this one a bit more focused and save the big one for a later note.
* * * * *
So “Crazy” Bernie Sanders and “Pocahontas” Elizabeth Warren (and the rest) are plastered all over the news as we approach the 2020 US election. Their derogatory nicknames were coined by none other than President Trump himself, perhaps a sign that he sees them as a genuine threat to his grip on The White House – as he should.
We don't claim to know what will happen in the 2020 US election, but we do know that this race is only the beginning of the real popularity contest that’s been raging under the surface of American society. Looking deeper at some of the Democrat candidates, we see a common thread emerging. It began in earnest already in 2016 (and seeded long before) and it could loom large in 2024 and beyond, perhaps already even in 2020.
A long dormant political movement.
With the Cold War long forgotten, America’s younger generations are becoming increasingly enamoured with a long dormant political movement. The social democratic brigade is here to rescue America from itself, and the leader-in-waiting (she’s a bit young still apparently - until she isn't) of this new movement is Alexandria Ocasio-Cortez or “Eva Perón”, as President Trump has sardonically anointed her. Just this week, Ms Ocasio-Cortez took to Twitter to comment on her trip to Denmark:
“Spending the day in Denmark after C40, enjoying this social democracy that treats healthcare & education as rights, zero-carbon as priority & infrastructure as a key public good.”
Denmark is consistently voted as one of the world’s happiest countries (along with the rest of Scandinavia) and is a great success story, so it’s no wonder Ms Ocasio-Cortez admires this nation. However to behonest, whether Denmark is a social democracy is seriously debatable. We are not experts on Denmark but we stumbled across this thought-provoking piece by Jefferey Dorfman from last year which argues that Denmark is a mostly free market capitalist state which simply has high taxes in exchange for high entitlements from the state and is not in fact a social democracy.
Either way, according to a poll from Gallup conducted in 2018, young Americans (those aged 18 to 29) are souring on capitalism. Less than 45% view capitalism positively, a 12-point decline in young adults’ positive views of capitalism since 2016 and a marked shift since 2010, when 68% viewed it positively. Meanwhile, 51% of young people are positive about socialism, a number that’s held constant since 2010.
For a country that’s built itself and its culture upon the concept of the American Dream, this is astonishing. Or is it?
The other side of the world.
There is much emotion when we talk about which economic system is best but there can be no arguing whatever the incumbent economic system is that the key economic question needing to be addressed is: does it lead to the economic emancipation of its people?
It was Deng Xiaoping who famously once said “It doesn't matter whether a cat is black or white, as long as it catches mice.” Even a strict early disciple of the Chinese Communist Party was open to other forms of policy if they worked. If we apply this to the US democracy today that question is far less clear to many than it used to be. It can't be denied any longer that the capitalist system that made America great has left swathes of the population behind.
It’s fascinating to speculate and play with all the permutations and implications of what this could mean. The most critical point about this thought experiment is not which economic approach is right and which is wrong, but more importantly it is that the people whose lives are shaped under them are the ones qualified to judge. That is what democracy is all about, for good or for bad.
A 2017 Ipsos survey on “What Worries the World showed that the proportion of people in America who believe their country is heading in the right direction was 42% in 2017, 41% in 2018 and 42% in 2019. That means nearly 60% of respondents in the USA believe the country is heading in the wrong direction.
This aligns with what we are seeing in popular discourse. It comes at a time when US society is promoting (amongst other things) the issues of income inequality and climate change and is punctuated by things like the remarkable (and inexplicable to many older Americans) rise of young stars like Billie Eilish and climate change activist, Greta Thunberg (although she is Swedish). This suggests that a new generation of voters may indeed prioritise very different things to the Baby Boomers and Generation X incumbents who have dominated the political landscape as we have known it for some time.
It also appears that it is increasingly difficult for the generational gap to be filled. This is surely one of the reasons for the divide we see opening up in politics, which is possibly exacerbated by the echo chamber of social media. Indeed, there is a school of thought that believes if it weren’t for Cambridge Analytica, there wouldn’t have been a Trump presidency (or Brexit). We leave the social media discussion for another time, but if you are interested in this angle then watch The Great Hack on Netflix.
A thought experiment.
Our objective here is not to determine which economic system is better but rather to understand what is happening in our own quest to discover the answers. We are writing this more as a pure thought experiment than anything else, given some trends we have been observing and discussing as a team.
In 2002, John Judis and Ruy Teixeira wrote a book called “The Emerging Democratic Majority”, predicting Armageddon for the Republic Party based on demographic data. Of course, we know this to be premature, but the generational data continues to portend long-term problems for Republicans. Indeed, the New York Times has reported that in 2018, voters under 30 supported Democratic House candidates over Republican ones by an astounding 67% to 32%. And a 2018 Pew survey found that 59% of millennial voters identify as Democrats or lean Democratic, while only 32 percent identify as Republicans or lean Republican. Perhaps more significant than political party affiliation is the data on ideology, with 57% of millennials calling themselves consistently liberal or mostly liberal. Only 12% call themselves consistently conservative or mostly conservative. That is quite a chasm that has opened.
The point here isn’t whether America will turn towards a more socialist economic system. It is that this is one of many paths that the road ahead can take, and if this scenario unfolds it would likely have substantial implications for US equity prices in particular. This is not because more socialist-leaning economic policies are a bad idea, or a good one but rather because what financial markets (or more accurately, people who participate in financial markets) hate with unbiased consistency is uncertainty and change.
What can happen, and why?
We’re the first to admit we have no idea what the outcome will be, so we simply prepare for a series of possible outcomes, of which this is one. So what can happen, and why?
Let’s start with our assertion that what makes markets move are its participants. In the US, most participants have been brought up on a diet of free market capitalism = good, socialism = bad. President Trump knows this and it’s possibly why he has been so aggressive with equating Venezuela’s socialist disaster to the Democrats’ plans for the US economy (never mind providing AOC with his nickname for her).
But imagine what most Americans would do with their stocks if a more socialist candidate came close to being in power. Imagine one thought process:
“Taxes could go up, protectionism could rise further, big tech could get broken up, big oil could come under more pressure and large banks could get regulated even further. Private equity is under greater scrutiny too. This could affect the entire market capitalisation of US indices.”
It is laudable to reduce inequality and of course, it’s something that every society should aim for, but the stock market is very unequal. The wealth sits with the wealthy. They have A LOT to lose. This grouping also just so happens to be the very same grouping that is very much against this new, more social economic angle. They are calling for a change to capitalism to include a more balanced mandate, but they’re certainly not calling for social policies! The latest voice calling for change is Marc Benioff, founder of Salesforce, who published his thoughts in this New York Times piece.
Another possible thought process could be to look back at the effects of President Franklin D. Roosevelt’s New Deal from 1933 to 1938 on stock prices. The Dow Jones Index rallied aggressively of course for most of this period but in fairness it was just after the crash of 1929 so the base from which the rally came was extremely low. It is probably not appropriate to use this as a barometer for what to expect now.
The bull case can be made that more inclusive policies and infrastructure programs will lead to better and more balanced growth in the future and this may well be the case over the medium term. However, we think it more likely that markets would be frightened by the implications of higher taxes and more intense regulation as well as possibly yet higher budget deficits.
The role of decentralised finance.
Bitcoin to the rescue? Just kidding. Kind of... Our paper for a new paradigm based on utility which we think is more suited to the “stakeholder rather than shareholder” world we are heading towards, is available here. In our view, Binance, the world’s largest digital asset exchange, is the pioneer and leader of this movement, with Binance Coin optimising for the network value of its utility portending the possibility of all sorts of upheaval for traditionally structured companies.
Our contention on the question of where the economic policies are going is that we need to be aware of how close this shift in US voter base could be. Let’s look at some data to help us assess this.
The two charts below show the share of the American voter base by generation. Both show the same thing – that by the 2024 election the share of Millennial and later generation voters will approach the share of earlier generations in aggregate.
This demographic shift is inevitable but there are simply too many variables right now to predict precisely when and how this plays out, nevermind whether younger generations will vote further left of centre at all. The point we make here is that it is possible a more left leaning candidate takes power, and when markets get wind of it becoming a reality, we cannot preclude severe volatility given where we have come from and who the holders of capital are. For this reason it is critical to monitor this narrative as it develops. Have a look at Epsilon Theory’s fantastic 2020 election narrative monitor which does a great job of this already.
As we said at the start, this was just a fun thought experiment. We actually ended up dramatically toning down this piece as we started heading off in all sorts of unintended directions. Bottom line is we monitor with great interest as investors and great fascination as students of history what is unfolding in America. The last decade has seen the biggest bull market of most of our careers and who knows what will bring it to a close (we will probably only work it out afterwards). We certainly are not going to preempt it. Our approach here is always to tread carefully and be aware of what the risks are so that we can always make sure we live to fight another day in the colosseum that is global markets.