Bits & Pieces — Volume 23: Idiocracy
The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise to the occasion. As our case is new, so we must think anew and act anew.
Abraham Lincoln
Idiocracy
The satirical comedy Idiocracy was released in 2005. In the film, ‘average’ Joe Bowers (Luke Wilson) is accidentally frozen by the military for 500 years. Joe wakes up to discover he is the smartest man on a planet overrun by idiots (clever people stopped having children, dumb ones kept reproducing). The US economy has collapsed, people are starving, and nobody is able to figure out why crops die when watered by Brawndo sports drink (“Brawndo: The thirst mutilator: it’s got what plants crave — it’s got electrolytes!”).
Newly elected President Dwayne Elizondo Mountain Dew Herbert Camacho (Terry Crews, below) promises to fix everything in one week, thanks to Joe. The story has a happy ending as Joe saves the day and ultimately becomes president himself.
With the universal dumbing down of political discourse, Idiocracy is closer to truth than fiction. The world was dumbstruck as Britain chose the unthinkable and voted to leave the European Union. Across the pond, Donald Trump has progressed from an amusing sideshow to a genuine contender.
A fact-checking outlet recently found that 78% of Trump’s statements were false, with 60% classified as “False” or “Pants on Fire” (see: Washington Post). This hardly seems to matter to his supporters. For Trump there is no such thing as bad publicity, a point he readily acknowledges: “You know, it really doesn’t matter what the media write as long you’ve got a young, and beautiful, piece of ass”.
Brexit and Trump are symptomatic of a rising, disenfranchised class. These are people who typically live outside the major urban centres, are frequently less educated and have lower paying jobs. They feel they’re victims of corporations, politicians, globalisation and immigration. To dismiss their concerns as being “stupid and racist” would be simplistic, patronising and dangerous. The upside to Brexit/Trump, is that this class has (indirectly) found a voice. Policy making should become more inclusive, while hopefully not populist. This can only be a good thing: societies built solely for the benefit of the elite class (if you’re reading this, you’re one of them) are inherently unstable and unsustainable. It’s too early to tell, but the longstanding two party hegemonies of the West (centre right and centre left) may give way to a new type of politics entirely.
At this point a Trump win appears highly unlikely. According to the analytical site FiveThirtyEight, Hillary Clinton has an almost 85% chance of winning.
Clinton is expected to collect a greater share of electoral college votes, with a smaller lead in the popular vote. At least 270 electoral college votes are required to take the White House.
Of course, a lot can change by November. Documentary filmmaker Michael Moore makes a compelling case for a Trump win based on several factors, including Clinton’s lack of popularity (see http://michaelmoore.com/trumpwillwin/). Another pet theory doing the rounds is that Trump could bow out of the race entirely. Trump’s campaign is woefully underfunded and he may withdraw if he’s thrashed in the televised debates and falls further behind in the polls. In this scenario his name would potentially remain on the ballot, even if he effectively stops campaigning. His most likely response would be to blame the Republican establishment for their lack of support, thereby further alienating his core voters from the party.
I suspect that, in the unlikely event of a Trump win, we’ll see a different incarnation of the man. The caricature of a caricature is useful for buying votes, but less useful in running a country. The office doesn’t carry with it unlimited power and much will depend on which party wins the House and Senate. Further, Trump is deeply unpopular within his own party, which will limit his ability to garner enough support to push his agenda. Simply put, there’s no red button labelled ‘Nukes’ in the oval office.
In life as in the movies, happy endings are possible, in spite of the circumstances.
It comes as no surprise that fund managers are worried about a Trump presidency. According to a survey by BofA Merrill Lynch, just over 20% see this as the biggest ‘tail risk’ to markets.
There’s an old saying: “If it’s in the Financial Times, it’s in the price.” A potential Trump presidency is, to quote former Secretary of Defence Donald Rumsfeld, a “known unknown”.
A Trump win would likely result in a minor correction, followed by a fairly sharp rebound. A major market sell-off would be a low probability event.
Market Outlook
Politics aside, markets are at an interesting juncture. Bearish arguments revolve around a relatively expensive market with lacklustre earnings growth. Bulls point to piles of cash on the side-lines waiting to be deployed. While some measures of shorter term sentiment are frothy, fund flows reveal that investors have been pulling cash out of equities and increasing allocations to bonds. This is not a picture of euphoria.
The S&P500 has been hitting new highs and bull markets tend to be, well…bullish. That said, over the coming weeks and months it would be completely unsurprising to see a correction in the 5% to 10% range. Regardless, I believe in holding a portfolio of world-leading businesses that are resilient enough to navigate any environment, including an Idiocracy.
Disclaimer: This note is not intended as investment advice. It should also not be construed as an offer to buy or sell any financial product.
