Markets function within a complex framework of regulatory and central bank influence. This regulatory and monetary backdrop is not the benign rule of “experts” supposed by regulatory advocates in college textbooks, but rather often the product of raw entrenched political power. Success is getting in sync with the flow of money and political power. The “imperial city” in Washington is the lodestar, not open competition in the marketplace.
The influence of political power has several dimensions. It is both internal political changes and external political changes that can influence markets.
In terms of domestic politics, the old “spoils system” which existed prior to 19th-century civil service reform, was superior in the sense that when an administration came into power, it brought its friends and supporters, many of whom were not particularly talented. When a particular party was turned out of office, the old bureaucratic friends had to leave as well and the new administration was able to bring in their own team. And then, over time, they too would be removed and the cycle would begin again.
Getting a new team from time to time brought in new ideas and it allowed the administration to function without the hostility of entrenched interests held over from political opponents, who would use their administrative power to block new directions. In a sense, it was more democratic. When things changed at the polls, things changed in the bureaucracy.
The unintended consequence of professional bureaucrats is they can stay in place as political parties ebb and flow, giving birth to a permanent bureaucracy almost impervious to change. This is further complicated when opposing political parties basically agree to the same regulatory philosophy.
But the world changes whether bureaucrats do or don’t change, thus political change does still seep through and has the potential to change the way markets have operated.
One of the aspects of the way things have run over the past several decades has been a close economic alliance with China. US industry poured billions into Chinese development, based on the theory that as they grew rich, they would become more “liberal”. Authoritarianism would wane, and having too great of a stake in the world economy, China would not become belligerent.
As China took over more and more manufacturing jobs, the US commensurately lost key knowledge and skills and has become overly dependent on China. We agreed to give up our jobs and they agreed to buy our debt.
It has proven to be a very bad political and economic bet. The US has become dependent on China and reshoring efforts are proving difficult. China is massively building and modernizing its military and has moved into an alliance of sorts with US rival Russia.
Moreover, as the Wall Street Journal recently reported, US business confidence in China has fallen to a 24-year low. Clearly, a major political shift is on with China, with MAGA Republicans initiating the change.
Meanwhile, Mexico has replaced China as the greatest exporter to the US, and China is steadily reducing its holdings of US Treasury debt. Additionally alarming, Mexico is descending deeper into the corruption of a narco-state. Bilateral trade seems to be taking over from globalist pretensions.
This shift from China will be disruptive to the US and to China itself. And when the two largest economies in the world are disrupted, the world economy will feel the change.
China has many problems, both political and demographic. One of the most immediate is the ongoing unwinding of their massive real estate bubble. After wobbling for two years, Ever Grande, a giant real estate development company has filed for bankruptcy. More companies, though, are in trouble. This is all part of the top-down, authoritarian model imposed by Chairman Xi as he moved his nation away from the market model back to the socialist model. Additionally, it was not just central planning of the worst sort, it was central planning juiced with a giant debt bubble.
So among the political changes likely to influence markets, the troubles in China are likely to be significant.
In terms of domestic politics, we have had our own flirtation with top-down central planning. Since Obama, elites have sought to change the healthcare system and fight “global warming”. The adoption of Modern Monetary Theory by the Biden Administration, and its record acceleration of Federal debt to pay for all these schemes, has caused a spike in interest rates, which itself runs the risk of destabilizing our own domestic and international debt bubble.
The supply of bonds is rising sharply, but the FED has become a seller rather than a buyer, Social Security is a seller, and China has become a net seller. Lower bond prices have meant higher rates, even as the FED attempts a “pause.”
Democrat policies of supply restriction and cost escalation, have all but destroyed the dream of owning a house for many young people. The ability to afford a new car also is fading. The destruction of the American middle class is already creating an enormous political backlash with significant risk for Democrats.
A strategic realignment has occurred with supporters of small businesses, farmers, and nongovernment labor-tending Republicans. while Big Business, wealthy elites, and Rainbow members now favor the Democrats.
We recently completed two trips to rural Pennsylvania and rural Montana. Trump signs are everywhere. It is fair to say, these people feel ignored. They rightly or wrongly do not feel the current system is working for them.
Big business and the regulatory state have cross-captured each other. Many business leaders would rather get a subsidy or loan guarantees than fight for profits against talented rivals. Those who benefit from the Green New Deal include car companies, power companies, and favored technologies. Democrats are busy building cartels in healthcare, pharma, technology, and power generation and have turned their backs on small businesses.
As the government increasingly picks winners and losers, those picked as “winners” by the government can get a nasty surprise when they discover customers don’t agree. We are seeing this play out among many of the EV companies. We don’t want a car that is expensive, has little range, and is prone to spontaneously catch fire.
Democrat political enemies include traditional farming, ranching, timber cutting, mining, coal, and petroleum industries. Tech companies are heavily favored by Democrats and often willingly become their political pawns. Democrats hate private medicine.
No wonder there is a huge divergence between small-town America and the Big Blue cities that reliably elect Democrats.
The rise of multiple monopolies has birthed a new variant of “populism”, which does not look much like its 19th-century cousin, which had a socialistic slant to it. Today’s populism could be described as formerly business-supporting conservatives joining forces with blue-collar workers turning against the policies favoring China and the crony capitalism cabal of the Green New Deal.
Small business and labor traditionally frowned on monopolies. Traditional free market advocates suggested it is only with government favors that monopolies can be maintained. That is still likely true. However, now that industrial cartels have government favor, how do you change that?
Exactly how does one try to get market share from Google?
Oppressive regulation is increasing costs and very often, the government-sanctioned products are inferior and of poor quality. The government now wishes to tell you how to wash your clothes, your dishes, and even how to cook your meals. In the name of “global warming” the government creates dishwashers that run for a half day and don’t clean dishes. If you can buy one that lasts five years, you are lucky.
The business community itself has further alienated the public with its constant panderings to ESG and woke culture. In so doing, they have alienated natural free market allies and will soon discover that state-planning socialists are not the best partners for business prosperity. Conservatives remain in favor of free enterprise but they no longer feel much loyalty to the current American form of crony capitalism, especially large corporations.
As strikes spread throughout Hollywood and Detroit, conservatives yawn and suppose these “woke” corporations are getting what they deserve.
This change in politics likely means the end of an era for American business. For the past 25 years or so, it has been a profitable joyride in China, a profitable alignment with the government, generous benefits of ultra-cheap money and low-interest rates, bailouts, and a record rise in corporate profits. Great benefits have accrued to capital and less to labor.
The middle class feels it is getting screwed. Loud minorities demand state reparations, increased benefits, and exemption from criminal activities. It may have started with Brexit and Trump, but populist movements are ascendant in Italy and rising even in socialist Argentina.
Schools don’t work, public safety is collapsing, and the system seems to favor the racially aggrieved, and the sexually confused, while the whole thrust of government is one of constant interference in our difficult daily lives with institutional lying now the norm rather than the exception.
Populism reflects that the middle class does not feel the current system is working for them nor are the elites pushing such policies either concerned or aware of these problems. Utopians have seized the reigns of power and want to change the climate of the earth, the relations between men and women, between families and the government, all while keeping as many people as medicated as possible.
Populists don’t trust the legal system, the medical establishment, the school system, the press, and the universities. They think the popular culture is often hostile to raising families.
Even the reputation of the military is falling, which explains recruiting woes. What happens when a large swath of the population becomes alienated from basic institutions?
One wonders if all the marijuana shops are there primarily to keep young, aggressive men in a haze of self-induced contentment and oblivious ignorance.
Above all that, the frequent bailouts and interventions to save various industries have lost considerable political support. The next credit crisis will find much less support for bailouts and besides, given the current state of deficit spending, big huge new bailouts are financially out of the question.
All these megatrends are moving in different directions than they were previously and markets will have to go about adjusting to the new reality. Republicans are no longer reliably “pro-business” while Democrats remain reliably anti-free market. The Chamber of Commerce is out of touch.
Today’s “populism” is more than a revolt against the administrative state and the commercial cartels it generates. It is a combination of economic frustrations and cultural alienation. It flips the 1960s on its head. The middle class is now revolting against the “Establishment run by the elites.”
This revolt is likely to grow, and politicians, in the end, are more than anything opportunists. Markets will have to adapt.
As we move through 2023 and into the next election cycle, The Prickly Pear will resume Take Action recommendations and information.