Politicians come and go...and that’s fine as long as you’ve got solid institutions
The very different circumstances of the Netherlands and the US show that systems underpinning governments are far more resilient than the governments themselves
Did you know that the Netherlands has not had a government, since the March 15 election yielded an inconclusive result?
Talks continue and life goes on as usual. Indeed, investors in Dutch stocks seem not to be troubled by this lack of a government; prices on the AEX Index have steadily risen since March.
Compare and contrast this calm in Amsterdam with the mayhem in Washington where there is, in theory, a Republican government, backed by supposedly sympathetic Republican legislators forming a majority in both the Senate and the House.
Despite these fortuitous circumstances the Trump administration is mired in gridlock as revolving doors spew officials in and out of office, substantive legislation has yet to be passed and even political insiders find that their best source of information about what the President is thinking comes from overnight tweets, only some of which are coherent.
Yet investors got quite excited when Donald Trump was elected, share prices surged, the US dollar rose and bonds yields trended upwards. No doubt many over-excitable investors thought the US was about to embark on an era of massive business deregulation alongside big tax cuts and trade policies that would strengthen domestic producers.
And then there was the promise of massive, pump-priming infrastructure projects, creating more jobs and business all round.
None of this has materialised. Instead of anything positive, there has been a series of negative moves with Trump removing the United States from the Trans-Pacific Partnership agreement and the Paris climate accords as well as a series of confusing attempts to change the terms of the North American Free Trade Agreement.
Yet trade continues to flow in and out of the US, as stock prices have remained buoyant. But then again, they were pretty buoyant under the previous administration.
The adults in the room at the Federal Reserve, who are beyond the President’s direct control, are allowing interest rates to inch up from their rock bottom levels and it is their actions that are having a more direct impact than the cacophony of noise emanating from the White House.
What does this tell us? Perhaps surprisingly, the lesson arising from the very different circumstances in the Netherlands and the US is that the systems underpinning governments are far more resilient than the governments themselves.
The Netherlands is not alone in Europe in experiencing long periods without a government; Belgium, for example, has a way longer track record for this sort of thing. Yet there is no panic in the streets, because citizens understand that although governments have the ability to disrupt their daily lives – usually not for the better – by and large there are other robust institutions ensuring continuity and stability.
It’s the same story in the US, only more so because the complex federal system diffuses power. At the heart of government, the legislature and the administration are separate. More profoundly, at state and even city levels, there are large dollops of autonomy.
Thus, for example, many parts of the US will continue to adhere to the Paris climate accord’s provisions even though the federal government has turned its back on it.
It’s a rather different story in systems where the institutions of state are weak, devolution of power is limited and everything is filtered up to the top where there is inherent instability, sometimes caused by warring factions within the political leadership but more fundamentally meaning that if the apex of the system crumbles there are no safety nets to catch the fallout. Indeed, the speed of disintegration is usually breathtaking.
The conundrum is: should investors respond to political change or simply rely on economic fundamentals and inherent systematic strengths as the benchmarks for their decision making?
Short term investors are buffeted on a daily basis by what are fondly called ‘new circumstances’ and they cannot fail to respond to them. However long term investors can be sanguine even when noise levels surrounding political systems reach crescendo levels, safe in the knowledge that while political leaders are more likely to damage economic fundamentals than improve them, the scope for doing damage is curtailed by the strength of the systems designed for precisely this purpose.
So, yet again, a policy of masterful inaction is generally called for when the temptation rises to tailor investment decisions to political change.