Mind the Gap

Donald Trump’s rise explained by need for economic revolution

Establishment politicians have ignored and failed to confront undeniable and visible economic failures

PUBLISHED : Sunday, 06 November, 2016, 6:19pm
UPDATED : Monday, 16 January, 2017, 10:26am

Brexit taught me not to pretend that anyone can predict how a Trump or Clinton victory would impact the markets. Although a Trump victory would be improbable and unpredictable it more importantly represents an enormous impact. Voter frustration finally finds a revolutionary symbol for the current problems plaguing the US economy. And, Hong Kong could see a mirror reflection of its own problems.

Stagnant income for average workers persist despite strong productivity increases; job creation is weaker than in previous economic recoveries; new jobs are concentrated in lower wage and shorter term positions; and an increase of wealth in the top percentiles of society have led to record levels of rising income inequality. It appears that fundamental rather than cyclical changes in the economy are demanding political realignment.

Peter Temin, former head of MIT’s economics department observed that the US economy should no longer be measured as a single structure, but as a “dual economy”. In fact, two mutually exclusive economic sectors unhealthily coexist within one country. A daunting socioeconomic gap separates its citizenry.

The dual economy framework was first described in the last century to explain the uneven development of emerging economies. A small and modern commercial sector used technology and capital to create exports and wealth by manufacturing products or extracting natural resources.

Unfortunately, the rest of the country fell behind and struggled at a subsistence level. Today, this model also explains the decline and fragmentation of developed economies.

The economic divisions spread to social and political constituencies. Mobility disappears between sectors. Any sense of community or shared goals is eroded. In the 21st century the parallel economies are split between a dynamic, high opportunity sector (HOS) where globalisation and technology provide enormous benefits, and a beleaguered low opportunity sector (LOS) where those same factors depress wages and weaken job security.

The HOS comprises highly educated and skilled workers: engineers, attorneys, scientists, senior executives, bankers and consultants. They are concentrated in global industries such as technology, finance, media and telecommunications.

Leading this group are those who can own or access to fungible capital pools: bankers, asset managers, venture capitalists, private equity investors and corporate executives who can exploit international capital and labour markets.

The rest of the population is stranded in the LOS: non-college educated workers who face dwindling career options or employees across all industries who hold jobs chronically threatened by automation or robots.

A contrarian bet in this election is likely to be very profitable. The markets have been pricing a Clinton win. Then on Friday the S&P 500 fell for the ninth straight session – the longest string of losses in 36 years. Trump’s significant strides in eroding Clinton’s lead sent volatility and uncertainty through the stock market. The market priced in a “Remain” outcome during Britain’s referendum on leaving the European Union. Contrarian traders and investors who took positions that assumed a Brexit win made handsome profits.

It is unthinkable that a candidate for President of the United States who is currently under FBI investigation for committing potential federal felonies could actually become president. Objectively, the punters that favour Clinton must believe that the US system is so thoroughly corrupted that it would rather see her assume the presidency than face the unknown abyss of Trump. Regardless of who wins, the bitter polarisation does not bode well for governance.

Peter Guy is a financial writer and former international banker