Do Markets Swing Along Political or Economic Events?: Part 1

EconomyMore than Ever, Geopolitics Is the Key to Understanding Financial Markets

These days, you may have noticed, investment professionals and financial advisors have lost much of their clout to political scientists.

Certainly, the next few years will require more political than economic analysis, given the proverbial “white elephant” in the room. The pachyderm in question is the fact that the United States has already entered a new Cold War with Russia, and possibly with China. Nobody has come forth to admit this, but its signs are everywhere. Consider the campaign of Hillary Clinton, the front-runner in the 2016 U.S. presidential race, which is less than two months away. The Clinton campaign has marched along as if a war with Russia had already gotten underway.

The most famous incendiary accusations alleged that Russian hackers were responsible for leaking Clinton’s confidential emails. Meanwhile, pro-Clinton media regularly posts cartoons and images portraying Hillary’s rival, Donald Trump, as an admirer of Russia’s President Vladimir Putin. There’s no doubt that Putin and Trump have expressed praise for one another. I would not be surprised if visitors to Russia might soon be able to buy a souvenir Trump-inspired matrioshka (the popular wooden Russian doll).

In the State Duma, the lower house of Russia’s parliament (the equivalent of the U.S. House of Representatives), some elected officials have expressed straightforward support for Trump. Alexei Pushkov, president of the Russia’s Foreign Affairs Committee, put it rather simply: “Trump promises a very, very good relationship. Clinton guarantees we have a very, very bad one. You don’t need binoculars to see the difference.”

It’s no surprise that in the former Soviet Republics—now NATO allies—of the Baltic Sea, Latvia, Estonia, or Lithuania, most people prefer Hillary Clinton over Donald Trump. As a main proponent of recent Ukrainian nationalism, the former U.S. Secretary of State has not hidden her displeasure with Putin. There can be little doubt that amid differences over Syria, Ukraine, and the buildup of western troops along critical border regions (such as Poland-Russia), the tensions between Moscow and Washington suggest we have entered a new “Cold War.”

Some might complain, and not with substantial merit, that the world has changed since the original Cold War. Therefore, we cannot continue to look to the future using the past as an example. The causes are different and the confrontation has taken a rather different path. For starters, there is no longer an “Iron Curtain.” The Soviet frontiers have retrenched considerably. But there exists one main difference between the original Cold War and the present one. Now the situation is probably more dangerous than during the Cold War.

The Political and Military Balance of the Past No Longer Exists

The conflict has become unbalanced, and this imbalance is a source of instability. Russia is the weaker player economically and militarily. To compensate, it may raise the risk, encouraging unpredictable actions with serious consequences. Meanwhile, as each camp blames the other for outbreaks of hostilities, there is a way for investors to profit from this.

Russia does not have enough firepower with conventional weapons. It can’t match the United States and its allies. So it will play the nuclear card. This is extremely dangerous. But it also points to a clear investment strategy. Indeed, economists must give up their arcane models and consider that political uncertainty has become a more important factor than the economic outlook.

The political situation, in fact, points to sources of growth. Much of this growth will be driven by investments related to the digital revolution but, as we have noted before, the defense sector can expect a major boost in funding, especially if Hillary Clinton wins in November. Other than defense, the political situation spells out considerable uncertainty. For starters, the Brexit, which hasn’t shown its teeth yet, may yet produce the dire consequences that several central bankers, including the Bank of England’s governor Mark Carney, expected.

One immediate consequence will be a collapse or, at the very least, a freezing of real estate markets. Meanwhile, as the Brexit consequences simmer, the rest of Europe doesn’t fare better. In European public opinion, populists, nationalists and anti-European Union leaders are popping up everywhere. Unlike before, their views are finding resonance beyond a niche sector of the population.