The New Political Paradigm (NPP) has been one of our medium-term themes as a framework for thinking about the market impact of gradually growing populist pressures and decreasing trust in institutions.
However, the results of the US election – with a centrist winning the White House but the Democrats unlikely to control both branches of Congress – should help keep some of the most market-moving elements of the NPP policy mix off the agenda for the time being.
The divided legislature should, for example, preclude some of the most aggressive potential changes in fiscal policy, such as modern monetary theory, universal basic income, or Medicare for All. In addition, a Biden presidency should provide a calmer style in Washington’s approach to China and trade policy in general, even if there is little change in substance.
Still waters, deep currents
Set against this, though, we have to consider the impact of COVID-19. As with so many things, the pandemic has accelerated the underlying trends of the NPP – not least in exacerbating inequality. The virus has taken the greatest toll on those who were already the most financially vulnerable prior to the outbreak.
Job losses have thus been most severe among the lowest-earning groups, for multiple reasons, and cost-cutting at firms may lead to greater automation and so further hinder labour’s bargaining power.
School closures have widened the education gap between students from different economic backgrounds. According to Boston Consulting Group, roughly 16 million young Americans – 30% of schoolchildren – lack internet access or laptops for online learning.
US food inflation has almost doubled since March, making it increasingly difficult for the poorest to provide for their families. And many Americans don’t own any financial assets, which means they won’t benefit from the market rally.
The deterioration in these and other areas is only adding pressure to longstanding fault lines: according to the latest data from the Federal Reserve, the top 1% of Americans by wealth accounts for 30.5% of all household wealth in the US, while the bottom 50% of the population holds just 1.9%.
The Edelman Trust Barometer at the start of the year already showed a significant gap in optimism about the future in different parts of developed markets’ populations before the pandemic hit, and that gulf is almost certainly wider now.
Nothing good comes from inequality. Besides the moral aspects around inequality and poverty, an OECD study shows that there is a significant negative relationship between economic growth and inequality. It makes the economy more vulnerable to shocks and pushes the political debate towards opportunism, isolationism and extremism, in our view.
Food-price increases in the Middle East helped trigger the Arab Spring protests, for instance, and a tiny rise in public transport prices triggered the massive and ongoing protests in Chile one year ago.
So overall, the NPP may be quiet for a while under the new US administration, but our expectation is that the underlying trends that gave rise to populism stay in place and become market drivers again in the years ahead. In the meantime, our mantra remains ‘don’t predict, prepare’.