Football (American football to clarify for my international readers) is my favorite sport. Every season there are several games that come down to a last second field goal. Take a hypothetical game where a team spends the entire game behind and then during the last two minutes drives down the field to try a last second 48 yard field goal (the kicker should make it more often than not, but it’s not an easy kick by any means). The kicker misses and the team loses. Fans and the media and perhaps even some of the team are quick to blame the kicker. He missed! If only he would have made it, we would have won!
However, that ignores what went on for the other 58 minutes of the football game. The team spent 58 minutes of the game losing. In the final two minutes they only drove down to the other teams 31 yard line (field goals are about 17 yards longer then the yard line the ball is on due to the 10 yard length of the end-zone and the holder being positioned about 7 yards back from the line of scrimmage). It wasn’t like the kicker missed a chip shot from the 10 yard line.
Brexit and Trump’s shocking upset victory remind me of the above example of a football game. I’ve seen people place the blame for Brexit on Leave voters being misinformed, the Leave campaign lying, lack of a good “narrative” for the Remain campaign. I’ve frequently seen people “blame” Trump’s win on Hillary’s email scandal, Russian interference, FBI Director Comey’s last second statement, the electoral college (Hillary is currently ahead in the popular vote by around 2.8M), and more. Just like the football game there is an element of truth to some of those just as the kicker really did miss the kick. But, what about the other 58 minutes?
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Whether it’s Brexit, Trump, the rise of outsider political parties across Europe (Five-Star in Italy, Syriza and New Dawn in Greece, National Front/Front National in France, etc) the trend is pretty much the same. People are fed up with the status quo. So why is that?
Depending on where you are in life it can be hard to see why. If you’re a top corporate executive raking in tens of millions a year you have no reason to be upset. If you’re a highly paid professional such as a doctor or lawyer things are probably going pretty well, you might want some tweaks to the system here or there but things are probably pretty OK. If you’re an upper income professional like computer programmer, mechanical engineer, or middle manager things are perhaps not great but you probably don’t see a reason why you’d want to blow up the political system. For people making above average incomes it can difficult to understand the appeal of some of these political outsiders but I believe the explanation is rather simple: it’s the economy.
Take a look at the graph below. It shows real median income versus worker productivity growth.
Trump And Brexit
People have been working harder and haven’t been getting paid more. However, this masks an even deeper problem beneath the surface. The graph below shows the amount of pre-tax income accruing to the top 1% versus the bottom 50%.
While median household income has stagnated that obscures the fact that the income distribution has been growing more unequal. In fact, the US has one of the most unequal income and wealth distributions of any developed nation.
Also, despite the economy growing, most of that growth has accrued to corporations and the elite. The chart below shows the share of GNP (gross national profits) that are spent on employee compensation and that are retained as profit.
We can see that corporate profits as a percent of GNP have reached all time highs and that employee compensation is at all time lows.
The chart below shows the actual GDP growth of the US compared to several pre-recession and post recession estimates of potential GDP (That would be GDP growth if the recession hadn’t happened).
We can see by the red line at the bottom that while the economy has recovered it is not back to its pre-recession strength.
Depending on where you are in life, these trends may not be obvious. And what’s going on in the US is going on in other countries to varying degrees. Unless politicians are able oversee an economy where everyone participates in the economic growth the population will continue to vote for outsiders. What we are seeing across the globe is the continued rejection of the status quo.
As long as the trends of unequal growth continue we expect the trend of rejecting the political status quo to continue and are investing accordingly.
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Article by Ben Strubel, Strubel Investment Management