June 2016


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Let us separate matters. We face a political upheaval of the first order, but this is a necessary catharsis. Governments come and go. So do political parties.

We face a much more serious constitutional crisis. It is why some of us want a national unity government, keenly alert to the interests of Scotland and Northern Ireland.

As Professor Kevin O’Rourke from All Souls College argues here,  most Leavers waltzed into Brexit with scarcely a moment’s thought for trauma inflicted on both sides of the Irish border. This carelessness must be rectified immediately.

What we do not yet face is a global financial crisis or a “Lehman moment”. The world’s central banks were ready for Brexit and have acted in unison.

The S&P 500 index of Wall Street stocks has shrugged off the vote. It is 13pc above its lows in February, when we really did have a nasty fright across the world.

Jerome Schneider from Pimco says there have been none of the tell-tale signs of systemic seizure. Rates on commercial paper have hardly moved. The Libor/OIS spread – the stress gauge – has been well-behaved. So have collateralised funding markets.

This may be no more than the calm before the real storm. The prime money market funds have much shorter maturities than in 2008, and this could lead to a “roll-over” crunch if fear returns. Assume nothing.

It was a dead certainty that the rating agencies would strip Britain of its AAA status. Standard & Poor’s told this newspaper before the vote exactly what it planned to do, and we reported the warning – not that it has made any difference to borrowing costs.

More worrying is what S&P also said: that debt coming due over the next 12 months is 755pc of Britain’s external receipts and large sums have to be rolled over continuously. This is the highest for all 131 rated states, thanks to London’s role as a global financial hub. We will not know whether there is any mismatch, either in currencies or maturities, until the repayment deadlines hit and the skeletons come out of the closet. The test lies ahead.

What we have learnt from the market moves since Brexit is that Europe is just as vulnerable as Britain. The vote has already triggered a banking crisis in Italy, where the government is struggling to put together a €40bn (£33bn) rescue but is paralysed by the constraints of euro membership.

The eurozone authorities never sorted out the structural failings of EMU. There is still no fiscal union or banking union worth the name. The North-South chasm remains, worsened by a deflationary bias. The pathologies fester.

The FTSE 100 index of equities in London is back to where it was on the eve of the vote, compared to falls of roughly 6pc in Germany and France, 10pc in Spain, 11pc in Italy, 13pc in Ireland, and 14pc in Greece.

My point is not that they we are in OK and that they are in trouble. That would be facile. The FTSE 100 is cushioned – or flattered – by the devaluation effect on foreign earnings of big multinationals. The broader FTSE 250 is a purer gauge, and that has dropped 8pc. Homebuilders Persimmon and Taylor Wimpey are still down by a third. It is not painless.

Yet it should be dawning on European politicians by now that the economic fates of the UK and the eurozone are entwined, that if we go over a cliff, so do they and just as hard, and therefore that their bargaining position is not as strong as they think. They cannot dictate terms.

Few seem to grasp this, much like the wishful thinking in September 2008 when so many supposed that Lehman posed little danger to them. Britain has “collapsed politically, monetarily, constitutionally and economically,” said Dutch premier Mark Rutte, almost seeming to enjoy the flourish of his own words. Our great ally William the Silent would not have been so frivolous.

Morgan Stanley says they need to wake up. It warns that the eurozone will suffer almost as much damage as Britain in a ‘high stress scenario’, and so do others. Danske Bank says the UK and the eurozone will both crash into recession later this year.

If so – and that is not yet clear – it is hard to see how the eurozone could withstand such a shock, given the levels of unemployment and the debt-deflation dynamics of southern Europe, and given the intesity of political revolt in Italy and France.

Contrary to the supposition of Mr Rutte, the fall in sterling is a blessing for the British economy, and a headache for the eurozone. The exchange rate is acting as a shock-absorber, just as it did in 1931, 1992, and 2008,  all bigger falls, and all benign.

Devaluation strikes no fear in a chronic deflationary world where almost every major country is trying to push down its currency to break out of the trap, and largely failing to do so. It would facetious to suggest that Britain has pulled off this trick. Crumbling investor confidence is never a good thing. But the UK has stolen a march of sorts, carrying out a beggar-thy-neighbour devaluation by accident.

The pound needs to fall further. It is still too strong for a country with a current account deficit running consistently above 5pc of GDP. The International Monetary Fund said just before Brexit that sterling was 12pc to 18pc overvalued, and may have to fall more than this to force a lasting realignment of the British economy.

This cure has hardly begun. As of today, sterling is 5pc below its trading range for the last month against the euro and the Chinese yuan. It is weaker against the US dollar but the dollar is on steroids, much to the horror of the US Treasury.

The more sterling falls, the greater the net stimulus for the British economy. The reverse holds for the eurozone. It is a further deflationary shock at a time when Europe is already in deflation, when inflation expectations are in free-fall and bond yields are collapsing below zero, and when the ECB is running out of options.

There are two dangers for the world economy. One is that China is exporting deflation with alarming intensity. Morgan Stanley estimates that China’s trade-weighted devaluation is running at an annual rate of 11pc, and factory gate deflation adds another 2pc. This is a tsunami coming from the epicentre of global overcapacity.

The other danger is that British and European politicians fail to understand what is coming straight at them from Asia. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.

US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.”

Nobody seemed to heed his words at the EU’s imperial summit in Brussels, an exercise in righteous anger but not much else. The markets may yet speak in harsher language.

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Crazy and not-so-crazy scenarios

Here are the chances we’ll see these election outcomes.

Electoral College tie 269 votes for each candidate 0.4%
Recount At least one decisive state within 0.5 ppt 3.6%
Clinton wins popular vote 83.5%
Trump wins popular vote 16.4%
Clinton wins popular vote but loses Electoral College 4.2%
Trump wins popular vote but loses Electoral College 0.7%
Johnson wins at least one electoral vote 5.5%
Clinton majority wins at least 50 percent of the vote 40.9%
Trump majority wins at least 50 percent of the vote 3.4%
Clinton landslide double-digit popular vote margin 34.5%
Trump landslide double-digit popular vote margin 1.8%
Map exactly the same as in 2012 0.1%
Clinton wins at least one state Mitt Romney won in 2012 87.4%
Trump wins at least one state President Obama won in 2012 65.6%
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Donald Trump just took the lead in a major national poll for the first time in roughly six weeks.

In a Rasmussen poll released Thursday, Trump held a 4-point lead over presumptive Democratic nominee Hillary Clinton. Of the 1,000 likely voters surveyed, the presumptive Republican nominee won over 43% of support compared to Clinton’s 39%.

The margin of error was plus or minus 3 points.

The poll is the first Trump has lead over Clinton since mid-May, when Trump held a 2-point lead in an ABC News/Washington Post poll.

The Rasmussen poll breaks a streak of 22 consecutive polls Clinton has topped Trump in.

After the Rasmussen survey, Clinton’s lead in the RealClearPolitics average of several polls is now 4.9%.

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US stocks are more or less, back to their starting point prior to Brexit.

Clearly, no-one actually has any idea what will happen and what effect that will eventually have. So stocks are probably going to fluctuate in a sideways range until some form of consensus is formed.

This, if correct, opens up a number of trading strategies that are effective in sideways markets. The increased volatility, if it remains, is obviously going to be an issue, but is potentially manageable.

Obviously in this market, one needs to remain extremely flexible, as positions are likely to be very vulnerable to news flow over the next few days certainly and likely couple of weeks.

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They wanted to restore their country – they wanted to make Britain great again.

If that sounds familiar, that’s because it’s little different than the groundswell of support that swept Donald Trump to the Republican nomination – and will sweep him to the White House this November.

It turns out our country is headed towards its very own Brexit. Just like the voters in the United Kingdom, Americans are fed up with a status quo that ignores their problems and constantly leaves them falling farther behind. A staggering two out of every three Americans believe America is on the wrong track. Now they’re making their voices heard.

Don’t believe me? The facts speak almost as loudly as the millions of Americans who want to make America great again.

One of the things that stunned the so-called experts is the huge turnout that led to Brexit. The same thing happened on this side of the Atlantic during the Republican primary season. An enormous number of people voted for the outsider candidate. The previous record was 10.8 million votes for George W. Bush in 2000 – Trump blew past that record with over 13 million primary votes. In the nine presidential elections I have worked in, I have never seen such voter energy and enthusiasm.

This amazing turnout reflects the simple fact that Donald Trump has broad appeal. Independents in particular are responding to him.  Our recent polling in two battleground states shows independents flocking to Trump over Hillary Clinton. In Ohio, independents go for Trump by 19 percentage points. In North Carolina, they prefer him over Clinton by 24 points.

These numbers show just how upset the American people are with the status quo. They don’t want a third term of President Obama’s abysmal economic growth and feckless foreign policy. They want someone who will upend the status quo rather than worsen America’s decline.

Wonder why independents strongly support Trump over Clinton?  He’s authentic, he’s not a political insider, and he has a positive vision for America. And that’s exactly what voters want.

Trump’s positive vision for America is especially important. People in this country are sick of “political correctness” and “politics as usual” – they want a leader who recognizes the problems America faces and calls them by their name. Trump does exactly that. Everything he does is centered on “Make America Great Again,” and he has inspired tens of millions of people.

The bottom line is that he is the only one who can deliver change in Washington D.C., because he’s the only one who hasn’t spent the majority of his life sucking up to political elites or being a politician himself. He is a successful businessman with a proven track record of creating jobs and improving people’s lives.

His experience is exactly what’s missing in Washington – and it’s exactly what the American people want.

Our latest data proves this, too.  Our political action committee has identified millions of Trump supporters across the country in recent months.  And our engagement with these voters shows a clear, overwhelming trend.  When shown a negative attack on Clinton and an optimistic vision of our country conveyed by Trump, the response is as much as 50 percent higher for the latter. They know he has what it takes to make put America back on the right track.

You don’t need data, polls, or any analysis by the so-called experts to see this. You only need to talk to the American people. They’re demanding a change. They’ve had enough with the broken status quo and they want a brighter future. Donald Trump is the only presidential candidate who can give them what they want, which is exactly why millions of people are energized by his positive vision to make America great again.

This is just happened in the Brexit vote. So no one should be surprised when the same thing happens here in November.

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There seems to be no earnings trade available in NKE. The pricing seems to be a consensus on a +/- 5% and with that small of a move, there is no trade worth the risk.

So I’ll simply pass on this trade.

*After hours earnings reported

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So the market makers were pretty spot on with -3.5%

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There has been and still is the idea that ‘diversification’ is a risk management tool, and to a certain extent, it is. However, diversification linked to leverage, changes that assumption into something very different.

Diversification, of uncorrelated markets, or securities, say Nike common stock and London mortgage securities, would seem prima facie, unrelated or uncorrelated. However a trader who holds these same securities as another trader, now correlates those securities as any trader who holds them becomes linked to every other trader who holds those securities.

When leverage forces you to sell, you sell what you can, not what you should.

Now when selling what you can, that may very well be Nike, and now you have a rush for the exits in Nike, of every trader on margin, who holds London mortgages [or whatever]. In times of stress, all markets and securities are correlated by the traders who hold them. Diversification is a chimera.

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Friday’s post-“Brexit” market wipeout was one for the record books: The $2.08 trillion decline was the worst single day ever.

The CBOE Volatility Index (VIX), Wall Street’s “fear gauge,” posted its fifth largest gain after trading in U.S. equity futures was halted overnight. The Nasdaq Composite suffered its largest rout since 2011 and is now down nearly 6 percent for the year. The plunge at the open was the U.S. market’s worst since 1987, a sign of fragility and lack of liquidity. Gold’s 4.7 percent surge was its biggest day since Lehman Brothers failed in 2008.

The fear was palpable ­— and it’s set to continue as Britain’s repudiation of top-down economic elitism cuts to the core of what’s been sustaining financial markets over the last seven years: Low volatility and relative political stability. With a contentious U.S. presidential election ahead — and GOP contender Donald Trump’s anti-immigrationtendencies closely aligned with Brexit sentiments — the turbulence could well last through November.

Related: Why ‘Brexit’ Is the Biggest Threat Yet to This Bull Market

The political fallout is just beginning, with pro-remain British PM David Cameron resigning and “Article 50” — the EU’s exit clause — yet to be invoked by the British government. The Brexit process is likely to take years.

The only example we have was Greenland’s 1982 decision to exit the EU’s predecessor after a popular referendum voted for independence. After much wrangling over fishing rights (an industry responsible for the vast majority of the country’s economy), the island nation finally left in 1985 under the Greenland Treaty.

It took more than 100 meetings and three years to extricate a frozen island of 56,000. What of a well-developed island of 65 million?

In the years to come, nervousness, uncertainty and copycat independence movements in other countries will reign. Anti-EU politicians in Italy, France and the Netherlands have already called for referendums while similar calls were made by anti-immigration parties in Sweden and Denmark.

Related: In the Aftermath of the Brexit Vote, the Bluffing Continues

Should Brussels take a hard line in the trade negotiations to come, the British economy and the pound sterling will suffer as traders price in a larger economic drag from Brexit, destabilizing markets. Should Brussels make the process as painless as possible, it will embolden pro-independence movements elsewhere and hasten the collapse of the EU project altogether.

It’s a no-win situation for the European Union elites. Deutsche Bank analysts noted the difficultly in a note to clients, saying policymakers must strike the right balance in exit negotiations between preserving existing trade and investment links with Britain while sending a strong signal to other EU countries that an exit isn’t going to be easy or desirable.

No wonder then that it wasn’t British stocks that were hit hardest on Friday (although British banks suffered their largest one-day decline on record) but peripheral Euro area stocks. Greek stocks lost nearly 16 percent, while Italian stocks were down 12.5 percent. A breakdown in the European Union would threaten Greece’s bailout programs, since a smaller Euro area would put the rescue burden on a smaller number of countries. In Italy, the euro-sceptic Five Star Movement recently won a decisive victory in the second round of municipal elections.

Related: How the Brexit Affects Your Retirement

As for financial market volatility, keep an eye on the currency markets. By virtue of the sheer volume of trading in foreign exchange, and the buildup of popular currency carry trade positions in which investors borrow currencies at low rates to buy up stocks and other risky assets they expect will bring a higher return, volatility here will spill into other areas of the financial system. Remember the selloff last August? That was driven by Chinese currency volatility.

Consider that another area of the global financial system that was hit hardest on Friday was Japan — half a world away from Europe — as safe haven inflows into the yen forced the closure of yen carry trades. The yen ended the day up 6.6 percent against the euro, slamming the Nikkei average down 7.9 percent on worries over the impact on export competitiveness.

Another drag will come from the surge the U.S. dollar is enjoying in all this.

The greenback surged to levels not seen since March in mid-day trading on Friday. A strong dollar has been one of the main reasons for an ongoing corporate earnings recession, with S&P 500 earnings down four quarters in a row. Expect the strong dollar to be blamed for another batch of weak results when the second quarter earnings season starts in a couple of weeks.

Related: What the Brexit Vote Means for the US Economy

In an example of a classic negative feedback loop, a stronger dollar will also unwind some of the recent strength in crude oil prices — which, in turn, was one of the main motivators for the powerful stock market rally out of the February low. West Texas Intermediate fell 5.1 percent after testing below its 50-day moving average for the first time in four months.

For the bulls, all hope rests in the rising odds of an interest rate cut by the Federal Reserve later this year. But as experiments with negative interest rates in Europe and Japan have revealed, at this point, lower interest rates are doing more damage (by weakening bank profitability) than anything else.

In short: The three years of low volatility investors have enjoyed since the Dow Jones Industrial Average first hit the 18,000 level in 2014 is ending. And thus, allocations to safe havens like cash and gold should be reconsidered.

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With no deal, all Mr. Cameron could do was warn about the risks of leaving the EU. If Brits try to escape, he said, they’d face the razor wire of a recession or the dogs of World War III. He rather overdid it. Instead of fear, he seemed to have stoked a mood of mass defiance.

Mr. Obama also overdid it when he notoriously told the British that, if they opted for Brexit, they would find themselves “in the back of the queue” for a trade deal with the U.S. That overlooked a basic point: The U.K. doesn’t currently have a trade deal with the U.S., despite being its largest foreign investor. Moreover, no deal seems forthcoming: The negotiations between the U.S. and the EU over the trans-Atlantic Trade and Investment Partnership are going slowly, and the Brits involved in the talks are in despair.

Deals negotiated through the EU always move at the pace dictated by the most reluctant country. Italy has threatened to derail a trade deal with Australia over a spat about exports of canned tomatoes; a trade deal with Canada was held up after a row about Romanian visas. Brexit wasn’t a call for a Little England. It was an attempt to escape from a Little Europe.

Many British voters felt a similar frustration on security issues, where the EU’s leaders have for decades now displayed a toxic combination of hunger for power and incompetence at wielding it. When war broke out in the former Yugoslavia in 1991, the then-chair of the European Community’s Council of Ministers declared that this was “the hour of Europe, not the hour of the Americans—if one problem can be solved by the Europeans, it is the Yugoslav problem.” It was not to be.

Nor did the EU acquit itself much better in more recent crises in Ukraine and Libya. Field Marshal Lord Charles Guthrie, a former chief of the British military, put it bluntly last week: “I feel more European than I do American, but it’s absolutely unrealistic to think we are all going to work together. When things get really serious, we need the Americans. That’s where the power is.” Brits feel comfortable with this; the French less so.

Throughout the campaign, the Brexit side was attacked for being inward-looking, nostalgic, dreaming of the days of empire or refusing to acknowledge that modern nations need to work with allies. But it was the Brexiteers who were doing the hardest thinking about this, worrying about the implications of a dysfunctional EU trying to undermine or supplant NATO, which remains the true guarantor of European security.

In the turbulent weeks and months ahead, we can expect a loud message from the Brexiteers in the British government: The question is not whether to work with Europe but how to work with Europe. Alliances work best when they are coalitions of the willing. The EU has become a coalition of the unwilling, the place where the finest multilateral ambitions go to die. Britain’s network of embassies will now go into overdrive, offering olive branches in capital after capital. Britain wants to deal, nation to nation, and is looking for partners.

British Prime Minister David Cameron said Friday that he would resign after losing a referendum on EU membership.
British Prime Minister David Cameron said Friday that he would resign after losing a referendum on EU membership. PHOTO: CHRIS RATCLIFFE/BLOOMBERG NEWS

Even the debate about immigration had an internationalist flavor to it. Any member of any EU state has had the right to live and work in Britain; any American, Indian or Australian needs to apply through a painstaking process. Mr. Cameron’s goal is to bring net immigration to below 100,000 a year (it was a little over three times that at last count). So the more who arrive from the EU, the more we need to crack down on those from outside the EU. The U.K. government now requires any non-European who wants to settle here to earn an annual salary of at least £35,000 (or about $52,000)—so we would deport, say, a young American flutist but couldn’t exclude a Bulgarian convict who could claim (under EU human-rights rules) that he has family ties in the U.K.

To most Brits, this makes no sense. In a television debate last week, Mr. Cameron was asked if there was “anything fair about an immigration system that prioritizes unskilled workers from within the EU over skilled workers who are coming from outside the EU?” He had no convincing answer.

The sense of a lack of control over immigration to Britain has been vividly reinforced by the scenes on the continent. In theory, the EU is supposed to protect its external borders by insisting that refugees claim asylum in the first country they enter. In practice, this agreement—the so-called Dublin Convention—was torn up by Ms. Merkel when she recklessly offered to settle any fleeing Syrians who managed to make it over the German border. The blame here lies not with the tens of thousands of desperate people who subsequently set out; the blame lies with an EU system that has proven itself hopelessly unequal to such a complex and intensifying challenge. The EU’s failure has been a boon for the people-trafficking industry, a global evil that has led to almost 3,000 deaths in the Mediterranean so far this year.

Britain has been shielded from the worst of this. Being an island helps, as does our rejection of the ill-advised Schengen border-free travel agreement that connects 26 European countries. But the scenes on the continent of thousands of young men on the march (one of which made it onto a particularly tasteless pro-Brexit posterunveiled by Nigel Farage, the leader of the anti-immigration UK Independence Party) give the sense of complete political dysfunction. To many voters in Britain, this referendum was about whether they want to be linked to such tragic incompetence.

The economists who warned about the perils of Brexit also assure voters that immigration is a net benefit, its advantages outweighing its losses. Perhaps so, but this overlooks the human factor. Who loses, and who gains? Immigration is great if you’re in the market for a nanny, a plumber or a table at a new restaurant. But to those competing with immigrants for jobs, houses or seats at schools, it looks rather different. And this, perhaps, explains the stark social divide exposed in the Brexit campaign.

Seldom has the United Kingdom looked less united: London and Scotland voted to stay in the EU, Wales and the English shires voted to get out. (Scottish First Minister Nicola Sturgeon has already called a fresh vote on secession “highly likely.”) Some 70% of university graduates were in favor of the EU; an equally disproportionate 68% of those who hadn’t finished high school were against it. Londoners and those under age 30 were strongly for Remain; the northern English and those over 60 were strongly for Leave. An astonishing 70% of the skilled working class supported Brexit.

Here, the Brexit battle lines ought to be familiar: They are similar to the socioeconomic battles being fought throughout so many Western democracies. It is the jet-set graduates versus the working class, the metropolitans versus the bumpkins—and, above all, the winners of globalization against its losers. Politicians, ever obsessed about the future, can tend to regard those left unprotected in our increasingly interconnected age as artifacts of the past. In fact, the losers of globalization are, by definition, as new as globalization itself.

To see such worries as resurgent nationalism is to oversimplify. The nation-state is a social construct: Done properly, it is the glue that binds society together. In Europe, the losers of globalization are seeking the protection of their nation-states, not a remote and unresponsive European superstate. They see the economy developing in ways that aren’t to their advantage and look to their governments to lend a helping hand—or at least attempt to control immigration. No EU country can honestly claim to control European immigration, and there is no prospect of this changing: These are the facts that led to Brexit.

The pound took a pounding on the currency markets Friday, but it wasn’t alone. The Swedish krona and the Polish zloty were down by about 5% against the dollar; the euro was down 3%. The markets are wondering who might be next. In April, the polling firm Ipsos MORI asked voters in nine EU countries if they would like a referendum on their countries’ memberships: 45% said yes, and 33% said they’d vote to get out. A Pew poll recently found that the Greeks and the French are the most hostile to the EU in the continent—and that the British were no more annoyed with the EU than the Swedes, the Dutch and the Germans.

The Brexit campaign was led by Europhiles. Boris Johnson, the former London mayor turned pro-Brexit firebrand who now seems likely to succeed Mr. Cameron, used to live in Brussels and can give interviews in French. Mr. Gove’s idea of perfect happiness is sitting on a wooden bench listening to Wagner in an airless concert hall in Bavaria. Both stressed that they love Europe but also love democracy—and want to keep the two compatible. The Brexit revolution is intended to make that point.

Mr. Gove has taken to borrowing the 18th-century politician William Pitt’s dictum about how England can “save herself by her exertions and Europe by her example.” After Mr. Cameron departs and new British leadership arrives, it will be keen to strike new alliances based on the principles of democracy, sovereignty and freedom. You never know: That might just catch on.

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Brexit has structural similarities with Trump’s rise. It is the logical outcome of the Conservative Party’s political strategy of the past twenty years. Conservatives used the European Union (EU) as a whipping boy to help smuggle in their “Thatcher – Reagan” neoliberal economic policies. The Labor Party spoke out in defense of minorities, but it did not defend the EU and nor did it adequately confront neoliberalism.

trumpIn the US, Trump is the analogue “exit” candidate. His rise is the logical outcome of thirty years, during which Republicans used dog-whistle racism and the culture war to smuggle through their neoliberal economic agenda that has wrought the destruction of shared prosperity. Democrats resisted racism and the culture war, but were complicit in the promotion of neoliberalism.

The lesson for the Clinton campaign is it must move beyond rhetoric criticizing neoliberalism and adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope. Neoliberalism is the ultimate cause of the establishment’s rejection. Racism, immigration and nationalism may be the match for the anti-establishment fire: wage stagnation and off-shoring of jobs are the fuel.

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