September 14^th was a cloudless sunny day in the west of Scotland. 
A musical friend had gathered 20 or so guests in her home.  They were invited to a chamber music recital in which the hostess was playing, one of four members of a string quartet.  The musicians were seated in a bright, pretty drawing room.  Shafts of autumn sunlight glinted on their music stands.  Some chat, then silence.  A Dutchman, a naturalised Australian, an Englishman resident in Germany and a Scots lady held their bows poised over the strings.  The leader and second violin played the first quaver, the others joined them in the second bar of Mozart’s quartet known as “The Hunt”.  As they played they smiled at each other from time to time, emotions united in their tribute to loveliness.  Twenty minutes later the listeners clapped rapturously.

On the homeward journey there was time to reflect on the restorative value of co-operative effort directed towards something intrinsically beautiful.  Maybe emotions are unusually susceptible just now because of the signs of fracture visible everywhere one looks.  Relationships between nations, between communities, between people all reduced to petty antagonisms.  Such is the pain inflicted by the power of populism, to divide, to detach minds from humane or aesthetic perception.  Populists’ appeal to baser instinct drains humanity of its capacity to look beyond itself, to rise above the ritual resentments and nationalistic prejudices.  Populism weaponises resentments.  It mobilises them against the voice of moderation and consent.  The harmony of democratic consensus is revoiced as an ugly dissonance.

Populists share no political dogma.  Those minded to foment resentments for their own purposes care little where they find them.  One might find a populist wrecking ball as readily amongst acolytes of Marx as of Hayek.  Orbán, Trump and Bolsonaro cover a pretty wide political spectrum.  Archetypes may be more obvious in other countries but are not invisible in our own.  Their common denominator is a will to harness the power of disaffection to their own ambitions.  They know how the germ of resentment works.  Once it takes hold it disables the cohesive power of civility, orderliness and precedent.

To be sure, humans have nursed resentments for as long as we have drawn breath.  One might wonder then why populism has acquired the potency it now has. 

Seeds of disquiet in the UK have been fertilised in at least five areas of exploitable resentment.  First, abuse of corporate power has gone unchallenged since Thatcher’s defenestration of the unions in the 1980s.  Compliant institutional shareholders have looked aside from grotesque rewards lavished on boardroom occupants.  Second, Western governments’ veneration of the financial sector and scams affecting millions lit the tinder.  Thirdly, since the financial crash ten years ago, the effects of “austerity” have delivered daily reminders of greed’s legacy.  Fourthly, lax oversight of privatised state monopolies estranged consumers from service providers.  Finally, social media has equipped a rebellious force with the means to solicit recruits among a populace of billions. 

Populists rally round simplified tag lines.  “Clear the swamp” in Washington; “Parliament against the people” in Westminster; “Germany should reclaim its past” AfD in Berlin.  Each summons the people to recover a lost identity, to retrieve control.  It is a call to sever existing ties, to fracture current associations and thereby reclaim a vanishing heritage.  Through its historic association with statist intervention and shared endeavour, democracy’s centre ground has little appeal for the aspiring populist.  The extremes offer much more fertile soil.  Thus in the USA, White House initiatives have favoured big business and the ultra-rich on one wing and a nationalist underclass on the other.  Those sandwiched in the middle are abandoned.

Early sweeteners have helped buy the confidence of American asset owners.  They have been further privileged by the distorting effects of huge injections of liquidity into the global banking system.  For these reasons asset prices have shown remarkable resilience even as the tectonic plates of political discourse shift.  Equity indices in the USA have reached new highs.  Other markets including the UK have been immunised from more local threats by the dominance of Wall Street and palliative doses of fresh liquidity administered by their own central banks.  Those factors, along with the relative strength of China’s vast economy, have been sufficient to counter strong political headwinds.

But just as the failures of liberal democracy have swung the political pendulum towards the populist, so will the emptiness of beguiling tag lines pull it back again.  When disillusionment sets in, the reality of underlying economic trends will reassert itself. 

Economic debate already casts doubt on the continuing effectiveness of flooding the banking system with new cash.  Some economists argue that the process can be continued more or less indefinitely.  So much the better if asset prices get pushed ever further into an “Alice in Wonderland” fiction where fundamental economic metrics don’t apply.  It is a fanciful resort that appeals to populists including Trump.  He hectors the Federal Reserve daily about the need to dole out more money. 

Others prefer to look at the real world.  Medical science indicates that the strongest palliatives lose effectiveness over time.  Ever larger doses are needed to provide the same relief.  Like the human metabolism, an economy’s natural forces cannot be stalled indefinitely.  Lollipop tax breaks for the richest cannot be sucked twice.  Their effect too has a limited life.  Similarly, sky-high global indebtedness cannot rise forever.  At the same time the global economy appears to be slowing as the stimulative impacts of globalisation lose their force.  The rate of global corporate profits growth is declining. 

Happily, there are countervailing economic forces.  Able business leaders will learn to cope with a radically changed market place.  Likewise they will find ways to exploit opportunities in the energy field as technology opens up new power sources.  Quite a lot of any additional borrowed money may find its way into overdue improvements to the local infrastructure.  Major advances in medical science and their associated possibilities are announced daily.  Business conduct is being reshaped by a lately espoused social consciousness.  Institutional fund managers are making fuller acknowledgement of the responsibilities that belong to them.

The net effect of these may help restore some vitality to the global economy.  They may even pull back the political pendulum to a central point of balance.  Perhaps it is already swinging.  Election results in Hungary and Austria afford some indication of pushback against a populist agenda. 

There is a paradox here.  Interest rates – the numeraire of financial
assets – have collapsed under the weight of cash created by central banks.  Post 2009 their policy has been to “do whatever it takes” to prop up economies against fears of devastating deflation.  The more threatening the economic trends, the more support was supplied.

However, as the effectiveness of monetary support and populist bromides dwindles, financial distortions will be unwound.  Interest rates will rise.  The question of how soon it will happen is not one rational analysts can answer.  Investment dispositions need to take account of this uncertainty. Nevertheless, any ultimate return to economic orderliness should be welcomed by investors.

Healing the social fractures is a different matter.  Injuries inflicted by cynicism and resentment run deep.  Relationships casually severed, trusted institutions petulantly dismissed, common civilities enthusiastically shredded won’t be readily restored.  National elections are imminent and pending in the UK and USA respectively.  The eructative language of the protagonists plumbs new depths of dishonour.  Mistrust and mendacity displace shared endeavour and mutual respect. 

Yet the musicians play on, the choirs sing.  Neighbours join each other to help a stricken local community.  Food banks are stacked with provisions for the hungry.  People still sense an enduring value in joining with others to achieve something worthwhile.  It is a value that has outlasted the populists’ siren call.  Its survival gives all of us reason to rejoice, alongside the few who gathered that sunlit day in the west of Scotland.

20^th November 2019