The Rise Of Political Risk

by: Markos Kaminis

Many in the media are attributing nascent softness in European and also American shares to whatever happens to be in the news that day or this week. While many of these issues are certainly important to the market, like for instance the latest Spanish bond sale or the European recession foreseen here for months now, there's a major macro factor of stock performance that short-sightedness has not allowed into perspective. Political risk is increasingly entering the frame (mostly for European shares today), and it threatens to change the investment game and more for Europe, the United States and much of the world this year and beyond.

In times of duress, austerity stricken citizens tend to vote with more than just boisterous protesting; you know, like the now commonplace (in Greece) burning of automobiles, breaking of storefront windows and hurling of stones at your friendly neighborhood cop. While many nations have put off long awaited elections, this year, the ballots will hit the fan. Meaningful policy change should increasingly accompany that, and so significant risk may oppose shareholders if the wrong people take office.

This weekend offered the first splattering in a big, bad and potentially disgusting way for investors. The French elections could break up the French-German connection lovingly known as Merkozy. French PM Nicholas Sarkozy and German Chancellor Angela Merkel have with their concerted effort led Europe through its most difficult time since the Second World War. In fact, they have very likely kept the European Union together, though in a weakened and more fragile state. It is precisely this popular opinion that threatens to unseat the French connection, with Sarkozy expected to be overcome by Socialist Francois Hollande, who this weekend scored a first round victory over the incumbent Sarkozy. The election concludes on May 6, which is shaping up to be like a sort of doomsday for Europe and investors in European or regionally sensitive shares.

You see, on May 6, the Greeks will also very likely unseat their leadership. The choice for Europeans continues to be represented by the same old faces from the same old political parties, which are adept at dishing out whatever the people's palette desires on any given day. For instance, in Greece today, the New Democracy Party is talking up growth initiatives over the sour tasting austerity their socialist counterparts in PASOK have been forced to serve. Yet, it was under New Democracy that Greece forged its economic data to sneak into the eurozone. I'm not sure the Greek people are as forgetful as politicians may think, and so they may turn in a more radical direction between now and May 6. Such a popular decision could completely undermine the unstable stilts Europe is balancing upon, and that's a concern for investors.

The problem is that for Greeks, and others, there are very few alternative digestible options to choose from. Still, desperation has driven many to desperate affiliation. The communists have even found some support, which may be a good thing, as they help keep radical opposition fragmented.

Extreme right wing radical parties have been quick to spring up across Europe with common political themes, notably anti-immigration, anti-assimilation and of course, anti-austerity. So far, these fascist parties have come up against the broadly accepted wisdom of the day, which is that globalization and common civilization lead to prosperity. However, I have to question how much longer such anchors will hold against the storm of economic recession (depression for some) that is tormenting Europeans.

More than 50% of Greece's young adults are unemployed and tired of the old guard, which is represented for them by both of the popular parties. Youth unemployment is a common theme running across Europe, and if the young are inspired enough to assault policemen, then they're inspired enough to vote against the establishment.

In France, the extreme right wing candidate Marine Le Pen received 18% of the popular vote this weekend, vividly illustrating the new found favor of fascism throughout the region. However, for France, full-blooded fascism cannot take comfort hold of the nation, due to its important immigration driven minority. Still, the fascist voice is now needed by both major parties to overcome the other, and so Madame Le Pen garners leverage which she may use to insidiously gain more power. This is most probably a bad thing for the EU and the eurozone, and for investors in the sector, both with capital and with corporate assets.

Those voices which would smother this argument and the threat of fascism with the usual description of the disjointed membership of the "far right," which includes various extremists, anarchists, racists and religious conservatives, would miss the critical point. What unites these varied groups is dissatisfaction with the ruling parties, and that is a rapidly increasing commonly shared disgust throughout the streets of Europe. At this point, it might only take further economic strife, which is expected here, combined with new and perhaps sensible sounding figure heads atop these parties to drive radical change in Europe, and that is not a farfetched or distant possibility.

For now, the seemingly smartest voices continue to support the policies of the established parties. The problem is that the comfort of their seats has made these politicians too complacent to effectively find creative means of economic restoration, which I see as necessary over austerity. They are so sure of themselves and the ways of today, that they are likely to be overrun like deaf blind men standing before a herd of charging elephants, in my view. They are unable to clearly see that the usual lunch meetings with the usual experts providing the usual economic advice will not suffice these dynamic times.

What fascism would likely bring to Europe and eventually maybe beyond would be an undoing of civilization. The progress of the world toward a more inclusive intermingled society since World War II could be undone in a decade. The European Union may hold in some form for the sake of mutual protection against the dark shadows that lurk to the east, but despite its similarly sensible economic reasoning, the eurozone would likely disintegrate.

The polar opposite fiscal and monetary direction, which I will discuss separately, could lead desperate European leaders to strike a stronger political union while they still can. Combining in such a manner, however it may make sense to the desperate, should also support the growth of the region's economic cancer across now somewhat healthy states. I expect that such a unionization effort would tie the region, and could thus drown the entire group together, i.e. the German's worst nightmare. That's because I expect the European Central Bank (ECB) would then get its hands dirty, and the excessive creation of fiat currency combined with other factors I see developing geopolitically, could undo the financial system entirely, and perhaps global trade as well. I will write more about this truly undesirable possibility in a dedicated article soon enough.

While economic data pointing to decline across Europe is definitely playing a key role in the day's activity (eurozone PMI contraction), it should have been expected by readers of my column. You read others to know what is going on today, and you read me to know what will happen tomorrow.

Today or not long from now, the realization that the people may not stand much longer behind ruling regimes, and with destructive fascism clawing at the door, will drive concern about civilization and spread chaos across securities markets. At the hour of scribbling here Monday, and likely well noted by the reader, Europe was off sharply with the global markets falling in concert. You can expect more of the above should fascism (nationalism) overtake a too slowly inspired establishment. The Vanguard MSCI Europe ETF (NYSEARCA:VGK) and the European Equity Fund (NYSE:EEA) were each down between 2% and 3%. For the nation in the news, the iShares MSCI France Index (NYSEARCA:EWQ) was down more than 3%. The Global X FTSE Greece 20 ETF (NYSEARCA:GREK) was off 2.6% and the iShares MSCI Spain Index (NYSEARCA:EWP) was lower 3.2%, as bond spreads widened across Europe. The levity of the matter is even more apparent as we view the 3.6% drop in the iShares MSCI Germany Index (NYSEARCA:EWG) and the 3.9% collapse of the iShares MSCI Italy Index (NYSEARCA:EWI). In my opinion, well-founded contagion concerns have the SPDR S&P 500 (NYSEARCA:SPY) and the SPDR Dow Jones Industrial Average (NYSEARCA:DIA) lower more than 1%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.