More and more people are asking about geopolitics, especially in light of the upcoming US general election in November. The three things I would say about this are:
The Trump-Biden repeat is not a forgone conclusion, or a 2017-style Republican dominance for that matter.
Biden and Trump’s economic policies are not that different. They are both fiscally expansionary, dollar negative, and both welcome trade wars.
The real question, the geopolitical question of our times, is not whether Trump will become president again, but whether America will seek to take larger advantage of its superpower status, ending a century-old paradigm of a “soft power” over its allies.
With the results in from Iowa and New Hampshire, to no one’s surprise, a repeat of the 2020 US election is becoming more of a possibility by the day. The world is once again waking up to the possibility of a second Trump presidency.
To those contemplating what this means for markets, I have three things to say:
Don’t count your chicken just yet. A Trump-Biden contest is indeed a strong possibility, but there are two party conferences that may still determine the candidates. Surprises have been known to happen at these events (watch the Democratic one especially).
To return to the White House, Mr Trump will still have to win many moderate votes, or at least benefit from those votes staying at home.
Even in that event, control of both branches of government (executive and both chambers of Congress), which effectively unlocks the US Government is an even smaller probability for both parties.
For those running long-term money, all these are perhaps beside the point.
Just take a step back and look at the differences between Mr Trump and Mr Biden:
Both are fiscally expansive and seemingly unconcerned about the consequences of very high debt.
Thus, both are dollar-negative and at the same time paradoxically inflationary
In terms of Europe, both see it as the junior member of the coalition. Where Mr Trump insisted on higher NATO expenditure, Mr Biden is unabashedly incentivising manufacturing to move from Europe, Stateside.
Both are tough on China. Mr Trump may have started the trade wars but during Mr Biden’s tenure sanctions intensified.
Besides the obvious differences in style, their agendas are surprisingly similar. One could argue that Mr Biden may show much higher deference to the central bank’s independence, which is important, and that Mr Trump might be inclined to further cut corporate taxes but these are small points.
So why the congruence between these two people who could be no more different: the New York real estate mogul and reality star and the career civil servant?
Because it’s not about them. Neither Mr Trump nor Mr Biden will define America’s destiny. The forces behind America’s present internal strife are entirely historical in nature, and very well documented too. There comes a point in every superpower’s history where it considers becoming an empire.
Let us take a step back and learn from history.
The world’s first democracy (not Republic which is representative) was Athens. A city where all had an equal vote as long as they were male, free, owned land and were of pure Athenian blood. All were allowed an opinion. And the mob was allowed not to like that opinion and exile them. In 478 BC, Athens founded the Delian League, an alliance meant to fight off Sparta and the Persians. Much like a NATO of the time. It started out fairly egalitarian. Then, some twenty years later, democratic Athens’ most democratic politician, Pericles, stole the treasury from the island of Delos, brought it to Athens and built the Parthenon. Defence funds turned into a huge gold and ivory statue of the goddess Athena, and the Athenian Democracy turned into the Athenian Hegemony.
Fast forward five centuries and the Roman Republic struggled with its imperial destiny too. Victories over Carthage, the Teutons, Spain, Greece and Gaul gave the Republic a lot of power. The Senate decided against the empire and promptly stabbed Julius Caesar in the back (and the front for that matter). Seventeen years later, Caesar’s adopted son, Augustus, became emperor anyway.
The next major democracy sprung two millennia later. The French Revolution, which preached liberty, equality, brotherhood and ownership (liberte, egalite, fraternite et propriete), quickly turned into an empire under Napoleon.
The victor of the Napoleonic wars, the world’s oldest parliamentary monarchy, the United Kingdom, did not shun empire either. At its height, the British Empire ruled over 13% of the world’s land mass, literally the empire where the sun never set.
Germany, a superpower at the beginning of the twentieth century, also set upon the path towards empire.
The world has been lucky so far that ingrained in America’s DNA lies isolationism. The whole point, after all, of building an independent nation three thousand miles west of Ireland was to avoid European wars and kings.
But over the years American appetite to stand above the world has grown. Two world wars, nuclear energy, a Cold War, the Suez crisis, the Middle East, Vietnam, the Afghanistan proxy war of the 80s, Nicaragua and the Contras saw mostly a reactive participation of the US. After the attacks on the World Trade Centre, however, and the invasion of Afghanistan and Iraq, America’s ambitions grew.
No longer willing to share its meagre growth with Europe in exchange for fealty, America is unnerved by another superpower. For years American politics have been inundated by warnings about the ascent of China. Much like Rome did not rest until Carthage was destroyed (or after the event), America sees China singularly as the opponent to beat.
The isolationist democracy which lies at America’s core, competes with its unprecedented military and economic capabilities which positions it centre stage globally.
Why does all this matter to investors?
Because as the world fragments and cooperation is rendered more difficult between trading blocks, who whether we realise it or not prepare for a showdown, political concerns take primacy over economic success. With America, and its reluctant junior partner Europe, on the one hand, China and its allies on the other, and India and the Middle East somewhere in the middle, long-term investors need to consider who the winner will be, and where to place their assets. Diversification, which is the obvious answer, happens usually around a stock and bond index, heavily weighted to the Dollar and Western assets. Should investors think of wider diversification? Will non-Western countries safeguard their assets the same way Western capitalism does?
The Trump-Biden election is but a small episode in a very large turn of history: the end of the short-lived unipolar world and America’s response to that. Ultimately the election will not matter as much as we may think. What will matter is the course the world’s superpower will decide to take. Investors may well park their Modern Portfolio Theory, and pick up some history books.
