Political Polarization Can’t Be Good for Growth?
I’m in Ottawa this week for some meetings with a few MPs. I’m working for sensible policy to help Canadians and to avoid a bleak fiscal future if hard decisions are not made soon. By way of disclosure so, I don’t get accused to being too partisan, I clearly fall on the right side on fiscal issues and I’m left of center on most social issues. Centre being the key point here. If you want to put me in a box, I’m a pragmatic Libertarian. I’m a member of the Conservative Party and I’m President of my electoral district association. I believe the smaller the government footprint is the better society will likely be. Government should handle the basics. Adjudicate, police, and cover the essentials like education, healthcare, the environment and food safety. AND BOTTOM LINE, MAKE SMART POLICY. That’s ok too if you don’t agree, that’s what makes markets as they say. I always welcome constructive debate around important societal issues. We all should, it’s our civic duty!
This weekend ushered in the 1-year hurdle for the Canadian election in 2019. We can expect the political heat to be turned up in Canada over the next year—it’s a big election. Pipelines and the environment will no doubt be front and center. With provinces swinging to the right, it will be very interesting federally. You have probably heard that the swing vote is typically more about how people feel about the economy. The partisan vote tends to stick no matter who’s running, but swing vote tends to be all about how people are feeling on election day. I could paint you a picture, that does not look very good one year from now with 2020 likely to bring recession. There are lots of factors with the political polarization being a big one.
I’ve always been interested in policy from a macro perspective as an analyst and portfolio manager for over 30 years now. I hate politics. Policy matters a lot to the economic outcome. I’ve been extremely unhappy with how many governments globally have run massive deficits and run up debt level following the Great Recession. That debt is the labour of citizens—far too many miss that point. This should be no surprise if you’ve been a regular watcher or if you have ever caught one of my seminars. I’m always pounding on about the debt problems.
The trigger point for me to get more involved in shaping policy in Canada was the absolutely stupid election promise Trudeau made to reverse the starting age for Old Age Security that the Harper government started to graduate. Back in the darker economic days of the 1930s and 1940s, when times were tougher and many of these promises were made, life expectancy was a little over 65 years old. It made political and financial sense to offer some additional benefit to those who struggled to save for retirement. That was the Berman family by the way. My mother due to her mental health issues could never really hold down a job and my father due to a lack of formal education, could never make more than a paycheck to paycheck wage. I grew up on the poverty line or perhaps even a bit below it. Benefits like that for hard working people who for various reasons struggled were a blessing. I get the need for social assistance for those that try but find it hard to succeed.
However, policy needs to adapt, life expectancy is now in the mid 80s and some say kids born today will live on average to 100 or more. THE MATH NO LONGER WORKS! Governments can keep spending like they have been, we are facing a very bleak long-term growth outlook and far too many decisions politically are made to keep your job rather than with long-term thoughtfulness. I will debate anyone on the topic of debt and unfunded liabilities. One estimate I saw is that the unfunded promises in the world for pensions and healthcare are between 200 to 400 trillion dollars looking to mid century. I asked a former governor of the Bank of Canada, David Dodge, at a recent dinner what he thought as a former central banker. His answer was simple. “We can’t pay!”
It’s well past the time we started to have real honest dialogue with Canadians, Americans, and the rest of the world. 100% of all the growth the world has seen over the past decade has been fueled by DEBT! You heard me. It’s all debt and it’s not sustainable. Frankly, no one wants to hear about it, but pretending it’s not there only makes it worse. There are solutions.
I think the next economic downturn can be bad, real bad, but I’ve been on this for a few years and governments keep extending the growth with more debt. We could easily see a massive trillion dollar infrastructure Bill with a Democratic Congress in 2019 extending the debt and the party just a little longer.
We are likely to see political turmoil in Europe next year with a new government in Germany and concerns over BREXIT and Italian deficits snowball. Merkel’s coalition is crumbling and could lead to new elections according to the economist this week.
This week in the Economist magazine, they focused on the brewing trade (cold) war between China and the US. I’ve suggested for a while, that markets are not paying this enough respect and are still high off the Trump tax cuts, which will lose their year-on-year earnings growth boost in 2019. There are a number other things, which individually can be dismissed, but collectively offer a very heavy weight to economic growth.
In the US, the mid-term election is a referendum on president and tweet @realDonaldTrump. Make no mistake about it. The House of Representatives usually swings in a mid-term election if people are not happy with the president. Despite what Trump says about Trump, I expect to see an impeachment in 2019 over election meddling, but I doubt the Senate will have enough votes to convict.
While the pollsters were massively wrong in 2016 about BREXIT and the US election, this time I don’t think they will be.
Bottom line is that each individual issue can be glossed over, but all of them together along with central banks taking the liquidity stimulus away will end the party. Why? Because it always ends the party, it’s only a matter of when!
Our fall roadshow dates are out. Come out and find out how to profit while protecting in the longest bull market of all-time, where I will look at some of my top sector ETF picks for the next few years and how to play them. Click here to register for free and as always we ask for volunteer donations to one of our two favourite charities. Children’s cancer research at the Sick Kids Hospital and Alzheimer’s and dementia research at the Baycrest Hospital.