Stumbling Towards Uncertainty
The future is always uncertain, but it is certainly more uncertain this year than most
There are political, economic and social changes a foot. There always are. Usually, however, outcomes from such changes can be analyzed and assigned levels of probability and the consequences of those outcomes quantified.
This year is different. There are many known political, economic and social changes underway that are either ‘firsts’ or for which there are no recent historical analogues from which to draw meaningful comparisons.
Uncertainty is one of the greatest general enemies of markets. The increase in gold and silver prices in 2016, reflects in part, many political and economic uncertainties.
Here are just some of the known future events that will provide uncertain outcomes in 2016.
Demise of the U.S. Two Party System?
Two presidential candidates, Donald Trump and Bernie Sanders have already shaken up the political system in the United States. Trump, the presumptive Republican nominee for President of the United States, has never held political office. Sanders, a junior Senator from Vermont and an independent until late 2015, is mounting a serious challenge for the Democratic Presidential nomination against former First Lady, Senator and Secretary of State, Hillary Clinton.
Each of the Democratic and Republican parties have had primary challenges to the establishment candidates in the past, including challenges to incumbent Presidents, e.g. Governor Reagan vs. President Ford in 1976 and Senator Ted Kennedy vs. President Carter in 1980. This year, however, not only are both parties experiencing challenges to establishment candidates, in the case of the Republican party the challenge was successful and mounted by a candidate who had not been active in any meaningful way in the party. On the Democratic side, Senator Sanders has won 21 of 48 primary/caucus contests and is polling even with Ms. Clinton in the California primary set for June 7.
The Trump and Sanders campaigns are discussing staging a debate between the two candidates prior to the California primary. This would be a first in Presidential politics. The presumptive nominee of one party has never debated anyone from the other party prior to the completion of that party’s nomination process.
Whether either the Democratic or Republican parties can regain control over the nominating process and selection of candidates for other offices after this year’s primary season remains an open question.
The ongoing investigation regarding Ms. Clinton’s email use while Secretary of State could add another element of uncertainty if she is found to have acted illegally. If Ms. Clinton has to withdraw from the Presidential race, could the Democrats find a replacement that could run an effective campaign against Donald Trump?
If Trump wins, his presidency would throw the political and economic status quo into turmoil. It is uncertain whether or how much Trump would make use of executive orders, the use of which could lead to sudden/dramatic reversals in current foreign and domestic policies or the introduction of new ones. It is also probable that a Trump Presidency would bring a slew of new people into his administration with little Washington D.C. experience, creating further uncertainty as to policy direction.
The vote as to whether Great Britain stays within the European Union is set for June 23. A leave vote would throw markets into turmoil and may encourage other European nations to eye the exit. New trade, military and economic agreements would have to be negotiated with uncertain outcomes. Whether the final outcome is net positive or negative for Europe is not the immediate issue, but the uncertainty that a leave vote would create.
Austria held their Presidential election last week. Neither of the two candidates were from the two long standing ruling parties. In a nearly tied election, the vote turned in favor of the left green party candidate over the right anti immigration candidate. The rise of candidates outside the established political system can only lead to more uncertain political outcomes.
Central Bank Interventions
The global economy is always uncertain. The consequences of unprecedented stimulus programs in the U.S. Japan and Europe whereby central banks buy bonds and even stocks in an effort to boost their flagging economies have added further uncertainty. Also uncertain is the impact of negative interest rates (another ‘first’) on the global economy. Many central banks have instituted negative interest rates whereby the borrower PAYS the lender. The outcomes of central bank intervention in unconventional ways cannot be accurately predicted as stimulus programs of the type and magnitude currently in effect and negative interest rates have never been tried before.
The U.S. Federal Reserve is complicating matters. While other central banks are experimenting with negative interest rates and increasing their stimulus programs, the Fed is ostensibly unwinding its stimulus and raising interest rates. The dynamic among central banks engaging in simultaneously loosening and tightening of monetary policies creates further uncertainty.
The People Vote for Economic Rights
Governments providing assistance to their populations is not a new concept. The Romans appeased their citizens through a program of panem et circensus (bread and circuses). A ballot initiative in Switzerland, if passed would go well past bread and circuses. The Swiss initiative for ‘basis income’ would not only give the Swiss citizens the money to buy bread and go to the circus, but would guarantee it!
Swiss Guaranteed Income Proposal
This week the people of Switzerland will vote on a “guaranteed income” proposal which if passed would require the government to provide 2,500 Swiss Francs per month to each individual and 600 Swiss Francs to each child. If the proposal passes it is uncertain what will be the impact on the economy, inflation, and social behavior. While the concept of guaranteed income is not new, it has never been instituted in any nation. If the Swiss initiative passes, certainly copy cat legislation will be introduced elsewhere.
A changing social climate was a hallmark of the 20th century and change has accelerated in the 21st century with the increase in the ease of dissemination of ideas through technology. The ease of movement of people has also added to the pace of social change. The migrant crisis in Europe, illegal immigration in the United States, transgender bathroom issues, black lives matter, college campus safe space and free speech controversies, political correctness, pushback and backlash against these issues will also add to the uncertain political and economic environment.
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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.