THE RISE OF POPULISM – Can breaking bad be good?

All is not well amongst the citizenry. A groundswell of public opinion is becoming palpable against the darker side of global capitalism. The unfettered flows of capital and people across borders are causing unease amongst a growing number of domestic citizens, with a feeling of mistreatment at the hands of the elite few and foreigners. In Britain, the Brexit vote by British citizens in late June to exit the European Union was a shot heard around the world. It serves formal notice of the rise of populism. In America, Donald Trump's ticket to the White House is printed on similar sentiment. In Canada, a sense of unfairness is being expressed in public discourse about the state of the housing market.

Citizens feel disenfranchised from the global capitalist system for at least four reasons: wage pricing power has disintegrated and the value of loyalty has been wiped out by the primacy of the profit motive, especially through outsourcing; legal and tax systems are biased to support the wealth of the few over the incomes and well-being of the many; immigration into several countries has suddenly reached epic proportions, and; governments have permitted skyrocketing amounts of foreign capital to acquire assets with ease.

Populism seeks a better deal from capitalism. The path towards getting it promises to be a long and bumpy one. It will necessitate the stalling of internationalization. That means global trade ebbing further down from it’s peak, and the long shadow of business uncertainty stretching further out. This all but ensures that corporations face greater challenges ahead in growing earnings, that volatile capital market conditions will continue to reign, and longer run investment returns will remain illusive. Ironically, this gloomier longer term outlook is not inhibiting sprite equity market recovery rallies in the short term. For the moment, growth concerns are deemed offset by more liquidity and lower interest rates.

As populism gathers force, public policies will change, and the global economy and capital markets will face some serious tipping points. For example, consider the populist complaint that relatively few foreigners are affecting the affordability of housing for the many. It is probably true. Incalculable large amounts of Chinese, Persian, and Russian capital have been given free tickets to take flight and land invested in safer countries. Realtors, legal and banking agents in London, Sydney, Vancouver, San Francisco, the list goes on, are funnelling monstrous volumes of foreign capital into their property markets. It is not just the quantity. It is also the lack of sensitivity to price, and the scant due diligence on the new beneficial owners and the source of their funds. Populist thinking is that money of unknown origin and repute is inflating property prices out of reach of locals who have been "working hard to get ahead". That leaves many with a bad taste about the system that they thought was there to serve and support them first.

In Canada, populist sentiment helped spawn the federal government’s decision to form a working group to review the housing market. Rightly so. Frothy housing markets require far more than just local solutions. It is a national issue because we are in a world interconnected by fluid foreign capital flows. Decisions that affect those flows have international political and economic consequences. For example, a country’s current account is it’s net financial balance with the rest of the world. In Canada, as in the UK, this account is in deficit, with foreign inflows into real estate financing a chunk of it. In the wake of the Brexit vote, uncertainty regarding Britain’s future may lead to foreign capital flows being redirected from there to Canada. That's populism potentially redrawing the economic landscape. It bubbles up the question: is it prudent for a country to rely on foreign capital inflows as the primary source of economic growth and foreign exchange rate strength? If Canada chooses to turn some of it away, we’ll see if breaking bad can be good.