Election Trends in 2015 – No Incumbent is Safe
In the political sphere, this year has started with a bang, when Syriza won the Greek parliamentary election. All of Europe’s attention was focused on this outcome and its aftermath over the coming six months or so. As it turned out, it was a bad omen for political incumbents nearly everywhere.
More recently, we have seen the government of Stephen Harper in Canada go down in flames, with its opponents winning an unexpected landslide victory. As an aside to this particular election: as a friend of ours who hails from Canada remarked, pretty much the only positive policy initiative he could identify so far was the new government’s plan to pursue the legalization of soft drugs (in our opinion the decision to refrain from overseas military adventures is a good idea as well).
Election winner Justin Trudeau (left) and loser Stephen Harper (right)
Apart from that, Justin Trudeau’s new government seems to hold fast to the belief that the keys to “economic growth” are the redistribution of wealth and heavy government spending, which flies into the face of both theory and what are by now ages of bitter experience. On the other hand, Mr. Harper’s chief quality was that he refused to go along with global climate hysteria. Other than that, the man wasn’t much to write home about (for instance, his government did everything to boost an already dangerous housing and consumer credit bubble, with the aid of a more than willing central bank leadership).
In Guatemala, Jimmy Morales, a comedian who has never before been in politics (i.e., he seems to be Guatemala’s version of Beppe Grillo) and who reportedly has “eccentric policy ideas” (this doesn’t necessarily mean they are bad – we haven’t really checked them out) has decisively beaten the incumbent government. The previous government was apparently involved in corruption on a truly staggering scale (which is not necessarily a reason to lose an election). While we know little about Mr. Morales, he promises at the very least to have some entertainment value – which is the most voters can usually hope for anyway.
Guatemala’s new president Jimmy Morales
In Turkey, the incumbent AKP led by Recep Tayyip Erdogan at first lost its absolute majority, but proceeded to simply try again in a repeat election a few months later. In the time between the two elections, the government decided to call off its truce with the Kurdish PKK and resumed bombing it, while Turkey was concurrently battered by frequent terrorist attacks and unrest. The aim seems to have been to make voters realize that they would be better off by voting for “stability”, which of course only Erdogan is supposedly able to provide.
This scheme ultimately worked, as the AKP party won the second election. The AKP government was involved in several major scandals as well (running the gamut from large-scale corruption, to heavy-handed suppression of dissent and competing political movements, to planning false flag attacks in neighboring countries), which goes to show that such scandals are per se not a reason to lose an election. Still, the first election proved that even a well-entrenched quasi-dictator of Erdogan’s stature is no longer safe from the incumbent’s curse.
Mr. Erdogan, in typical finger-wagging posture (if one takes a number of photographs at random during on of his speeches, at least one third of them will show him wagging his finger).
Then we had Mahendra Modi’s BJP lose the regional election in Bihar – with quite a bang. It was widely considered a “severe political setback” for the prime minister who himself not too long ago swept to a stunning victory on a program consisting of wide-ranging reform promises.
The outcome of the Bihar election will certainly complicate his reign, and may even spell the beginning of the end for his rule. It seems that a surprising number of Indians increasingly see the BJP as a divisive party. Similar to Turkey’s APK, the BJP has religious roots, only it represents Hindu nationalism instead of Islamic nationalism.
Mahendra Modi contemplates the Bihar election results.
Meanwhile, in Poland the euro-skeptic Law and Justice Party (PiS) led by Jaroslaw Kaczynski has unseated the incumbent government, support for which has dwindled to just over 23% of the vote. The landslide victory of PiS was the biggest ever in Poland. Future confrontations with the EU are baked in the cake. The policies of PiS reportedly consist of a mixture of social conservatism and left-leaning economics, which is just about the worst mixture imaginable, as it unites government-dictated behavioral control with economic control. A dash of euro-skepticism can hardly make up for this (admittedly it remains to be seen what policies the new government will actually implement).
Jaroslaw Kaczynski, leader of the Law and Justice Party and twin brother of the late Polish president Lech Kaczynski.
The Reds Take Portugal
And then there is the “red dawn” in Portugal, where the ruling conservative alliance led by Pedro Passos Coelho has lost its absolute majority to a hodge-podge of leftist parties, ranging from democratic socialists to the radical “Left Bloc” to hardline communists. In somewhat exaggerated fashion, Ambrose Evans-Pritchard accused Portugal’s president of crossing a proverbial Rubicon by asking the alliance to form a minority government.
However, the governing coalition (which competed as a coalition in the election as well) did receive a relative majority of the votes, so this step was perfectly legitimate. The comments made by the president on the occasion were extremely ill-conceived though, as they made it appear as though it was devotion to Brussels and NATO rather than the election outcome that was the chief criterion guiding his decision. In the meantime, the leftist parties have managed to cobble together a coalition of their own, in spite of having vast differences on a number of important subjects.
Portugal’s PSI-20 stock index – the market has been in trouble for some time, barely benefiting from Mario Draghi’s money printing bonanza. It is no surprise that the incumbent government lost its absolute majority – click to enlarge.
Not surprisingly, the policy proposals of the left-wing coalition are nothing short of lunatic (a detailed list can be seen in this article by Paulo Santos). In typical socialist fashion, they are promising that the State will make everybody better off, without wasting much time on explaining how the vast array of presents they intend to shower the population with will be financed (it won’t come for free).
The usual method is a combination of highway robbery, running up public debt and inflation. However Portugal no longer issues its own currency, so the inflation route isn’t available to the government anymore. Running up additional debt is out of the question too, as Portugal remains de facto bankrupt and survives on the good graces of its creditors in the rest of the EU (it was one of the earliest bail-out candidates during the debt crisis).
Antonio Costa, leader of Portugal’s Socialist Party has cobbled together a coalition with the radical Left Bloc and the Communist Party.
So the only method left is increasing taxation, but Portugal is only just emerging from a deep economic crisis, so this is unlikely to bring in the expected revenues and is bound to backfire economically (just as has predictably happened in France when an “anti austerity” socialist government came to power and proceeded to institute confiscatory tax rates).
If the socialist-communist alliance indeed manages to form a government, interesting times are going to be in the offing for Europe again, as almost every single policy proposal by the putative leftist coalition is in conflict with Portugal’s commitments to its creditors (this appears in no way different from the situation in Greece after Syriza’s election victory – Portugal may end up “Greecified” in other words).
To avoid any misunderstanding: we haven’t suddenly become fans of EU-imposed so-called “austerity” policies. We have criticized the approach extensively on many occasions, as it often seems to consist of little but burdening the citizenry with additional taxes and all sorts of regulatory impositions, while leaving the State largely untouched. Not everything about the policy prescriptions associated with the bailouts in the euro area has been bad however; they have to be assessed on a case by case basis. For instance, there is nothing wrong with labor market reforms and the breaking up of licensing-based cartels.
Naturally, we cannot begrudge people wanting their country to break free of the EU and its ever increasing centralization and usurpation of regional policies. As we have noted, today’s EU is a far cry from the vision of its founders, who essentially wanted to restore the classical liberalism of the era before the World Wars. They wanted to roll back the unfortunate legacy of socialism and fascism and bring back free trade, and free movement of capital and people. A EU focused solely on these principles would certainly not meet with our disapproval.
However, today faceless bureaucrats in Brussels decide what lighting citizens may use in their homes, what the curvature of cucumbers and bananas should be, how much water may be released per toilet flush or may flow through a shower-head per minute, how much electric power vacuum cleaners and toasters may use, and so on and so forth. In other words, it has become a regulatory Moloch, the diktats of which are practically out of the citizenry’s control. For every rule that enhances economic freedom, it issues ten that restrict it (see: “Saving the Planet one Slice at a Time” and “Tales from the Brussels Crypt” for some details on this).
None of this changes the basic fact that beggars cannot be choosers. The peripheral countries of Europe have been busted by a boom induced by loose monetary policy, but as a side effect the bust has revealed that the “mixed economy” type welfare state is unsustainable and in reality long bankrupt. We can only laugh at socialists wanting to spend even more money their government simply doesn’t have. Who is going to pay for this? They have yet to realize that they have run into what one could call the “Thatcher boundary” – they have simply run out of other people’s money.
Evidently, voters are in a very bad mood just about everywhere. Unfortunately, they are bereft of good choices in most places. Usually one essentially gets to exchange one bunch of psychopathic looters for another – so it is like jumping from the frying pan into the fire. Very often, things will simply go from bad to worse, as the underlying basic problems are usually misdiagnosed, resp. there is no-one willing to actually tackle them.
Investors should pay very close attention to this trend. In Europe specifically, the Portuguese election is a strong warning sign that the deceptive post-crisis calm could soon come to an end. An election is looming in Spain as well, and it seems almost certain that the incumbent government will lose it. In Spain there is also a bunch of left-wing parties waiting to take over, which ensures confrontation over the economic reforms that have been enacted as part of the EU’s “fiscal compact” and the bailout of Spain’s insolvent banking system (which by the way remains de facto insolvent – the problem has been papered over, but not resolved).
In Spain’s case a number of economic reforms have actually had positive effects though – the country can currently boast of one of the strongest economic growth rates in Europe. It would be a pity to undo this small success by rolling these reforms back. And yet, this is precisely what the opposition wants to do.
Pablo Iglesias of Podemos, Spain’s version of Syriza – the purple reds.
Apart from having enacted reforms under duress, the incumbent government unfortunately doesn’t have a lot to recommend itself to the electorate. It has been involved in major corruption scandals as well (see: “The Fish Rots from the Head” for details), and many of its domestic policies are rightly regarded as oppressive. These range from restrictions on the use of cash, to a law forbidding to “insult” police, or film policemen when they are in action (opening the door wide to police brutality during demonstrations and other occasions). In fact, as Mish has noted, this particular law is worthy of a full-scale police state.
One certainly cannot fault the Spaniards for pining for change – their main problem is once again that their menu of choices is abominable. Meanwhile, a major confrontation between the central government and Catalonia’s regional government is looming, as the latter wants Catalonia to secede from Spain (if we were Catalonian, we’d certainly want to secede as well).
Catalonia’s parliament has already voted for secession, but the European press reports that Spain’s constitutional court has “stopped” the process for now by agreeing to rule on a complaint lodged by the central government against the secession plans (why a putative independent Catalonia would care about the rulings of this court remains unexplained).
Catalonia’s Artur Mas – bent on secession from Spain, an idea that enjoys strong support in Catalonia (the Catalonians have history on their side as well, as we have previously discussed).
Anyway, in Europe the trend toward unseating incumbents – which has undoubtedly been strengthened in a number of countries by the recent migrant crisis (Ms. Merkel’s rule seems unlikely to survive the event) – is highly likely to bring back crisis conditions as the facade of unity increasingly crumbles.
This is a significant trend for a more general reason as well: it shows that the “back to business as usual”/ “everything is awesome” message propagated by the ruling elites is not deemed credible by most electorates. When the social mood is ebullient and positive, incumbent politicians nearly always get reelected, regardless of their faults. They can be immersed in scandals up to their eyebrows, they will still win elections.
Nixon didn’t have to face impeachment hearings and was ultimately forced to tender his resignation because he was a manipulative Machiavellian criminal. He essentially tripped over a falling stock market. Clinton, who was certainly dogged by scandals as well, was conversely perfectly safe, as his reign was accompanied by a major stock market bubble.
When the performance of financial markets diverges from underlying social mood trends, it is usually time to be very careful. It very often means that a financial accident is not too far off. This could e.g. be observed when George Bush’s popularity rapidly declined while the stock market kept rising at the same time. The two trends didn’t really mix well, and ultimately it was the stock market’s trend that “caught up”.
The SPX and continental Europe’s strongest stock market, the German DAX. The happy days may not last – click to enlarge.
Financial market participants have recently ignored political developments (not to mention economic developments), instead choosing to continue to put their faith into the power of the printing presses of central bankers. This could very easily turn out to be a costly mistake.
The former trend should be heeded, as it reflects a deteriorating social mood, which is never a positive environment for risk assets. The printing presses meanwhile will eventually run into the constraints of the real world. Central banks can create money ex nihilo, but they cannot create one iota of real wealth. On the contrary, their policies over recent years have simply caused malinvestment and capital consumption, masquerading as “growth”.
In the near term, expressions of a worsening social mood in the form of at times unexpected election outcomes have the greatest potential to lead to renewed upheaval in Europe. However, the rest of the world won’t be immune to this. It is high time to give this trend due consideration (and this doesn’t necessarily only concern investment decisions). Caveat emptor.