‘A grave threat’

The weekend was spent in Niagara-on-the-Lake, with the teeming masses. We stood at the confluence of the Niagara River and Lake Ontario. Looking to the left, rising from the water were the towers of Toronto. Looking to the right, a few hundred yards distant, was New York state.

If the polls hold, citizens on both banks could have new leaders in the near future. Britain, too. And France. Maybe Germany as well. In fact, it’s one of those unique times in history when change, anger and voter unrest could redraw the political map of the industrialized world. Left standing will be the authoritarians, dictators and potentates of one-party systems where votes don’t matter.

It’s a big deal. And maybe not so good. Headlines like this, from Scotia’s smart guy Derek Holt always get my attention: “Trump could be a grave threat to the bond market.”

Yikes. That would mean only one thing – a reversal, sending rates skidding higher.

So what’s going on?

We told you a few days ago about the widespread rise of populist politicians. They made big gains in the European elections. They forced a snap election in France, which the centrists seem certain to lose. Voter angst will probably trash UK leader Rishi Sunak next month. Seven in ten Germans disapprove of the boss, Olaf Scholtz and his alliance. Despite being a convicted felon and serial grifter, Donald Trump is leading Joe Biden in most polls. And Justin Trudeau’s Libs will be wiped out if current public sentiment holds.

In most cases, the oppo leaders are catering to citizen anger over failed expectations. Post-Covid inflation came as a shock. Interest rates everywhere shot up to counter the surge in prices, and made life harder. The shocking wealth disparity that new technologies and global corporations have brought stokes rage. In most G7 countries, and especially Canada, the cost of real estate has made voters feel governments failed. All this is set against a backdrop of anxiety over what’s happened in Gaza and Ukraine, plus the constant Putin nuke threat. And don’t dismiss climate change. Or forgetting your passwords. It’s too much.

But as we articulated here in recent weeks, populism almost always means protectionism, nationalism, isolationist policies, trade barriers and tariffs plus increased public spending, deficits and debt. It’s why we hear cries of ‘Germany for the Germans’ and why Trump can get away with saying (to applause) newcomers ‘are poisoning the blood of this country.’

We get it. Folks are angry. The comfy middle-class lifestyle they expected isn’t rolling out. Villains are required. Globalism and the WEF. Immigrants and migrants. Central bankers. Bezos, Musk, Gates, Zuckerburg. People in $3 million houses. And everybody currently in government. The desire to stick a finger in the eye of the wealthy and powerful is overwhelming. People vote against, not for. This time maybe more than ever.

We mention Holt because this weekend his investment clients got a shocking report. “Central banks are entering a period of heightened uncertainty stemming from political developments that cannot be avoided or separated from the potential effects upon markets and economies,” he writes. “Political developments are putting renewed risk into the implications for fiscal policy, European unity, the bond market, and market stability. How these developments may net out is deeply uncertain at this phase which means how central banks may have to respond could also be highly uncertain.”

What this means is sweeping political change on a global scale. It will result in “higher uncertainty” and possibly “a tectonic shift in policy direction.”

That does not mean a shift into something better. Trump is a fine example.

Joe Biden has done a poor job at managing the US debt (it’s risen 50% since the pandemic and gone from 107% of the economy to 122%), but Trump would make it worse, he says. The rerun president would drop corporate taxes permanently, expand public spending, reduce personal taxes (no tax on tips, for example) and boost the military budget. “That would take Washington’s deficit to GDP ratio to the highest level on a sustained basis than at any other point outside of wartime or deep crisis like the GFC and pandemic.”

The result: US bond yields surging to 6% or more. Residential mortgages in the 8-9% range (the market froze cold when 7% was hit). “In short, Trump’s tax plans could wind up landing like a lead balloon in the back pockets of American debtors including consumers, homebuyers, and businesses.”

Canada gets whacked, too. Already there are suggestions our interest rates could rise almost 2% during a Trump presidency, taking mortgages close to 8%. Another threat is that between now and election day in 2025 the Trudeau/Freeland Libs will try to buy voter favour with even more spending. Bigger, steamier deficits. Higher debt. And a legacy that could cripple the next crew who seize the reins of government – especially if the orange guy is in charge in the States.

“Central bank plans could be thrown into a state of upheaval toward greater easing pressures if market turmoil intensifies over the summer and beyond,” says the economist. “Political risk and consequences for market stability and policies are front and center.”

It’s a bell we’ve been ringing here for a while. The wise will pay attention. The rest will punish and covet. Now you know  how may turn out.

About the picture: “I appreciate all you do and share with the general public,” writes Neil in Toronto. ” Thanks. Here’s a photo of the family bunny, Flash.  Take care and all the best.”

Blog note: When we run pictures of rabbits, you might think there’s a drought of dog and cat submissions. And you’d be correct. If you have a beast to be featured, email a picture (urgently) to ‘garth@garth.ca’.

Failure to do so could result in more photos of Chrystia Freeland.

Source: https://www.greaterfool.ca/2024/06/16/a-grave-threat/