Born in September 63 BCE, Gaius Octavius Thurinus, was a noble Roman, ushered into an age of trouble. In the very days when he was welcomed into the world, Rome was being plunged into a violent civil war as a nobleman, Catilina, tried to overthrow the Senate. Still, the Republic was saved, peace ensued and young Octavius’s life was being planned for him. He would occupy some high office, he would marry another noble woman, look after his estates and try his best to distinguish himself in the Republic. His fortunes changed somewhat at age 11, when his famous grand-uncle, Julius Caesar, declared victory over the Gauls in Alesia. Romans were not happy though. Food inflation was running rampant due to the failed policies of Egyptian Pharaohs who supplied Rome with wheat. Caesar took advantage of the situation and, when he crossed the Rubicon in 49, he plunged the Roman state into another civil war, which he, incredibly, won. Young Octavius was now the heir to Caesar’s -indebted- estate and name. When Caesar was murdered in 44 BCE, Rome was once again plunged into civil war. 19-year-old Octavius, now Octavius Caesar, set out to avenge his great uncle, with the help of Marcus Antonius. Two years later, that civil war, the third in twenty years, was over, and Octavius was now in charge of Rome, with Antonius in charge of Egypt. Power sharing agreements don’t last for long. By 32 BCE, Octavius faced Antonius in the naval battle of Actium. Antonius lost. In the space of thirty years, the Roman Republic had seen revolts, inflation, food shortages and four major civil wars. It was clear that democracy was no longer working.
Octavius disabled the Senate and declared himself Emperor. Modestly, he changed his name to Augustus (‘illustrious’), increased the number of months by two, one for his uncle (July) and one for himself (August) and declared himself a living God. He proceeded with changing Rome from top to bottom. He created very strong institutions. Political stability legacy didn’t last forever. More dictators came, more civil wars. Public morals decayed. But the legacy of Augustus was an economy that remained strong and stable for two whole centuries.
Roman history has a lot of lessons for modern investors:
When institutions are strong, leaders may change, but the economy does not necessarily suffer.
When institutions are weak, changing leaders often is a symptom, not the disease.
Investors should therefore fear weakening institutions more than they should fear changes in leadership
Democracy is not a one-way street
Last week was eventful in terms of political developments. British Prime Minister Boris Johnson, was dramatically forced out of office by a cabinet revolt. Early on Friday, former Japanese PM Shinzo Abe was shot dead in a country that features zero gun violence. Meanwhile, in Brazil there are rumours of a coup, in case Jahir Bolsonaru loses the election. And in the US, the Rome of our times, the world’s first modern Democracy, January 6 2021 looms large over the body politic.
The first question for investors is whether equities and bonds have enough of a geopolitical risk premium attached to them. To answer this, we need to ask ourselves which are the key institutions of capitalism, and whether they breed stability.
The US stock market. The world’s deepest stock market is stable and, almost unfailingly, promotes good governance. The SEC is as stalwart protector of financial transparency. Long past are the days of Enron-style corporate scandals rocking the New York Stock Exchange. The Euronext, the LSE follow similar strict standards. Despite volatility, we haven’t seen any significant failings, even in emerging world markets. The ESG movement over the past years, although not institutional, acts as an additional safeguard for corporate behaviour.
Central banks. One may argue with the leadership of central banks. Jerome Powell, after all, may not have the economic credentials of Ben Bernanke, Janet Yellen or Alan Greenspan. But the Fed is run democratically, more probably than ever in the past. Its decisions on fighting inflation are unanimous. The ECB remains staunch in its mission to protect the Euro at all costs. There is no evidence of weakness that would prevent it from doing so. The Bank of England, mistakes or no mistakes, continues to enjoy the trust of the governments and consumers.
Commercial banks. Even as global markets experience more volatility than in the global financial crisis, commercial banks have managed to stay out of the spotlight. They are well capitalised, robust, to the point even when central banks are asking them to increase lending, despite the economic slowdown.
The tech sector. The most prominent sector in the stock market is experiencing sharp drops in stock prices. However, it is an exceptionally under-leveraged sector. Governance could improve, but there’s no hint that the most important players won’t be able to continue to deliver services that are vital for the global economy.
Politics are always messy. Often unfair and sometimes even undemocratic. But for long term investors, what matters is not the stability of politics, but the stability of underlying policy decision making. Are institutions robust enough to withstand political volatility? For the time being they are. But make no mistake. Protracted political convulsions will eventually erode major capitalist institutions. This is not, however, a process that takes months but decades. And the beauty of the capitalist system is that it’s easier and much safer to tie people’s fortunes to financial markets and the economy, rather than the rise and fall of politicians.