Right-wing Populism & the Finance Industry

The US stock market under a Right-wing populist (Source: here)

I spent two decades working in financial markets, first as an investment bank analyst, then as a bond trader, and finally as head of research at a large specialist emerging markets investment manager. The experience taught me a great deal about how financial markets work, including its many idiosyncrasies.

One of my main gripes about the financial industry is the herd mentality of investors. I used to joke that the key to making money is to buy when it’s cheap. If you are not in financial markets, you will not get the joke, because this advice sound perfectly obvious, even trivial.

Yet, in financial circles when say you, “Buy when its cheap!” it never fails to draw a laugh, because the vast majority of investors never do that! Instead, they sell when prices fall and buy when they rise. This pro-cyclical behaviour of investors is one of the reasons financial markets have excess volatility; too many bubbles and excessively deep crashes.

Investment banks make markets in stocks and bonds, so they encourage herd mentality. They make a profit each time a stock or a bond is traded, so they make sure always to issue doomsday messages in the middle of sell-offs and over-the-top hype during rallies; it encourages excessive trading and puts more money into their pockets.

Don’t ever trade on the advice of an investment bank!  

But why, I hear you ask, do investors fall for this kind of nonsense? Aren’t they well-educated and clever people?

Well, yes they are, but here is the thing. Do you remember those kids back in high school, who always did what the majority did, who always wore trendy clothes, who never stepped out of line, who always hung out with the popular kids, and in whose skulls an independent thought never ever materialised?

Well, those kids all ended up in finance!

Investors are , for the most part, hive-brained herd animals. They feel far safer doing what everyone else is doing than striking out on their own. Besides, it is still perfectly acceptable in the finance industry to incur huge losses as long as everyone else is also incurring huge losses. Very, very, very few investors ever strike out on their own.

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While I find the herd mentality of investors infuriating, there is one facet of investor behaviour I hate even more, namely the tendency of investors not to distinguish between populists and technocrats on the Right of the political spectrum.

It is obviously not surprising that most finance types vote for Right-wing politicians. After all, Right-wingers typically favour low taxes for the rich and businesses. In their defence, one can say that at least finance types vote in accordance with their personal interests when they vote for the Right.

Yet, what is genuinely mysterious is how finance types seem completely unable to distinguish between Right-wing populists and Right-wing technocrats. Populists undermine institutions, whose delicate design and relationship to other institutions are essential to preventing abuse of power, while technocrats do not.

To me, this distinction between populism and technocracy is critical and absolutely fundamental to investing. Left and Right does not even come into it.

Let me be more specific. Populists are politicians, who would, at the drop of a hat, ditch democracy, rule of law, and basic human rights as long as it gets them more power. They would not hesitate to strike down even the most basic building blocks of modern societies, such as independence of the courts, the civil service, and a free press. They would readily scapegoat vulnerable people and go to war in preference to taking on difficult fundamental reforms. They would manipulate government statistics, even pursue state capture to steal from the state and secure their tenure. They would sacrifice any and all long-term objectives for instant political gratification.

Some populists would even go so far as to engineer financial and political crises in order to get a stab at emergency powers that could enable them to become autocrats. The actions of poplulists are invariably short-sighted and almost always lead to catastrophe. Populists’ lust for power and willingness to do anything to satisfy it always remind me of Shakespeare’s Sonnet 129:

Th' expense of spirit in a waste of shame

Is lust in action; and till action, lust

Is perjured, murd'rous, bloody, full of blame,

Savage, extreme, rude, cruel, not to trust,

Enjoyed no sooner but despisèd straight,

Past reason hunted; and, no sooner had

Past reason hated as a swallowed bait

On purpose laid to make the taker mad;

Mad in pursuit and in possession so,

Had, having, and in quest to have, extreme;

A bliss in proof and proved, a very woe;

Before, a joy proposed; behind, a dream.

    All this the world well knows; yet none knows well

    To shun the heaven that leads men to this hell.

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Confession: I am generally cynical about politics. Usually, the best I hope for in a politician is that he/she doesn’t screw up too much. It is extremely rare that politicians do anything genuinely useful. In fact, the risks are usually skewed heavily to the downside. And the biggest risk by far is that a populist assumes office and does something genuinely dangerous and destructive.

It is therefore always preferable, in my view, to support a technocrat candidate over a populist candidate. Even when I don’t share the political views of technocrats and regard them as utterly boring and uninspiring, I still support them if the alternative is a populist.

It is deeply worrying that most finance types have a complete blind spot when it comes to spotting Right-wing populists. It is also odd, because they rarely waste any time labelling Left-wing candidates rampant populists, even when they are not.

Trump versus Kamala is a case in point. I do not have statistics on how finance types voted in the last US election, but I am prepared to bet a large majority voted for Donald Trump. He was the Right-wing candidate, after all. The finance industry will have seen in him the promise of lower taxes and the prospect of becoming even richer. In the privacy of the voting booth, they will have ignored or entirely failed to recognise the dangers posed by Trump on account of his strong populist tendencies.

Needless to say, they will also have shunned Kamala, who, while boring, would nevertheless have been a far safer bet. There is no way she would have threatened NATO allies in favour of Putin. She would never have abandoned America’s commitment to free trade. She should not have dismantled the entire State, the full consequences of which will soon become painfully obvious to everyone in the United States.

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The damage caused by populist Donald Trump has now become obvious for all to see, even the finance types. Many of them will be busy trying to concoct ways they can say the words “I told you so!”. That is when I switch off. They never did, even though the signs that Trump would turn out to be a dangerous populist were there all along:

·      We knew from his first term that Trump does not believe in free trade, because he introduced tariffs and started trade wars.

·      We knew from his first term that Trump does not believe in human rights, because he separated children from their mothers.

·      We knew from his first term that Trump does not believe in democracy, because he attempted to stage a coup when he lost to Biden.

·      We knew from his first term that Trump does not believe in institutions, because he criticised NATO and withdrew from several United Nations organisations.

·      And we know from his decades-long career in business that Trump is a crook and, most likely, a Russian asset.  

Finance people ignored all that. A mere few months ago, they were falling over themselves on financial television praising Trump and his promise to Make America Great Again. Now they are busy downgrading growth forecasts and return expectations. Their inability to spot populism has upended their hopes of a big payday, made worse by the fact that the herd of investors has turned tail at the same time. Markets have crashed turning and you should probably be buying stocks and emerging markets right now.

For now, though, all of us are paying a price.

The End