Stocks gave ground yesterday amid some profit taking. A sharp drop in energy prices nicked the oil sector. Late in the day, President Trump once again spoke of the possible need for further tariffs against the Chinese should trade talks fail to make progress. The markets reacted much less harshly than they have in the past given Mr. Trump’s behavior pattern to pull back at the last minute. But, if anything, he is unpredictable and a poker player can’t win by bluffing all the time. Still, it is earnings season and with companies reporting decent results against a solid economic backdrop, the overall mood is still positive.
One big overtone of the past several years is populism. It certainly has changed the political landscape. Populists have either been elected or been a factor is many elections. There is no better example of this than President Trump. Populism draws ardent supporters. Whatever you think of Mr. Trump personally, you can’t deny his ability to draw huge crowds. But he isn’t alone. Bernie Sanders, in the 2016 campaign, had equally ardent supporters. Hillary Clinton’s failure to excite those to the left politically may have cost her the election. Today enthusiasm among progressives is split. Some of that energy has been hijacked, at least for the moment, by “the squad,” House newbies that have very progressive and controversial ideas. They scream loudly and crudely sometimes. So far, their appeal is narrow. Moreover, it saps some of the energy from the main show, those running for President. But over time, that will change and the energy will transfer to someone the squad endorses, or at least tolerates. We have already seen moments of emotional fire from Senators Elizabeth Warren and Kamala Harris. It is way too early to see whether early energy can light a fire, but if the Democrats are going to win, they are going to have to capture their share of populist energy.
Populism isn’t a left or right policy. It, as the word implies, represents the ability to hear the people and offer them a better path forward. Often the promises don’t morph into reality. Nations like Venezuela are prominent examples. In many cases, the promises mix with corruption and greed and generate undesired results. Brazil and Argentina come to mind.
We see populism coming to the forefront in Great Britain. Theresa May came into office at a crisis moment. The Brexit referendum had passed, but it needed a leader to get it executed. She wasn’t up to the task. Now, the leading candidate to replace her is Boris Johnson, Britain’s version of a populist. First, he has to win his own party’s nod, and then we will see if his charisma can get the job done. France, in its last election, chose between a right wing extreme and a young outsider with his own brand of charisma, Emanuel Macron. Mr. Macron lost his way, however, when he started to talk down to the populace. He heard the boos and has begun to listen better, but the jury is still out.
Mr. Trump, of course, represents a different and very unique version of populism. He has populist policies that appeal beyond his base, including more rational regulation, lower taxes, and a more disciplined approach to immigration but, to be polite, his execution is often crude and controversial. That leaves the window open for Democrats but as recent French history shows, getting too extreme is a path to defeat.
Look, for instance, at the progressive rush to Medicare for all. Joe Biden correctly points out that what sounds great is economically unfeasible. Seniors currently covered by Medicare have been paying Medicare payroll taxes their whole lives. Even assume private employers pay for a Medicare plan instead of private insurance in the future, how does one account for the millions who aren’t working for an employer who pays for benefits, aren’t poor enough for Medicaid, or aren’t old enough for Medicare? Therein lies the flaw of many purely populist ideas. The benefits are appealing and win votes, but the execution is way too costly. In the stock market, while the health care sector has lagged year-to-date, in good part due to the rhetoric surrounding the future of health care programs, for the most part, the threat of Medicare for all hasn’t had an overwhelming impact. Mr. Biden’s idea to rework and improve Obamacare makes more sense and can be done in a way that allows the current system to sustain itself. Yes, Republicans want to repeal and replace but that is all semantics. Any result would be an alteration of what is already out there. The real arguments won’t be about the label; but about the efficiency of a better plan.
That doesn’t mean the health care sector is off the hook. Everyone is attacking drug pricing. Drug price inflation has been falling for years. Generic prices have actually been in steady decline for much of this decade. At some point, the government may get into the business of negotiating drug prices. It actually does so today but not in a universal way. But in the end, it will be market forces that win out. That is always the way. Drug price inflation has been falling as co-pays rise and individuals become more invested in the economics of health care. Put the incentives in the right place and market forces will generate the proper result every time.
This week, the focus of bad behavior has switched from the drug companies to the big tech names. Depending on the moment, Facebook#, Amazon, and Google# have all come under fire. Too big, too monopolistic, and too corporate. Just as you can’t trust the fox to police itself when roaming around the chicken coop, these companies face increased scrutiny worldwide whether it be a tax based on size in France or trying to defend against accusations that Google is someone whose behavior is treason-like with the Chinese. Facebook wants to create a cryptocurrency as a dollar substitute. Governments worldwide don’t want Mark Zuckerberg to become their de facto central banker. Ultimately, there will be some version of a stable cryptocurrency that will be used as a preferred way to transact business, especially across nations that don’t have stable currencies themselves. But it will be governments that will oversee and regulate Libra, Facebook’s name for the currency, not a consortium of entities that Facebook deems to be the umpire. Blockchain technology is too important to be ignored. What Facebook is doing is forcing the changes sooner than governments worldwide want. The battle may seem like Facebook against the world, but it is actually a perfect example of better technology forcing change. It isn’t any different than putting robots on an auto assembly line or publishers typesetting electronically. What Facebook wants is for commerce to be executed over its various platforms. In less time than governments may want, that is exactly what is going to happen.
That begs the question whether Facebook, Google and Amazon are too big. Have they become so predatory that their sheer size gives them advantages so overwhelming that they must be broken up? There isn’t any one answer, and the question will have to be answered on a case-by-case basis. History has shown repeatedly that there are times when companies need to be broken apart. But these are few and far between. All will be regulated and, as they get larger, scrutiny will only increase. Big fines are inevitable and a cost of doing business. The companies, in their competitive angst, will track a fine line along the edge separating fair trade and monopolistic practices. When they cross the line they will be censured and pull back. That simply is the penalty of getting too big. If being too big ultimately proves to be a burden, these companies could separate themselves.
As for earnings season, so far it is too early to make much of a conclusion. More on that topic will come Friday.
Today, Luke Bryan is 43. Angela Merkel is 65. Donald Sutherland turns 84.
James M. Meyer, CFA 610-260-2220