By J.G. Collins
NEW YORK (June 17, 2014) – House Majority Leader Eric Cantor’s stunning loss in the Virginia 7th Congressional District Republican primary should be less surprising than it was. Coming on the heels of Thad Cochran’s initial primary loss in Mississippi1, Cantor’s failure is further evidence of a decided rightward and populist turn in some segments of the US electorate and, very possibly, a larger global trend.
The voters of all the G-7 have moved increasingly right in recent elections, stirred largely by stagnant national economies and wages, resurgent nationalism, and by populist themes of rightist parties that put the native population ahead of globalist ideology.
Japan’s Shinzo Abe has been unabashed in his nationalism, much to the consternation of his Asian neighbors. One of his first moves since becoming prime minister to recover Japan’s then-stagnant economy with his “Abenomics” policy was to convince his trading partners to ignore IMF and WTO rules so that he could pursue “beggar thy neighbor” currency manipulation without sanction. Since then, Abe’s approval ratings have hovered just around 60% while the yen is down roughly 20% against competing economies.
In Europe, the rightmost parties of France, Holland, Germany, and Italy have all seen increasing success. The voting for the European Parliament last month was decidedly rightist. As of this date, the right-leaning European Conservative and Reformist Group (“ECR Group”, what one might term the equivalent of a “states’ rights” party in the United States), holds 63 seats in the European Parliament, or 8.3%, making it the third largest group after the pro-EU European People’s Party (“EPP) and the Socialists & Democrats (“S&D”) and ahead of the centrist, pro-European Alliance of Liberals & Democrats. The ECR Group is a minority, for sure, but as tough economic times continue, they are a growing minority. They can also ally with the 31 members of the further right Europe of Freedom and Democracy Group (“EFD”) to control over 12% of the Parliament.
Similarly, a special election at the beginning of this month for the UK Parliament had the populist right-wing Independence Party come in second to Prime Minister David Cameron’s Conservatives, 17,431 to 10,028. The Conservatives had poured enormous resources into the race in Newark, a constituency in the East Midlands section of Nottinghamshire. Cameron himself made four campaign stops on behalf of the Conservative candidate. In 2010, Conservatives took the constituency by 16,000 votes, more than double their margin in this month’s special election.
This growing right-populist turn among the electorate in developed democratic nations was predictable. After six years of slow growth, high unemployment, stagnant wages and increasing income inequality for middle-and lower-income wage earners, voters have seen much of what they worked hard to acquire and achieve either lost or at risk. Many wage earners perceive that they have gotten the short end of the stick in the democratic social contract while their elected leaders have mostly worked against their interests. Working people largely perceive that governments have been enriching business and political elites, supporting “crony capitalists”, gorging on national debt, embracing an orthodox globalism that ignores fair trade rules and jeopardizes their jobs, and embracing immigration that puts pressure on their wages.
In the United States, rural voters and the working people across the country are especially vulnerable. They tend to be engaged in agriculture or in manufacturing work that exports mostly low value-added commodities and low-skilled manufactured products. They have been among those most displaced by the “Great Recession” and have felt largely abandoned by a political leadership that has done little or nothing to arrest their fears. Culturally and ideologically, they tend to be Republican. But they’re Republicans that have been ignored by their party establishment in favor of the party and business elites.
So, what does the rightward-populist turn of the electorate mean for investors, businesses and political leaders?
In the United States, it resets much of the legislative calendar through at least mid-November. Comprehensive immigration reform is likely off the table, along with the re-authorization of the Export-Import Bank, at least in its current form. Trade Promotion Authority, or “Fast-Track”, the legislation that allows the president to submit draft trade treaties to the Senate for up or down approval, may also at risk. Finally, US negotiators of the Trans-Pacific Partnership (“TPP”) and Trans-Atlantic Trade and Investment Partnership (“TTIP”), may have to be more assertive of American interests in hammering out provisions if they hope to secure ultimate passage of these multilateral treaties, as well as other bilateral trade treaties. Republican senators from states with large rural electorates would be happy to ingratiate themselves with voters by joining forces with unions and even left-wing Democrats to oppose trade treaties that shortchange their wage-earning constituents. It would not be surprising to see the new Congress impose a “sunset” provision on any trade treaties that are adopted so that they would expire after ten or twenty years.
There is, of course, some chance that immigration, the Export Import Bank reauthorization and other matters could be re-authorized during the lame duck session of Congress. But doing so would only further embolden Tea Party activists and other conservatives who already sense that their government doesn’t represent them. It would be the equivalent of a red shirt in the eye of a raging bull; a massive Tea Party recruitment event.
In Europe, continued recession is likely to enhance the power of nationalist-populist movements at the expense of the supranational authority in Brussels. European national governments, relative newcomers to accepting resident foreign workers in their borders, may become less tolerant of ethnic and national migration that, in their view, jeopardizes the job and economic security of their indigenous populations. Germany, particularly, is far less likely to subsidize or guarantee the economies of their poorer partners in the Eurozone to protect the Euro.
In Japan, the “third arrow” Prime Minister Abe’s economic proposals, after massive monetary stimulus and government spending, includes plans to reduce the corporate tax rate and regulatory oversight, possibly forgoing a planned 2% increase in the consumption tax, and efforts to increase women’s participation in the workforce. He is also working to substantially increase exports of Japanese food products and to boost Japan’s labor force to maintain the country’s ship building industry. Abe is also pushing for an interpretation of Japan’s pacifist Constitution that would allow the Japanese Defense Forces to more aggressively protect Japan’s vital interests, and that of her allies, in theatres well beyond Japan’s borders.
Assuming the economy continues to be stagnant, investors should expect a growing nationalist-populist trend.
In the United States, companies and industries that have been favored by government policy or at cost to taxpayers – so called “corporate welfare” — are unlikely to have the largesse continue far into the future. Companies like Boeing, a principal beneficiary of the Export/Import Bank, already have lost value on Eric Cantor’s loss. General Electric, which has been close to Obama Administration plans for high-speed rail, wind, and solar energy is likely to find less friendly government support. Others at risk are government sponsored entities like Fannie Mae and Freddie Mac; retailers that derive much of their profit margin from cheap imports, like Wal*Mart and The GAP; and, finally, companies hoping to effect inversions to offshore their company headquarters to lower tax jurisdictions, like Ireland, to effect tax savings. Winners are likely to include financial services companies who will take up the slack from Fannie and Freddie, as well as credit rating agencies and large banks that are likely to fill the void in export financing left by the loss or reform of the Export/Import Bank. Companies whose products have long been manufactured in the USA (or at least in North America), like Carhartt, and those that re-shore American jobs in accordance with recent trends, are also likely to benefit.
In Europe, companies in wealthier countries like the UK, Germany and France that rely on low-wage workers from poorer EU countries around the Mediterranean and Eastern Europe, as well as Central Asia and North Africa are at risk of wage hikes as policies are likely to harden against such foreign workers. These are principally European companies in the retail and grocery sectors. Sovereign debt from poorer Eurozone countries, like Portugal, Italy and Greece is likely to fall as support for the euro from wealthier countries is likely to be opposed by the electorate.
For Japan, companies in the defense sector, particularly maritime defense contractors like IHI Corporation (which builds the Izumo class helicopter carrier) and Mitsubishi Heavy Industries (building the Sōryū class fast attack submarine, with possible export to Australia) are likely to benefit. Companies in the food sector like Glico (confectionary), Yakult Honsha (yogurt drinks), and Ajinomoto (dumplings, noodles, food additives) would all benefit if Prime Minister Abe can achieve his goal of increasing food exports.
This commentary has been prepared by The Stuyvesant Square Consultancy. It is offered for informational and educational purposes only. It is not, and should not be regarded as, investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice.
Cochran lost the frst round of the primary to a Chris McDaniel. But neither candidate earned 50% of the vote, so, under party rules, they will meet next Tuesday in a runoff. ↩