In the fall of 2014, portfolio manager Dylan Grice did not know Donald Trump would run for President of the United States.
But it seems he did know that Trump would win.
It was a different time. Two years ago it seemed like the world was finally emerging from the slow economic growth it had experienced since the end of the financial crisis. The stock market was riding high, deals were getting done at record rates, and companies had no problem selling their bonds no matter what their grade. It seemed like we, the world, would soon get rich again.
But in a note called ‘Vampires, credit and cycles of trust,’ Grice rejected that notion.
“One trend we’re particularly concerned by is the increasing prominence and relevance of ‘tribal’ fault-lines long invisible to the rest of the world,” he wrote.
Something dark and divisive was taking over the world. While the market carried on as if everything was fine, confrontations of all kinds were on the rise. The cooperation between nations; between governments and their people; between people and corporations; was falling away. Grice could see it, and he knew that eventually, it would consume a market in deep denial.
“What we do think we know is that financial markets are playing with a very cooperative mind-set while the key players and factions in the outside world are not. Non-cooperators are on the ascendency and the investment climate will soon reflect this.”
Why is this? It’s simple. Markets do not function without trust and cooperation. Meanwhile, as Grice laid out in this paper, human history moves in cycles of trust — in peaks and troughs of cooperation.
We the world in 2016 are descending into the trough of a trust cycle that peaked with the end of the Cold War and the cooperation that followed until September 11th, 2001. In this downward spiral there can only be pain and conflict until we learn to trust one another again.
And that takes a great deal of time, and in that time, suffering.
Make America Tribal Again
I needn’t expound on the tribal nature of Trump’s campaign. It was about keeping people out of America, not bringing people in. It was about returning to a past the country lost, not opening our minds to the future we should, and inevitably must, face.
In no other part of Trump’s policies is this more evident than in his toxic talk of global trade. It is as vicious as it is unfair.
Never mind that global trade has been on the decline for the last 5 years, never mind that Americans have lost a thousands of jobs to automation rather than globalization. None of that matters. Trump’s rhetoric about China, about Mexico, about NAFTA, about the Trans Pacific Partnership, is not about facts, it’s about feelings.
And it’s certainly not about cooperation or peace either. It is about an aggressive tit for tat in which the United States has already been offended.
In Trump’s mind Americans – the citizens of the most rich and powerful country in the world – are victims. And we victims, he believes, are entitled to take back what is ours. This combination of victimisation and entitlement is one of the most dangerous combinations in human nature.
So again, we can turn to Grice’s paper. Credit, as Grice points out, comes from the Latin word for trust. Like credit, trust takes a long time to build but just moments to destroy. It is a cycle — when trust reigns there are always those who see a way to take advantage. Slowly, then, as others observe the success non-cooperators are enjoying, trust breaks down into utter chaos.
Over the past century we’ve completed roughly two cycles in which credit (and trust) has boomed and then gone bust, resulting in massive sovereign debt defaults.
Those two periods were the 1920s into the Great Depression and the 1970s into the 1980s when many emerging markets defaulted after commodities prices collapsed.
As for the Great Depression, it was with an uncooperative mind-set that the US — its back angrily turned against the world after World War I and struggling with economic inequity — enacted the Smoot Hawley Tariff in 1928, which put tariffs on 20,000 imports.
It was supposed to help farmers struggling with a modernising world. What it did was tip the world into the Great Depression.
“As a result, US trade halved within years, and global trade weakened even more, even if it continued at low levels within regional trading blocs such as the Commonwealth and the remnants of the Gold Bloc,” wrote Deutsche Bank strategists in a recent note to clients.
“The rise in protectionism served as an important catalyst to the global recession.”
That recession was the crystallization of our distrust, and that trust was only rebuilt after the world was entirely remade through the violence of WWII.
There’s nowhere to run
It is fair to say that the world staved off chaos with the bust of our last financial crisis through careful cooperation. But cycles find a way of asserting themselves. With Trump’s election, with Americans’ demonstration of failure to trust each other and the world, we have joined the darkness Grice was talking about.
“Moreover, Trump’s election victory comes at a time when support for free trade policies and multilateralism is flagging elsewhere. Protectionist parties are poised to do well next year in elections in European countries such as France and the Netherlands. And the UK referendum result means that one of the EU’s strongest advocates for free trade no longer has any influence over EU trade policy,” wrote analysts at Oxford Economics in a recent note.
“The upshot is that there is now a significant risk that the world enters a period of rising trade barriers and tit-for-tat trade wars. Along with an ageing population and fading benefits from technological change, this will help to keep global growth well below its pre-crisis pace for a long time yet.”
Slow growth, if Grice is correct, is the rosiest scenario here. In his paper he discussed the close relationship between debt, inflation and ultimately default. Sovereign and corporate debt has climbed in a time of low interest rates, but those interest rates are rising.
“… this long upswing in debt ratios suggests inflation risk to be a real inflation risk to be a real threat. This would indeed be more consistent with the internal dynamics of trust and cooperation,” he wrote.
And inflation is coming. Trump’s anti-globalization policies will bring it on, as Deutche Bank analysts pointed out in a recent note:
Another important implication is that de-globalization is inherently inflationary. The benefits of trade for productivity growth are well established in economic theory. The disruption of global value chains would constitute a particularly negative supply-side shock that lowers potential output. If multinational corporations were forced to re-onshore production on the basis of prohibitive trade barriers, the likely rise in wage costs as well as in producer import prices would likely be passed on to consumer prices. Slower productivity growth is strongly associated with higher inflation.
These are all ideas that Trump has discussed in one way or another as beneficial to the United States, but they’re not. They’re detrimental to the entire world.
And, it is with great regret that I inform you that it is a world we all live in.