With politics playing so prominently into what's been driving US markets lately, as investors (or the algos that trade on their behalf, at least) seemingly reacted to every comment out of Capitol Hill, the White House or President Trump's twitter feed.
With roughly three weeks to go until the big day, the hosts of MacroVoices invited Dr. Pippa Malmgren, who once served as a presidential advisor on economic policy during the George W Bush Administration.
Questions from host Erik Townsend focused mostly on the political outlook during the final weeks until the election, whether the polls are once again underestimating support for President Trump, as well as certain potential misperceptions related to the black vote.
Though, in one notable tangent, Malmgren offers some interesting thoughts about the collapse of Wirecard, the German payments giant that filed for bankruptcy protection after a special audit finally exposed the $2 billion-plus hole in the company's balance sheet.
Below, we outlined a few key excerpts from the interview:
The "Digital Civil War"
Erik: I want to pick up on a phrase you used just a minute ago, "a new kind of civil war". Tell us more about what you mean, because it seems to me we do have scope for this unrest, to grow to a scale that really is a civil war. But obviously, this is not the 1800s we're not going to dig trenches and have soldiers on either side with muskets trying to shoot at each other. It seems like we're already seeing burning things down major arsons, are one of the elements of these new tactics of what I think could escalate into this new kind of civil war. What are the other attributes? What is this new kind of civil war? What does it look like?
Pippa: Well, another attribute of it is its digital quality. And there's a lot of writing about it and you and I have talked in the past about the changed balance of power between states and citizens, and the use of data, and digitization, the use of mobile phones, for example to track behaviors. And again, COVID has totally accelerated that process with the introduction of track and trace, and ever larger powers and freedoms by governments to keep an eye on the citizens using their electronic technology and every nation does this differently.
Recently, I think just this week, we saw in Hong Kong the Chinese authorities blocked off a few city blocks, and everyone inside those few city blocks basically had a data search done. And it heavily targeted young people because they're trying to find who are the protesters, who are the organizers of the protest against the Chinese state. And so basically your digital identity, which is in your phone gives away so much information about you, who you connect with, where you've physically been.
It's capable of being used as a microphone to record everything that you say, there's a record of all your emails, all your communications, all your text messages. So, this is the new war zone, it is a data space and I don’t that we've reached an agreement about what's a reasonable amount of data for governments to have access to and what's not.
I don't think we've reached that in China and I don't think we've reached it in the West either because it's all so new, people still don't even understand that they're giving away that information. They still will have conversations in front of an Alexa and think that it is still private when in fact all that data is easily auctioned off on the net and available for sale.
So I think data is the second war space or Warzone where the civil unrest is unfolding and then I think another area of it has to do with morals. And this is such a super controversial area because everyone takes the high ground and says my morals are better than your morals, but the point is, they're all arguing about what's the right set of morals.
And I think that's a really fascinating fight about philosophically what are the right set of morals for a modern society? And that's why again, the Supreme Court issue is so important. And we just saw this opinion being released by Justice Clarence Thomas that calls into question the case that allowed gay marriages. And such an interesting question because for me when I was growing up a conservative was liberal in the sense that the view was, once you get to your own front door, anything you want to do, should be allowed inside within a certain reason.
But, basically, the freedom to be who you were was protected, today that's not considered the conservative position. And the liberal position has moved to, we're entitled to come into your house and tell you what you can and can't do. It's like a complete reversal of where things used to be. So some of this is navigating in a moral space, which is a bit like the 17th and 18th centuries, particularly 18th century where those were the kinds of issues that we had civil unrest over, they were moral issues, and we're seeing maybe a repeat of history on that front.
A Golden Opportunity For China
Erik: Now, a lot of Americans focus on the domestic aspects of this and the domestic policy aspects of this. I tend to think more about this in a different context, which is, I feel that for many years now China particularly and a number of other nations, have been waiting for their moment of opportunity.
Where there's a vulnerability in the strength of the American nation to where they could do something to change the dynamics, and particularly to try to displace the US dollar as the world's reserve currency. Are we headed toward a situation where an uprising of civil unrest in the wake of a contested election could create a moment of opportunity for China or other nations either militarily, or I think more likely financially to make an attack, so to speak on the United States?
Pippa: Well look, geopolitics is alive and well and we are definitely seeing the superpowers facing off against each other. And they're doing it in lots of different ways, some of which are visible, some are which not so visible, there's definitely a race for the command of space, meaning outer space. And there's a race for the command of data, and there's a race for resources, so some of the most intriguing geopolitical conflicts now are occurring in really obscure places like the border between India and China, where there's big argument about water.
So, I think, this traditional way of thinking that China wants to displace the US dollar, yeah, I get it, but it's not necessarily the highest priority. I think a higher priority is how to achieve domestic security and that's more about resources and relationships. And that's what the Chinese focus on is deepening their access to resources, energy, food, water, and deepening the relationships that they can rely upon at the expense of the United States.
Now, what goes along with that is the building of payment systems and the Chinese have been very active in talking about their new digital currencies, which they do see as being global in nature. And is displacing the dollar over time part of that? Sure, definitely, I'm just saying it's not like they wake up every morning going, let's displace the dollar. It's more that they wake up every morning going, let's make sure that we have enough food, and part of that is food security and the ability to pay for it wherever it is in the world.
I think Russia is bit different, and it was the United States that really called into question Russia's ability to manage its affairs in the world economy because once we started to say that we would use SWIFT the payments mechanism as a geopolitical tool. So, if the Russians behaved badly, we would deny them access to the swift bank clearing systems and they said, fine, we'll just create our own SWIFT, which they now have.
So it wasn't that they woke up saying let's displace the dollar, it was more that a geopolitical event occurred and they realized their vulnerability to the US dollar and found a way to diminish that vulnerability. And I do think that the commercial warfare between Russia and the United States or the West is definitely intensifying.
And we can see that in companies like you must be familiar with Wirecard and the big fraud that happened at Wirecard, it's a multi-billion dollar fraud. And it turns out that the finance director was not only a Russian but someone who's taken refuge and is considered an ally of President Putin's and it's raised lots of questions like, what was that really about?
Was that really just a commercial enterprise that went wrong? Or was that a geopolitical strategy to create a payment system in the West that was fraudulent and use it as a means of extracting information about how business is conducted in the West? Maybe compromising information about people using that payment system.
Like what was that objective? Or is it just coincidence that the finance director appears to now be an exile under President Putin's protection? Maybe it is, but it's an open question we don't know is what is this modern geopolitics about? Especially in the commercial arena, which is kind of a very different way of thinking about geopolitics than we are used to.
Social Unrest & The Black Vote
Erik: Pippa, how should investors be thinking about this election and particularly the accuracy of the polls, because according to the polls, it's pretty darn clear that Biden is strongly in the lead. Some people have suggested however that really there's a lot of room for things to change and there's also a lot of room for those polls to be wrong because of biases that are built into them. Is this thing a done deal? Is this election in the bag for Biden at this point? Or is that not the case?
Pippa: So, I think the first thing that really matters is the demographics of America is changing so rapidly that I don't think these polls are able to capture what's really happening. So for example, we're seeing an exodus of people from both California and New York into the interior of the United States, particularly into Texas, and places like Arizona.
So this is really interesting, Arizona starts to look like it's going to be a Biden supporting state and traditionally that's not where Arizona has been. So it's the morphing of the demographics of politics inside America as the coastlines migrate to the interior and it changes the flavor of politics and I think you'll see this in Texas as well.
Texas is becoming a less holy conservative state and becoming more liberal and left leaning again partly because Austin has become, in my opinion, the new Silicon Valley, the epicenter of innovation in technology in the United States. That's an incredible collection of the brightest minds in the country now all ending up there and that's put a very liberal bent on that community so naturally, they vote differently than they used to vote in Austin.
So I personally think that these old notions about what the people are like in any given state are just outdated and the polls are not catching this. And I also think that the silent Trump vote is probably bigger now than it was in 2016. People find that quite shocking and surprising, but I think it is, and one of the things I've been watching closely is the African American vote for Trump, which has been rising, and really rising substantially in recent weeks.
And everybody goes, well, how can that possibly be? So let me put it in stark terms, when people talk about the black vote in America, they assume it's one unified block. Well, this is crazy, nobody says the white vote in America is one unified block, it certainly isn't, and the black vote isn't either. So what we're seeing is a differentiation and it's the middle class mothers over the age of 40, who it turns out, are remarkably pro law in order.
And often in communities where the whole police force is principally African American they're the opposite of the defund the police crowd, they're the fund of the police, because that's my son, that's my daughter, that's my nephew, that's my niece. And those people, their vote for Trump has clearly been going up as a result of the social unrest, and that's shocking to a lot of people. How could you have anybody who's in that African American community vote for Trump? And the answer is, well, some people are putting that as a higher priority than you would have guessed.
Equally the Trump supporting white community is, I think there are a lot of silent Trumpers there as well and a good deal of distaste for how he conducts himself. But when they look at the policy they go, oh, but I still don't want to bring in Biden because what he represents is a significant move to the left, potentially/
And people are nervous about what does that mean in a COVID world where I'm already taking a big hit, the economy's already down, COVID is already a huge challenge, do I want to add to that? More regulation, more red tape, bigger government, more aggressive tax policy, is that really what I want? So they might hold their nose and say I don't really like Trump, but I really don't know what I'm going to get on the other side and I'm not too comfortable with that. I think that there is a lack of clarity and probably if Biden does win.
We're going to find it takes probably at least two years, maybe a year, but probably two years for the democrats to sort out exactly what their policy really will be because they're so divided between a very far left by American standards and a center position, which is really strongly supported. So how far to the left are they going to go is seriously an open question, so to that end, I think all these polls are going to miss all the stuff I just walk you through.
So I think it's wide open and the key thing is to try to get a sense of who are the silent supporters and where they are? And finally, will they be able to vote? I mean, COVID is starting to roll again, right? We're coming into the autumn, people are going to start getting flu, just like regular normal flu but anybody who gets the flu is going to be suspected of having COVID.
And so the question is voter turnout, how much voter turnout is going to occur? How much is not going to occur because of COVID? How much is not going to occur as well because of the supposed voter suppression tactics? How much voter encouragement is going to work or not work compared to usual? All of these are wide open questions, I don't think we can assume anything.
Listen to the full interview below: