May 7, 2017: The Day Populism Dies

Four for four?

I think so.

But let me explain…

It was early last summer (2016), just before the Brexit vote in Britain, that I wrote (for a former employer) that the Brits would surprise the world and vote to leave the European Union. It was not the popular position to stake. Those who care about such things suspected that the “Remain” camp would sneak out a narrow victory because leaving behind access to the largest combined consumer base on the planet and going it alone in this global economy is fairly daft (a sentiment I share). But I was in London in the weeks before the vote, and while the media seemed to focus on the issues that the wealthy and big-money cared about, the real fight was taking place at the lower end of the socioeconomic ladder – the people most affected and who feel most put-upon by free-trade and open borders. (Win #1).

Jump ahead a few months; it’s July 2016…

After listening to Donald Trump’s Republican nomination acceptance speech, I wrote that “In an odd way, [Trump’s] speech was a contemporary version of [Reagan’s] ‘Morning in America.’ In an odd way. [Trump] did present a vision of hope. You just have to see that vision and that hope through the eyes of those workaday Americans who feel hopeless and for whom Trump’s words served as a manifesto for a brighter, better, wealthier, safer tomorrow … It’s an odd perspective on hope that, I think, will propel Trump to the White House.” (Win #2).

With that, populism was on the ascent – or so the media in the U.S. and the U.K. insisted. Next to fall, they claimed, would be France and the Netherlands, both of which were facing governmental elections that had populists in the lead.

I even subscribed to that belief, until I spent two weeks in February 2017 hopscotching between Paris, Milan, Amsterdam and Brussels – outside the sphere of U.S/U.K. media bias. I flew home and wrote, “My sincere belief at the end of this European tour is that key European nations will not follow the path of America and Britain. They realize, I believe, that they risk too much in doing so.” My prediction was that Geert Wilders in the Netherlands would come close to winning in the March elections, but that in the end his movement would fail. (Win #3).

Now we’re on to what I believe will be Win #4 – Marine Le Pen’s bid for the French presidency.

Because of the way French elections work – a two-round voting process – there’s very little chance Le Pen wins. She has a big base of support, no doubt. And she very well could win the first round of voting. But she won’t take round two. That, I’ll bet, goes to Emmanuel Macron.

And with that, the great populist wave that seemed to wash over the West will have petered out.

It will have done so for a reason just as simple as the one that brought it to power in the first place: Economics.

The Death of Populism

Populism is a lot like dormant seeds buried under the detritus on the forest floor: It takes a catalyst for them to germinate – often a forest fire that clears out the brush. For populism, that forest fire was the Great Recession in America, the Global Financial Crisis across much of the rest of the world, and, in Europe, the European debt crisis and all the austerity and joblessness it spawned across the Continent’s southern flank.

Government and central bankers were largely to blame for fueling the crisis, and neither offered an easy exit when the crisis was in full fulmination. People rebelled. Like they’ve done throughout history, the aggrieved masses rallied around the voices that promised to end the pain, to bring back jobs, to dismantle the system that lead them to this terrible moment in time. So, we saw populist success in Spain and Greece.

Now populism is waning in Spain (Greece is a different animal altogether). Spain’s populist party, Podesta, has seen its popularity shrink as the Spanish economy has improved. Spain has become something of an economic rock star on the Continent, growing at an annual rate close to 3%. Unemployment, still high, is in retreat.

When people feel better about their finances and their prospects for a job, the last thing they want is a new, untested government screwing up the status quo.

Which is one of the key reasons populism failed in the Netherlands, and why it will fail in France: The economies in both countries have been improving, along with consumer and business sentiment.

In short, people are happier, and happier people are less likely to vote populist.

And for investors, there’s a potential opportunity in this rejection of populism…

Our Profit Strategy

Japan, per Reuters, is dumping record amounts French debt recently, fearful of a Le Pen victory. It’s the wrong trade, for sure. But it points to our opportunity.

If Le Pen wins the first round of voting and the euro weakens on that news, that will mark a perfect moment to trade dollars for euro. We’ll be buying euros on sale.

And that’s a great trade to make these days because the Continental economy is fairing much better than most Americans realize – so good, in fact, that I bet we see the European Central Bank raise interest rates this year, a move that would see the euro rise against the dollar.

But more on that in an upcoming post…

In the meantime, be prepared to put some cash to work in the euro on Le Pen-inspired weakness. My preferred vehicle is the Guggenheim CurrencyShares Euro Trust ETF (FXE). (As I always note, I’m not paid to promote any particular investment. I just tell you what I like based on my own experiences or my own analysis.)

We will soon know if I go four for four. The first round of French elections is Sunday, April 23, with the final round two weeks later, on May 7 – what I suspect will be the day this latest surge of populism officially dies.

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