Back in March, when looking at the latest political wave sweeping across Europe, Deutsche Bank’s Jim Reid wrote a report which observed that “it’s hard to get away from the fact that populism is currently going through an explosion in support at present” of which today’s vote of no confidence of Swedish prime minister Lofven was just the latest example. DB focused on Europe, as shown in the following chart, and noted that high double-digit youth unemployment has become a hotbed for anti-establishment sentiment, which has everything to do with the economy, and lack of opportunities.
The German bank then warned that the “liberal world order” is in jeopardy, and concluded rather ominously:
As of now the rise in populism hasn’t yet destabilised markets however we find it difficult to get away from the fact that uncertainty levels are bound to remain high while such power brokers remain in major elections. Indeed the unpredictability of Trump’s policies is such an example, with the recent tariff threats which have subsequently escalated market concerns about a trade war being one. At a time when global central banks are moving towards an unprecedented era of tightening and dealing with years of massive asset purchases, risks from rising populist support has the ability to seriously disturb the prevailing equilibrium of the last few years and subsequently markets.
Fast forward to today, when Bank of America strategist Barnaby Martin tackles the thorny issue of ascendant populism, which he attributes to the “lost decade” following Lehman’s collapse and what he dubs the “era of hubris” – a time when the richest 1% has seen its collective wealth surpass $100 trillion.
Martin begins by reminding us that a decade ago, “the collapse of Lehman Brothers sent shock waves through financial markets” to which the response was an unprecedented amount of central bank support, both in terms of its size and creativity.
And as we have observed on countless occasions, with central banks as a tailwind, financial markets have outperformed real assets over the last decade. Even so, the dichotomy in many cases is staggering:
Note that the cumulative total return on ICE BofAML’s Global Broad Market bond index since ‘08 is 50%…yet the growth in house prices globally over this time has been just a miniscule 1%.
Simply said, the last decade has seen those who hold financial assets become richer, as markets have lurched higher; meanwhile those without such assets – the vast majority of the middle class – have been increasingly left behind, however, even as wage growth remained stagnant and indebted governments have struggled to provide strong social support. As a result, a great wave of populism emerged as “issues such as wealth and income inequality have started to polarize societies much more.”
The next chart shows in staggering fashion just how “rich” the rich are today, especially when compared to some other big numbers and markets. According to BofA estimates the wealth of the top 1% globally has surpassed $100tr now…a number greater than the sum of the big-4 central bank balance sheets, current world GDP and the cost of the ‘07/’08 global financial crisis, for instance.
The great divide between the haves and the have nots has manifested itself not only in terms of accumulated wealth, but income as well, as the wealthy have had greater income-generating opportunities at their disposal, mostly due to access to better technology and education. It is therefore mostly the wealthy that have been able to reap the benefits of globalization, and perhaps the reason why the “not so wealthy” have been eager to tear apart the globalist system, and willing to listen, follow and vote for any populist leader who promises that.
Meanwhile, the top 1% richest in the world have witnessed impressive income growth since 1980 – in many cases, multiples of that seen by the less well-off in society. Also notice what Martin calls the “hollowing out” of the middle class over this period – where income growth has been the weakest- as “many have simply found their jobs replaced by either highly-skilled or low-skilled workers.”
Which brings us back to the core topic: the rise of social discontent, manifesting itself in growing populism. Observing the growing wealth and income inequality, Martin writes that these have been “important factors (albeit not the only ones) contributing to the rise in voters’ frustrations and resentment across the world.”
The result, as Deutsche Bank showed back in March, has been for the electorate to increasingly embrace “populist” or “antiestablishment” parties in hope of better times…and to shun mainstream left or right institutions.
As the next chart shows, the growth of populist voter tendencies has been clear since the late ‘80s, with the trend increasing in the post-GFC era.
There are few signs as yet of it fizzling out. At the end of 2017, ten governments in Europe included one or more authoritarian populist parties, according to Timbro. Average voter support for far left populist parties has also notably risen since 2011.
In his conclusion, Martin echoes DB’s Reid, saying that “the continued rise in income and wealth inequality globally suggests that populism is here to stay” and yet it remains to be seen how effective it will be at tackling inequality and placating voter frustrations.
Meanwhile, even economies that have witnessed strong growth in recent times have struggled to generate “inclusive growth” instead becoming the world’s new breeding grounds of pervasive inequality. As the next chart shows, income inequality in China has jumped dramatically since 1990 despite very strong economic momentum.
What is ironic, is that since 2008, the Chinese government – which is terrified of a middle-class revolt – has introduced measures specifically aimed at reducing inequality. But as chart 4 highlights, while this has slowed the rise in income inequality in China, as yet it has not meaningfully reduced it. Will China be ground zero of the next social revolution as the people decide their “communist” leaders have betrayed them and take matters into their own hands.