Changing of the Guard

by | October 25, 2021

The old guard is leaving. In Germany, Angela Merkel and Jens Weidman have stepped aside. In Japan, new prime minister Kishida is publicly jettisoning Abenomics. Britain has already Brexited. Poland is challenging the legal foundations of the EU. And although Trump may be out of office, his tumultuous tenure swept away formerly sacrosanct beliefs about American democracy and America’s place in the world. 

There is no going back, not for Britain and the EU, nor for the US. President Biden’s foreign policy team may not wish to admit it, but their policies of disengagement from Middle East entanglements and encircling China represent continuity with Trump, not a return to the bulwarks of US foreign policy in the first seven decades of US postwar history.

As we have written many times before, the foundations of public policy have been fundamentally shaken by the events of recent decades. The global financial crisis, growing economic insecurity, and the Covid-19 pandemic have eroded confidence in the virtues of free markets, globalization, inflation-targeting or fiscal discipline. Those underpinnings of the ‘Washington Consensus’ have been unable to withstand the blows of the early 21st century. The departure of the faces of orthodoxy, such as Merkel or Weidman, is merely a lagging indicator confirming that their values and beliefs no longer reflect the public will.

But what is equally obvious is that there is no ‘new guard’ to replace the one now departing. In its place resides populism. Yet populism is an emotive response, not a cohesive framework for addressing what is or what comes next. Populism is fundamentally about anger and frustration. It does not offer a roadmap for the future, not just because its solutions are risky (they are), but because populism offers no unifying message. The only thing in common between Bernie Sanders, Alexandria Ocasio-Cortez, Donald Trump, Boris Johnson, or Victor Orban is a rejection of the status quo (ante). 

Thus far, populism has only succeeded in rejecting the old rather than offering a vision of the new. The result is drift—a world that has lost its domestic and international political moorings. The consequences of unfettered emotions are clear—factionalism and division domestically, isolationism and nationalism internationally.

We can only hope that populism proves to be an interregnum between epochs of stability. But for that to be the case, institutions and those who lead them must hold up bridges between what was and what will come. Political dysfunction at home and abroad requires institutions such as the free press, central banks, the business community, organized labor, non-governmental organizations, and the courts, among others, to speak truth, maintain public confidence, and shore up society to ensure that those things that are unambiguous pillars of social stability—such as well-functioning markets, freedom of expression, voting rights, human rights and the rule of law—endure until such time as a new framework of shared belief creates sufficient social and political cohesion to restore civility at home and abroad.

While climate change, biodiversity preservation, equality of opportunity, and mutual respect are the key public policy challenges of our time, they cannot be addressed without first restoring our collective belief in the legal, economic, and political frameworks that gird civility in national and international relations. Without a broad consensus on how society meets needs, shares power, accepts differences, and respects rights, there can be no progress elsewhere, not even (or especially not) on existential issues such as mitigating climate change.

Alarmingly, financial markets appear oblivious to that reality. Stoked by unsustainable increases in corporate profits, fueled by super low interest rates, and exacerbated by the fear of missing out, ordinary and professional investors are willfully ignoring the long-term consequences of shattered belief systems, all in the pursuit of short-term windfall gains. Yet barring a miraculous and improbable end to the widening clefts that divide civil society within and between nations, today’s bullish investors are merely engaged in greater fool thinking. Prevailing asset prices are only justified on the basis that someone even more foolish will buy them out. Apart from the lucky few, that is absurd.

Some might prefer that the ‘wisdom of crowds’ is at work, namely that investors anticipate a healing before unmoored social and political drift produces cataclysmic results. Increasingly, such thinking appears based on hope. Yet hope is not a strategy. For those whose faith resides in the predictive prescience of markets, it is worth asking where that clairvoyance was on the eve of World War I or the GFC. Manias, panics, and crashes are replete in financial history. Even if crowds are wiser than individuals, history is replete with examples of colossal misjudgment by markets.

The old guard is leaving. The new guard is yet to be found. For anyone reading this born after 1945, the present is unlike anything in lived memory. We live in precarious times, no matter what today’s financial markets may be saying.

About the Author

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy.

Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland.

From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT.

At both GAM Investments and UBS Investment Bank Larry was widely recognised for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others.

Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

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