Break Glass In Case Of Impeachment

Impeachment is a political, not legal, process in the U.S. political system. If Democrats take control of the House of Representatives in 2018, Trump will almost certainly be impeached. Otherwise, it would require “smoking gun” evidence of criminal behavior to turn House Republicans against the president. For now, financial markets will largely ignore impeachment risks and focus on tax cuts. Midterm elections will accelerate their tax-cutting attempts.

To access the full report entitled “Break Glass In Case Of Impeachment”, please click here.

U.S. Election: Outcomes & Investment Implications

Donald Trump won by stealing Democrats’ thunder in the Midwestern rust belt. He promised, as a Republican, to boost fiscal spending and reduce trade globalization, marking the country’s leftward shift on economic policy. Do not bet on checks and balances stopping him from executing his policies in the short-term. Polarization will rise despite unified government.

To access the report entitled: “U.S. Election: Outcomes And Investment Implications“, please click here.

Republicans Are Not Fiscally Responsible


Brexit Update: Does Brexit Really Mean Brexit?

The U.K. has a new Prime Minister – former Home Secretary Theresa May – who has committed her cabinet to pursue a divorce from the EU. With the government in London now falling inline with the mantra that “Brexit means Brexit,” is there no hope for a reversal of the June 23 referendum results?

In this Brexit Update, we tackle three questions:

  1. What is the big picture relevance of Brexit?
  2. Have the “next steps” of the Brexit saga become any clearer?
  3. What does the U.K. want and can it get it from the EU?

The global relevance of Brexit is that it will signal to the markets that stimulative fiscal policy is around the corner. To be clear, Brexit will not cause fiscal stimulus (at least not outside the U.K.).

To access the Geopolitical Strategy Special Report report entitled “Brexit Update: Does Brexit Really Mean Brexit?”, please click here.


BREXIT – Next Steps

Investors trying to make sense of the post-Brexit political environment should adopt a simple maxim: the only certainty is uncertainty. No amount of poring over EU Treaties, U.K. legislative acts, or ancient Celtic runes will bring clarity on whether the country will ultimately leave the EU. Our view is that Brexit is a political act. As such, the process can certainly be constrained by economic reality or law, but it can only be fully reversed through another political act.

In this update on the “next steps,” we focus on the key inflection points at which U.K. policymakers may be offered the opportunity to reverse the decision made by the referendum. The diagram below suggests that there are several. However, many are overstating the ability of “technicalities” to change the outcome of the referendum.

To access the latest Geopolitical Strategy Special Report report entitled “BREXIT – Next Steps”, please click here.


The Coming EXITentialist Crisis

British voters decided to leave the European Union on June 23, potentially ending 43 years of membership. At BCA Research, our investment philosophy is that, at critical junctures such as this one, it makes sense to take a cold shower and resist making any rushed investment decisions. Brexit, if it were to go ahead as currently planned, has the potential to change the world. But how that will impact investors is a question that will take time to answer.

There are, however, some broad conclusions that we can begin to draw from the U.K. referendum. The most obvious is that the decision to leave the bloc strikes at the stability of the European Union, which is one of the core post-World War Two institutions that have kept peace in the Western world for the past seventy years. As such, its implications – if London actually follows through on the referendum – will be profound.

The U.K. referendum will also have implications for the global distribution of power. The world lacks global leadership as the U.S. wanes in relative geopolitical power. From an investor’s perspective, this is a negative trend, since “multipolarity” is both empirically and theoretically proven to be a harbinger of inter-state conflict. In recent years multipolarity has largely been mitigated by the persistence of Cold War-era institutions that allow the U.S. to amplify its power. The EU, NATO, and financial institutions such as the IMF and the World Bank are such entities.

By leaving the EU, the U.K. does not necessarily undermine this global order, but it does show that a 43 year-old geopolitical relationship can end. It will weaken the EU as a global player, given the U.K.’s formidable “hard” power, and aid Europe’s geopolitical rivals. And if it leads to the disintegration of the EU — which is not our base case at BCA Research despite the conventional wisdom — it will massively increase global geopolitical risk. I suspect that my clients in the financial industry will have to brush up on obscure geographical references – such as Alsace-Lorraine, Silesia, and South Tyrol – by the time this process is over, if it ever begins.

This would be a profoundly negative outcome. It is not an exaggeration to say that generations that thought they would never see another armed conflict on the European Peninsula could be in for a surprise.

On the domestic political front, the rise of anti-establishment movements – particularly in the U.S. and U.K. – has been one of the most talked-about themes in the financial community in 2016. However, it is unclear how to price any risk of non-centrists coming to power. Investors have had widespread disbelief that populism could win any major vote in any major economy. I can attest to this personally, as it has been difficult in recent months to get many of my friends and clients in London City to take Brexit seriously. I have received more questions about Austrian, Portuguese, and Spanish elections in the first quarter of 2016 than about the upcoming U.K. referendum.

I suspect that the focus over the next several months – in terms of assigning risk premia – will remain on Europe. However, the reality is that middle class malaise may be the most advanced in the laissez-faire economies of the U.S. and the U.K., especially now that the “debt supercycle” (a major BCA Research theme for the past 30 years) is no longer available to assuage the pain of decade-long stagnant wages.

In a way, anti-globalization policies are merely the right-of-center approach to redistributing income. It is now clear that the last three decades of free trade and laissez-faire policies have led to growing income inequality as winners of globalization captured most of the gains and losers were left to face the consequences, and the painful adjustment, without much redistribution. Take the vote on EU membership, which saw all of England vote to leave except for the financial capital of the world, London.

For Bernie Sanders and Jeremy Corbyn – as well as Podemos in Spain and SYRIZA in Greece – the answer is to dial up the redistribution. For Donald Trump, UKIP, and Marine Le Pen in France, the answer is to wall off their economies and hope to stave off redistribution by shifting the blame for tepid growth to the outside world. Both policies will be equally bad for equity markets and risk assets, as they will erode profit margins one way or another.

The 1990s consensus on deregulation, privatization, low taxes, budgetary discipline, and free trade is over. The median voter is shifting away from laissez-faire and demanding economic policies that contravene the 1990s “Third Way” consensus (Diagram 1). According to the median voter theory, policymakers will shift with the median voter to a new center and will not shift back to the old center once they capture power.

DIAGRAM 1 – So Long “Third Way” Politics!
This is bad news for emerging markets, in particular. It is also bad news for the shares of global companies who have benefited tremendously from the steady dismantling of barriers to the free flow of goods, capital, and labor.

In the long run, the decline of globalization will also usher in higher inflation. As my team and I wrote in 2014, globalization has effectively produced the largest supply-side shock in the history of mankind. As such, it is a major deflationary force. But if policymakers respond to populism with protectionism and fiscal expenditure, then the deflationary forces of globalization will reverse. Perhaps sooner than the market expects.

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[1] Please see BCA Geopolitical Strategy Special Report, “The Apex Of Globalization – All Downhill From Here,” dated November 12, 2014, available at