Political Anxiety
Rising political anxiety might not be fully priced into risk assets. The first quarter of 2019 begins with political anxiety in Europe over Brexit.
Britain is scheduled to exit the EU in March (which is just a few months away) and despite months of negotiations, both sides have been unable to strike a deal. There is justifiable political anxiety over Britain crashing out of the EU without a trade deal, a worst-case scenario.
The uncertainty about how billions of dollars of trade in goods and services will be conducted between the EU and the UK could rattle markets going forward.
The UK has 3,500 troops on standby in the event of a no deal Brexit.
Brexit is a mind field it is Europe’s political anxiety
Unwinding over forty years of co-operation that existed between the UK and the EU over a wide range of issues from air traffic management to mobile phone roaming fees (and everything in-between) in just a few years is beginning to look like a mission impossible.
So there is still talk, in this late stage of the negotiations of a UK’s second referendum in the hope that it would thwart Brexit.
But will the European superstate, EU survive long enough to make Brexit relevant?
Europe’s political anxiety is mounting with the rise of Eurosceptic popular nationalist parties.
France, a founding EU member, is in the grip of a Yellow Vest protest which has been rumbling for eight straight weeks and shows no signs of abating. The “let them eat cake” French President Macron is now battling for his political survival.
Europe’s political anxiety has erupted in a Yellow Vest protest in France and there is evidence of the movement spreading to other member states. Years of austerity and difficult economic conditions for the majority could result in the Yellow Vest protest erupting into a European Spring uprising.
All the ingredients in this explosive cocktail mix are now present. Rising wealth inequality, a corrupted out of touch political system where elected politicians serve their lobbyists at the electorate’s expense and the dire situation of regular folks to improve their situation through (nonexistent) labor unions and the ballot box makes more protests, disruptions likely. So the Yellow Vest protests could be the final spark.
On the geopolitical stage, the US-China trade war truce is also a cause for political anxiety
Neither side is indicating their willingness to make a compromise as the two heavyweights evenly match with both superpowers ready to fight it out if needs be.
China’s President Xi who was often pictured wearing a suit and tie behind a bouquet of flowers today appears more militaristic.
“Prepare For War”, said China’s Xi to his military officers.
A few days earlier China’s Admiral said sinking US carriers would be key to dominating the South China Sea. “What the United States fears the most is taking casualties,” the admiral said, before adding that such an attack on two of the U.S. Navy’s steel behemoths would claim upwards of 10,000 lives.
So China’s is today is muscle flexing and US President Trump who has built his reputation as a fighter, strongman is comfortable with muscle flexing, bearing in mind that diplomacy is not Trump’s forte.
Will the knight on a white horse will bring his people to war?
Perhaps the best clue came as early as the 45th current president’s inauguration speech.
“We all bleed the same red blood of patriots’,” Donald Trump inauguration.
Trump, a war president, is exactly where the deep state wants him. The motive for a US hot war with China are numerous. Uniting a divided nation through war is just one of them.
But think back to the 1930s, in some ways China today is Germany back then.
China is challenging USD hegemony and wants to expand its economic military dominance in the Pacific. China, up until recently was the US’s largest creditor and one clandestine way to shake off a big creditor nation and wipe off the debt is to take them out, then charge war reparations.
Moreover, the “forced” deindustrialization of China would accelerate the re-industrialization of the US, that is assuming the US wins…
So there is rising political anxiety that the US-China trade war could go hot
But let’s hope the above scenario is more suited to a fictional plot for a Hollywood gangster movie and the US-China trade war is resolved.
Political anxiety over US Government shutdown is yet another issue of concern
There have been reports of airport delays and food stamps being denied. 38.6 million Americans are dependant on government assistance for food necessities, according to the latest data released on December 7, 2018.
Furthermore, in late 2017, analysts projected a government shutdown would cost the U.S. economy $6.5 billion per week.
So political anxiety in Europe over Brexit, EU stability, US-China trade war which could lead to a potential hot war are all likely to weigh on the markets in the first quarter of 2019.
But rising political anxiety could also mean that the Fed abandons its plans for rate hikes and its balance-sheet reductions
Put another way, Fed Chair Powell’s Dovish stance could gain momentum in a climate of rising political anxiety.
What we learned in last Friday’s massive one-day stock rally is that the Fed is reluctant to tighten liquidity during a massive market correction.
A slowing global economy and growing political anxiety could turn a hawkish Fed Dovish if so that would provide tailwinds for risk assets going forward.
Bad news could again be good news for markets.
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