Well that didn’t take long. On Thursday afternoon France’s President, Francois Hollande, announced that he will not be seeking re-election. Could it be from his approval rating of less than 10%? Then the Italians voted against the reformation of their constitution in yesterday’s referendum, leading their Prime Minister, Matteo Renzi, to step down after just two and a half years in office in very David Cameron-like fashion (who stepped down from office after losing the Brexit vote). Both of these events further open the door for the Euro-skeptic parties – the National Front led by Marine Le Pen in France and the 5 Star Movement led by Beppe Grillo in Italy. The Italian banking system is in the worst shape of all the European banks so this Italian referendum vote against constitutional changes has the potential to have the largest impact as it could have repercussions for the entire banking system, the bond market, ECB policy and ultimately the Euro currency itself.
This chain reaction of falling dominoes I’ve been mentioning is the change underway where the people are taking back their countries and liberties by ousting all of the old-guard politicians that represent the political system put in place following World War II. All of the old institutions created to form a new world order of peace and prosperity are losing their significance – institutions like the IMF and the United Nations. Do you think Donald Trump is going to listen to the IMF or UN? Or will he do what he feels is best for America? We’re seeing the unwind of globalization as countries are beginning to say “it’s time to focus on us.” These institutions aren’t going to disappear; they’ll just slowly become irrelevant as countries stop listening to them.
We haven’t had any major global wars like World War II in that time, so from the perspective of peace it has been a success (obviously there have been smaller regional conflicts but that’s always the case). The issue that’s driving this change now is that the promise of prosperity has failed miserably over the last 20 years. Yes, the US has fared much better than Europe but for a while we were heading down the same path. The European countries not named Germany that joined the Eurozone have been decimated economically since its creation. The political leaders in Brussels way overstepped their boundaries with regulations, new taxes, fiscal budget controls and what seems to be the straw that broke the camel’s back: immigration and the forced acceptance of refugees.
These changes are likely to impact global trade the most and will ultimately be inflationary as the cost of goods rises. There will be many pros and cons that come with these changes but on the whole I see it as a positive for society. Governments have become too large and bureaucratic, and in an attempt to survive as they crumble under their own weight they’ve been pulling everything down with them through additional regulations and taxes. It appears the people have hit their breaking point.
Who could be next…?
I primarily write this blog to keep my clients up to date with my views and changes in their portfolios. However, I also know that I have a lot of non-client subscribers so I’m going to be doing a series of posts over the next few weeks talking about some investment themes and portfolio management strategies that I think will help investors get through these potentially volatile geopolitical changes. Seasonality effects tend to be positive for stocks going into year-end so hopefully we get a little boost we can use to diversify away from the more traditional asset classes like stocks and bonds. Stay tuned and thanks for following!
-Nick