Back in mid-January Bridgewater's Ray Dalio, speaking at the World Economic Forum in Davos, offered up his first thoughts on the populist wave sweeping across the globe (we covered it here).
And, once you've recovered from the laughing fit inspired by the irony of a bunch of billionaires sitting around discussing their displeasure with the masses of the world voting to undo their decades of power consolidation, you can continue with the following summary of Dalio's comments from Bloomberg:
DALIO: POPULISM MOST IMPORTANT ISSUE GLOBALLY
DALIO: POPULISM IS BY DEFINITION NATIONALIST
DALIO: POPULISM IS POLAR OPPOSITE OF DAVOS
DALIO: POPULISM IS AN EXPRESSION OF `FED-UP-ISM’
DALIO: WE’LL SEE MORE PROTECTIONISM, REVERSAL OF GLOBALISMDALIO: `NATIONALIZATION, PROVINCIALIZATION MAY TAKE HOLD’
DALIO: GLOBALIZATION HELPED REDUCE WEALTH GAPS INTERNATIONALLY
DALIO: DEREGULATION HAS CONS BUT ALSO PROS; GETS THINGS GOING
DALIO: CAN MIDDLE BE COHESIVE ENOUGH TO CURB EXTREMISM?
DALIO: TECHNOLOGY, GLOBALIZATION CAUSING INCOME DIFFERENCES
DALIO: POPULISM SCARES ME
...suffice it to say that he's not a big fan of populism.
Therefore, it should probably come as little surprise that, as we noted recently, after initially praising Trump's policies, Dalio turned sour on the new administration shortly after his trip to Davos...
“Nationalism, protectionism and militarism increase global tensions and the risks of conflict. For these reasons, while we remain open-minded, we are increasingly concerned about the emerging policies of the Trump administration.”
All of which culminated with a new, massive 60-page report from Dalio, entitled "Populism: The Phenomenon", which, in addition to reviewing the history behind historical populist waves around the world, put on full display Dalio's fears about the economic consequences of a Trump administration.
Populism is not well understood because, over the past several decades, it has been infrequent in emerging countries (e.g., Chávez’s Venezuela, Duterte’s Philippines, etc.) and virtually nonexistent in developed countries. It is one of those phenomena that comes along in a big way about once a lifetime—like pandemics, depressions, or wars. The last time that it existed as a major force in the world was in the 1930s, when most countries became populist. Over the last year, it has again emerged as a major force.
Given the extent of it now, over the next year populism will certainly play a greater role in shaping economic policies. In fact, we believe that populism’s role in shaping economic conditions will probably be more powerful than classic monetary and fiscal policies (as well as a big influence on fiscal policies). It will also be important in driving international relations. Exactly how important we can’t yet say. We will learn a lot more over the next year or so as those populists now in office will signal how classically populist they will be and a number of elections will determine how many more populists enter office.
That said, at least according to Satyen Mehta a money manager at Neon Liberty Capital Management, despite Dalio's dire warnings, populism has historically resulted in massive and sustained equity rallies that have historically averaged over 150% over three years...a phenomenon that he attributes to populists creating short-term stimulus that supports growth even as the nations’ debt burdens swell. Per Bloomberg:
If the last two decades of anti-establishment rule are any guide, the world may be on the brink of some monster stock rallies as it takes a turn toward populism.
A look at 10 of the 21st century’s most recognized populist leaders shows that in the three years after their election, local equities soared an average of 155 percent in dollar terms. And the rallies often continued as long as a decade after the vote.
"While conventional wisdom suggests investors should be wary of populist leaders, equity markets were actually much more resilient when their policies turned out to be more benign than initially feared," Mehta said.
Here is a just a small sample of some of the returns reviewed by Mehta after populist leaders took over in various countries around the world.
The pattern of outsize returns for countries run by populists has been seen from Brazil’s Luiz Inacio Lula da Silva to Russia’s Vladimir Putin, as well as in Poland, Egypt and India. Under leaders generally considered leftist, equities have done particularly well, producing 221 percent returns in three years. Right-wing heads of state saw 122 percent gains over the same period, according to data compiled by Bloomberg.
The numbers get a little trickier longer term, but for countries where there’s available data stock investors saw returns of 355 percent in the populist countries over five years and 442 percent 10 years down the road.
Of course, it should be noted that timing is everything and we suspect it was easier for Luiz Inácio Lula da Silva to preside over outsized equity returns in Brazil after taking office in 2003 after the tech bubble pretty much laid waste to equity markets around the world. Trump, on the other hand, has taken office just as equities are trading at all time highs on pretty much any metric you may want to look at.