Sunday, November 20, 2016

Brian Gaynor: US protest vote has echoes elsewhere


Donald Trump’s election, and the recent UK Brexit vote, demonstrates that there is considerable dissatisfaction with the political and business establishments in a number of countries.

A large percentage of the US and UK middle class, particularly white males outside the major cities, believe the system is rigged and they don’t have a voice.

New Zealand is fortunate because our MMP electoral system gives minorities a voice. 


Trump’s success was more of a protest vote against the close relationships between the insiders in Washington and New York than a clear endorsement of his policies.

Trump listened to the electorate in Michigan, Wisconsin and Iowa, who believe they have been neglected by the political and business establishments, and unexpectedly won these states.

Meanwhile, the Clintons have had a damagingly close relationship with Goldman Sachs, with Hillary Clinton receiving US$675,000 for delivering three speeches at Goldman events after she left the State Department.

There have been a large number of close relationships between Wall Street and Washington – for example, Hank Paulson leaving the top job at Goldman to become Treasury Secretary in 2006.

Robert Rubin, Treasury Secretary in Bill Clinton’s Administration, had been a Goldman employee for 26 years. He became chairman of Citigroup after leaving Washington and received more than US$126 million in cash and shares before his bank was bailed out by the US Treasury in the global financial crisis.

Voters in the rust belt, mid-west and conservative South believe they have no voice in the Washington/Wall Street insider game. Trump says he will radically change the rules of the game, but a number of his policies suggest otherwise.

These include:
  • Reducing the corporate tax rate from 35 to 15 per cent
  • The repatriation of corporate profits held offshore, subject to a low one-off 10 per cent tax
  • Repealing death taxes
  • Giving massive tax credits to companies to encourage infrastructure spending
  • Reducing regulation and the size of government.
These policies would give Wall Street a huge boost, but we don’t know whether Trump will prioritise these initiatives ahead of other policies. The problem is that Trump is a complete unknown as far as policy implementation is concerned and we don’t know if he will appease the interests of his middle-class white voters or the Republican business community.

Investors are undecided, but Tony Schwartz, ghostwriter of Trump’s business memoir The Art of the Deal, is quite clear. Schwartz, who spent considerable time with Trump, told The New Yorker: “If Trump is elected President, the millions of people who voted for him and believe that he represents their interests will learn what anyone who deals closely with him already knows – that he couldn’t care less about them.”

There is growing worldwide political dissatisfaction with the establishment and the next votes to watch are in Italy on December 4 and France, Germany and New Zealand next year.

The Italian referendum, which was proposed by Prime Minister Matteo Renzi and his centre-left Democratic Party, is a vote to approve a dramatic reform of the Italian constitution. Renzi is considered to be an establishment politician and his constitutional reforms are strongly opposed by anti-establishment parties.

At this stage, the French presidential elections in April and May look like a battle between incumbent socialist Francois Hollande, Republicans Alain Juppe and Nicolas Sarkozy and the far-right Marine Le Pen. The latter is performing very well in the polls.

Germany goes to the polls in the second half of 2017, with Angela Merkel’s poll ratings continuing to slide. She received a further blow last Sunday when her centre-right Christian Democrats lost ground to the far-right Alternative for Germany (AfD) in three important state elections.

The AfD received between 12.5 and 24 per cent of the vote in these states, the best result for a far-right party since Adolf Hitler.

These anti-establishment far-right movements are a major concern and will be watched closely by investors in the months ahead.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.

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