The pendulum swings right: A pushback against liberal, progressive, interventionist economics

Perhaps we should not have been surprised at all. All year, we have seen strong anti-incumbent sentiment in elections held around the world because of unhappiness over work and business opportunities, inflation surge and cost of living attributed primarily to pandemic disruptions. But a clear shift towards the far right has been unfolding for far longer, driven by more deep-seated issues.

Javier Milei, a far-right libertarian, became president of Argentina. In Europe, France, Germany and Italy have swung to the right in recent elections. Italy is now led by Prime Minister Giorgia Meloni of the far-right Brothers of Italy party. Jordan Bardella (successor to Marine Le Pen) of France’s National Rally is seriously challenging President Emmanuel Macron. In Germany, the coalition government of Chancellor Olaf Scholz is falling apart. The far-right party Alternative for Germany (AfD), although with support of only 20% voters, is rising in influence, especially among the young and in eastern Germany. In Austria, Freedom Party has become a major force. In Hungary, Viktor Orban has consolidated his dominant position with his “illiberal democracy”, sceptical of liberal, globalist influences. President Recep Tayyip Erdogan’s right-wing, conservative, nationalist, pro-business economic approach remains the dominant force in Türkiye, as does India’s Narendra Modi. In Japan, Shigeru Ishiba, the moderate in the Liberal Democratic Party who recently assumed leadership of the party, has just lost parliamentary majority in a lower house election and is now leading a fragile minority government.

What is happening is the pendulum is swinging right, after years of liberal extremism. Why do we write this article? There are many recent negative commentaries on how the US could have voted for a man who re fused to accept electoral defeat, has a criminal conviction, is prone to vulgar and indecent discourse, and is a bully, womaniser, racist and fascist. It is totally missing the point. Trump did not win the US presidential election because of his personality, but despite it. And unlike in 2016, he also won the popular vote — gaining clear support across gender, ethnicity and age, including young, first-time voters, in rural, suburban as well as major cities in both blue and red states. It was a stunning expansion of his coalition, beyond his primary white working-class voter bloc to now include Black, Latino, Hispanic, Arab and Asian American populations. It was a coalition of the working class (many without a college degree) of all colours.

Trump broke identity politics. This is the majority working class pushback against the college-educated far-left liberal elites, seen as increasingly out of touch with their values and way of life. The working class is struggling to cope with a rising cost of living. They are disenchanted with the direction in which their countries are going. They feel alienated, frustrated, angry and resent the intellectuals and elites who are not see ing or hearing them. They voted for Trump because his economic message resonates — livelihoods, work, wages, taxes, inflation and immigration. A Venezuelan American said it well: “Creeping socialism reminded him of the situation he left in his home country.”

See also: Education lies in the heart of our nation’s problems and the pathway to our solution

Yes, “it’s the economy, stupid,” a saying popularised by James Carville, a strategist for Bill Clinton’s 1992 presential campaign.

It is economic well-being that voters now prioritise. It is about the peoples’ livelihoods, their cost of living (inflation, exchange rates), their work and wages, business opportunities, the taxes they pay, threats from immigration, their everyday safety, their children’s education, their ability to have a decent shelter (owning or renting homes), the threats from global competitors, the wastages by government and corruption leading to inefficiencies that are a cost for the people to bear. Case in point: Many first- and second-generation immigrants are voting right, for more restrictions on immigration — the “shut the door behind you” mentality — and approve of the mass deportation of undocumented migrants that Trump has promised. In one word, it is all about self-interest. As it turns out, Trump is not aberrant but represents the quintessential (majority of) American(s) today!

Beyond economics, we believe the election results also reflect, to no small degree, the backlash against the “woke” culture (LGBTQ and especially transgender rights, racial injustice, sexism, immigration and climate change) that has gone haywire. “Woke ideals” were seen as being forced on the people, against their traditional beliefs and con servative values — “educating” and shaming them into how they should now think and act, and, worse, the “cancel culture” against dissent and the suppressing of free speech in the name of social justice.

See also: Outlook 2025: Where and what to invest in?

The liberals have become “illiberal”. In their quest for freedom, they now impose their own views on others and deny freedom to those who disagree.

We think as more people interact and communicate using short-form, easy but biased articulation, society will become increasingly polarised. But it is not just social media that is to blame. Mainstream media is equally guilty of being caught in their own echo chambers — and increasingly disconnected from the lower spectrum. These media outlets are staffed by well-educated and mostly liberal personalities, which influences their reporting perspectives (intentionally or not) that, in turn, draw readers and audiences of similar beliefs. This also explains why they are losing readership as they become increasingly disconnected from the masses.

It is why few in the mainstream media saw the pendulum swinging and why they are “shocked” by Trump’s majority — the multi-racial working class who voted for him, even when they did not like the man himself. The Republican Party, traditionally seen as a party for the wealthy, has turned populist. Conversely, the Democratic Party, heavily influenced by the progressive left, is culturally out of step with the majority of Americans. Even now, as the blame game begins, reading the deluge of post-mortem analyses, we are unsure whether the intellects fully understand why a chunk of their voting bloc deserted them on Nov 5.

What a second Trump Administration means for US stocks and the world

The US stock market soared once the race was called for Trump. All three major bell wether indices hit fresh all-time record highs, finishing with their best week in the year. And the US dollar index recorded its biggest one-day gain in eight years (see Charts). Since this election was based on economics — on livelihoods, jobs, taxes, inflation and immigration (that affects jobs and wages) — the market rally has just confirmed that what is good for self is also good for the economy.

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Deregulation. Investors believe that the Trump Administration will be more business-friendly and push back against the tighter regulations under President Joe Biden. Fewer regulations and less bureaucracy — in the financial, energy and tech (in AI, robotics and autonomous vehicles) sectors — as well as less stringent or a reversal of environmental policies will stimulate innovation, boost deal-making and mergers and acquisitions, and open up more business opportunities that would support stronger economic growth.

Tax cuts. Trump has also proposed a slew of targeted tax cuts and lower corporate tax rates of 15% from the current 21%, in addition to extending his 2017 individual and estate tax cuts, which would further bolster consumption, the economy and corporate earnings.

To pay for the tax cuts, at least partially, there are plans to reduce or axe some of the liberal extremism-driven policies, including social programmes and clean energy subsidies that must be funded by higher taxes. As we said, this election is about “self” — Americans do not want their tax dollars going to others. Trump has also proposed to task Elon Musk with cutting trillions of dollars in government spending.

In addition, we suspect that Trump could pull back from global institutions and alliances, including funding for critical climate change initiatives (such as money for transformative climate actions in developing countries), NATO and overseas wars. The first cut back is likely to be support for Ukraine in its war with Russia, which he claimed he could end within 24 hours as president, and perhaps even US military presence in Asia. The reduced foreign spending would allow him to divert funds to his domestic agenda.

Tariffs. Another big campaign promise was to impose a blanket tariff of 10% to 20% on all foreign goods, with an additional 60% on Chinese imports, which, coupled with lower corporate taxes, are aimed at attracting investments into domestic manufacturing and create jobs for the American people.

Many of Trump’s promises are based on his “America First” vision, which will not bode well for the rest of the world. Tariffs — and then retaliatory tariffs — will hurt international trade and the global economy. For instance, some 13% of Malaysia’s exports go to the US. Also, a weaker Chinese economy (because of lower US exports) would further weigh on global growth.

And if Trump proceeds to replace taxes with tariffs, does it also mean that friend-shoring and the China+1 strategy is over? He has already threatened to penalise American businesses that offshore their production to Mexico with significantly higher tariffs. Things may well get worse for emerging economies if China accelerates the dumping of its products into their markets and hurting domestic manufacturers, as it had been doing in recent years in response to rising trade barriers in the US.

Of course, it remains to be seen how many of Trump’s campaign promises are simply rhetoric, and how many translate into policies. But if Republicans also win control of the US House, as it very likely to, it will make passing legislations much easier. And since this will be Trump’s second and last term, he can not seek re-election, and this will allow him to aggressively push his agenda.

On balance, Trump’s win reinforces the deglobalisation secular trend and our market outlook for 2025, which we articulated last week (scan the QR code to read the article, “Outlook 2025: Elevated inflation, interest rates and valuations + moderate gains in growth, productivity and capital returns. Where and what to invest in?” [The Edge, Nov 11, 2024]) — except that we may now see stronger US economic and corporate earnings growth in the short-medium term, at the expense of bigger public deficit and higher debts. Tax cuts, tariffs and mass deportation of undocumented immigrants (loss of workers) will most likely lead to higher inflation. Unsurprisingly, US Treasury yields rose in knee-jerk reaction after election night — on expectations of elevated inflation, coupled with better economic growth. The US dollar also strengthened. Deregulation and a more friendly business environment will boost corporate earnings growth prospects, valuations and stock prices.

On the flip side, we think the outlook for the rest of the world has worsened. There are now greater uncertainties, particularly for countries dependent on trade. US stocks, underpinned by better earnings growth outlook, will draw even more capital inflows, at the expense of other markets. Emerging market currencies, including the ringgit, have weakened against the greenback, as have the euro, Japanese yen and Chinese yuan. The FBM KLCI also traded lower in the immediate aftermath. We think sentiment for the Bursa Malaysia will remain weak, for the foreseeable future. Chinese stocks were more resilient (after an initial sell-off) as investors hold on to hopes that the government will unveil bigger fiscal stimulus (that may or may not happen) to counter potential Trump tariffs. We, too, are bullish for China. Trump will be more practical and transactional, which favours China.

Sidebox: What are right and left in economics?

In economics, policies considered “to the right”, or conservative, generally prioritise free-market principles, individual responsibility and limited government intervention. Common characteristics are lower taxes, deregulation, reduced government spending, privatisation, free trade, open markets and reduced dependency on welfare programmes through reforms. That is, markets rather than governments are better in determining economic outcomes and promoting individual prosperity. Some well-known books and authors associated with this view are:  

• The Wealth of Nations (1776) by Adam Smith: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”
• Capitalism and Freedom (1962) by Milton Friedman: “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”
• The Road to Serfdom (1944) by Friedrich Hayek: “The more the state ‘plans’, the more difficult planning becomes for the individual.”
• The Constitution of Liberty (1960) by Friedrich Hayek: “Liberty not only means that the individual has both the opportunity and the burden of choice: It also means that he must bear the consequences of his actions.”
• Basic Economics (2000) by Thomas Sowell: “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it.”
• Skin in the Game: Hidden Asymmetries in Daily Life (2018) by Nassim Nicholas Taleb: “If you do not take risks for your opinion, you are nothing.”

On the other hand, economic policies considered “to the left”, or progressive, argue for a more active government role in the economy, advocate for wealth redistribution and social justice. Some examples of the influential books and authors are:

• Capital in the Twenty-First Century (2013) by Thomas Piketty: “The history of inequality is shaped by the way economic, social and political actors view what is just and what is not”. Promoting progressive taxation and wealth redistribution to curb inequality.
• The Shock Doctrine: The Rise of Disaster Capitalism (2007) by Naomi Klein: “Extreme capitalism means extreme crisis.”
• The People, No: A Brief History of Anti Populism (2021) by Thomas Frank: He argues for progressive populism to combat inequality and restore power to the ordinary people.
• The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (2020) by Stephanie Kelton: “Austerity is a failure of the imagination, an unwillingness to see what’s possible.” She argues that governments with sovereign currencies are not constrained to spend, thereby supporting universal healthcare and jobs guarantee.
• The Value of Everything: Making and Taking in the Global Economy (2018) by Mariana Mazzucato: “The state has a role not just in fixing markets but in actively co-creating and shaping them.”
• The General Theory of Employment, Interest, and Money (1936) by John Maynard Keynes: He argues that active government intervention is necessary to manage economic cycles.
• Capitalism, Socialism and Democracy (1942) by Joseph Schumpeter: He predicts that the very success of capitalism might lead to its own downfall through social discontent and the rise of socialism.
• The Great Transformation (1944) by Karl Polanyi: He argues that unfettered markets disrupt social relations and harm individuals.
• Development as Freedom (1999) by Amartya Sen: He argues that development should expand people’s capacities and freedoms, not just economic wealth — supporting policies that invest in health, education and poverty alleviation.

Putting ideas neatly into boxes necessarily involves generalisation and simplification, we will be the first to admit. We have done so out of necessity for this article. Clearly, in much of economic thought and principles, there are overlaps. And it is also a question of time frame. Support of liberal ideas with government facilitation for healthcare, education, poverty alleviation in the short term as proposed by the likes of Sen, Keynes and others is not inconsistent with the longer-term implications of the free market principles of Smith, Friedman and Hayek.

Both right and left economics have pros and cons. “Extreme capitalism means extreme crisis,” as articulated by Klein. What she misses is that “Extreme liberalism also means extreme crisis.” Taken to extremes, both will seriously hurt the people. And in the past, a large middle class has struck a middle ground. Sadly, with more information comes more disinformation and polarisation. Extreme views and fake news. Consequently, the middle ground is rapidly growing smaller and smaller. That is to say, we can expect to see the pendulum of voters’ reaction gyrating to more extremes than in the past. And this current pushback against liberalism is but an example of a reaction to how far the left has had an impact on the economies and social fabric of various nations.

For both left and right economics, the destination is the same — the economic well being of the people and the nation. It is the path to this end that is different.

— End of Sidebox — 

The Malaysian Portfolio gained 1.3% for the week ended Nov 12, bolstered by gains from United Plantations (+8.6%), Kim Loong Resources (+5.6%) and Harbour-Link Group (+4.0%). The notable losers were IOI Properties Group (-3.9%), Insas – Warrants C (-3.1%) and KSL Holdings (-1.1%). Total portfolio returns now stand at 204.4% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 12.1% over the same period, by a long, long way.

The Absolute Returns Portfolio also gained last week, up 2% and lifting total returns since inception to 17.1%. The top three gainers were Talen Energy (+8.7%), DBS (+7.7%) and CrowdStrike (+7.3%). DBS’s share price rose to fresh record highs after the bank reported stronger-than-expected earnings results for 3QFY2024. Aside from declaring a quarterly dividend of 54 Singapore cents per share, DBS also announced a new share buyback programme of S$3 billion. Its outgoing CEO estimates the bank still has up to S$5 billion in excess capital after the share buyback is completed, suggesting more capital returns is in the works for shareholders. Uber Technologies (-4%), Tencent Holdings (-3.8%) and Swire Properties (-1.3%) were the biggest losers.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.