Land Of The Free Lunch, Home Of The Frustrated

by: Eric Parnell, CFA


People from all around the developed world are angry and frustrated.

This understandable frustration with a political and financial system that has failed them has led to calls for change. This includes the rise in left wing populism.

Whether such shifts will be supportive of an improved economic and market environment is worth a closer look.

People from all around the developed world are angry and frustrated. Many suffered at the expense of elites who acted recklessly in sparking the financial crisis, and in the years since they have seen policy implemented that is seemingly benefiting the same elites that caused the crisis while leaving the rest of the world behind. This understandable frustration with a political and financial system that has failed them has led to calls for change. But whether the type of change that they are now demanding will lead to a satisfactory outcome for the global economy and its markets in the end remains to be seen and is worth closer evaluation.

In a recent article on Seeking Alpha, I focused on the far right movement across the globe in countries across Europe. I also discussed how we are seeing some similar themes manifesting themselves in the United States. And the emphasis of the article was to consider the economic and market implications associated with policies related to increased nationalism and tightening immigration.

In this follow-up article, I will be focusing on the leftist movements we are seeing emerge in many parts of Europe. And just like on the right, we are also seeing similar left wing sentiments emerging in the United States. Once again, the emphasis of the article is not on political opinion but instead the economic and market implications of the policy prescriptions being promoted by the far left.

Before We Get Started

Before going any further, I'm inclined to make the following point. Just as in my previous article on the topic, my use of descriptions in relation to candidates or policies on the left or right are intended to be explanations and not pejoratives. In the event that they are interpreted as a cloaked expression of opinion or bias, I'm stating in advance that this is not at all my intent, as the Internet has enough other destinations for authors to express their political opinions outside of Seeking Alpha. My focus instead on this article is exploring the potential economic and market implications of any new political movements, not whether it is necessarily right or wrong from a political opinion standpoint.

The Rise Of Populism

Populism is a belief that the powers in the political system should not be concentrated among an elite establishment but instead should be distributed more broadly among the masses. While strong populist sentiments can certainly also exist on the right as evidenced by the success of Donald Trump in securing the Republican nomination for the 2016 U.S. presidential race, they tend to flow more broadly among those candidates and parties that reside on the far left of the political spectrum. And it has been very similar populist sentiments that helped propel the rise of self-proclaimed democratic socialist Bernie Sanders in the race for the Democratic nomination here in the U.S.

While it certainly varies depending on the specific party or candidate, at the core of the far left populist view is the railing against capitalism. The belief is that the existing political system is too focused on serving the needs of the wealthy with their undue access and influence at the expense of the general public. Thus, it is the belief of the far left that elected officials should disrupt this concentration of power among the elites by playing a greater role in curbing capitalist activities, expanding regulations, forgiving burdensome debts carried by the general public, and having the government play a much more direct decision-making role in the economy and markets.

The Economic Implications Of Populist Policies

The instinct toward populism is understandable. The political system in many parts of the world has been broken for some time now, and elected officials have proven particularly inept during the post-financial crisis period in carrying out fiscal policies to address the ongoing challenges that many are still struggling with today. Moreover, many feel as though they continue to pay the price for poor capitalist decisions in the past while these same capitalists continue to feed off of the political system for their own benefit and at the further detriment of the general public.

But while this sentiment is certainly more than justified, the economic and market policy prescriptions that often emerge from pursuing a more populist agenda in many cases can end up proving more problematic for a country's long-term prosperity and a drag on the long-term growth of global financial markets.

The first and arguably most profound economic constraint working against the success of more left wing government policies is the following: the government is typically not anywhere close to being an efficient allocator of scarce resources. One of the advantages of a capitalist system is that the incentive to maximize profits for one's own personal interest is generally aligned with the efficient allocation of scarce resources. In short, in order to maximize revenues and minimize costs in order to maximize profits over time, those who control such scarce resources are best served by using them most efficiently in order to achieve these goals. But in the case of government officials, their primary goal is not profit maximization. Instead, in most cases, it is to get reelected and to maintain power.

Thus, the use of resources is not necessarily determined in most cases by efficiency but instead by directing these scarce resources to the individuals and groups that will help those in control to stay in power. None of this is to say that well-run governments cannot bring themselves to focus on the efficient utilization of scarce resources and be highly effective at it. But since this outcome is not necessarily aligned with a politician's objectives, it can more often lead to instances of authoritarianism and future economic growth that falls well below potential due to the misallocation of resources.

Another challenge associated with more far left policies is the issue of negative spillover effects. A key principle associated with socialist or communist oriented policies is the more even distribution of wealth and income. But if people have less of a meritocratic incentive to pursue their own self interests, they often end up being less motivated to be productively self-sustaining and become more inclined to feed off of the public system instead.

Another issue is in terms of access to capital. Lowering borrowing costs and increasing access to credit for the general population, including the less credit worthy, can provide many with the ability to achieve homeownership and secure a college education, which is great and productive for a society. But it also can end up resulting not only in some people borrowing more than they should but also the providers such as homebuilders and universities increasing prices much more than they would otherwise. And from a sovereign perspective, while greater debt forgiveness may be preferable over the weight of austerity, it also excuses for next time the need for borrowing discipline and restraint when the access to credit becomes free flowing once again.

In short, both the borrower and the lender has a responsibility during good times to make sure that this money can be realistically paid back at a later date no matter what the future economy may hold. And this can be difficult to achieve within the framework of a more government-run system.

In the end, there is no free lunch. For every "free" government program, someone somewhere is bearing the cost. And this is a point that can often be overlooked in a more populist political approach.

Just because more populist policies have their limitations does not mean that pure capitalism is necessarily the answer either. The general population is understandably frustrated because the benefits that should supposedly work their way down from the wealth being accumulated among the highest income earners has not even come close to materializing, hence the increasingly widening wealth disparity in many economies around the world and the continued outcry against the "top 1%."

Perhaps if the global capitalist system was less obsessed with making as much money as possible now no matter the cost and was more focused on longer term objectives of sustainable profit and wealth creation that helped foster the wellbeing of society as a whole, perhaps the rising far left sentiment would be more subdued. But once again, this is where the failure of the political system comes into play. For if those who are currently in power had been more effective to this point in promoting and applying balanced fiscal policies and regulations that would have encouraged this more productive behavior from their capitalist market systems, and this includes global central banks showing less accommodation and greater discipline and constraint, they would likely not be facing a potential overthrow by political outsiders today.

Far Left Power Players Worldwide

With these long-term risks to economic growth in mind, it is worthwhile to take a trip around the developed world to identify where far left populism is on the rise and where new leadership intent on carrying out this mandate are working their way toward gaining power.


Greece (NYSEARCA:GREK) is where the left wing break though in Europe (BATS:EZU) has been most notable so far. And it is no mistake that it has taken place in the Eurozone economy that has been most adversely affected by the financial crisis so many years ago. The first far left group to seize power since the financial crisis is Greece's left wing Syriza party, in January 2015. This anti-establishment Eurosceptic group came into power by focusing on the poor instead of the establishment with the mandate to seek debt relief from its European creditors and to roll back the budget cuts imposed by previous bailout packages. Alexis Tsipras, the Prime Minister of Greece, proclaimed upon winning the election that "Greece is leaving behind destructive austerity, fear and authoritarianism. It is leaving behind five years of humiliation and pain."

Later that same year in the summer of 2015, the party took the fight to the brink with the European Union. But in the end, the left wing outsiders finally backed down. Ultimately, Greece ended up with more of the same in terms of another conditional bailout package that is more likely to lead to further economic deterioration than actually fixing the problem. Not surprisingly, the Greek population has become increasingly disenchanted with the euro experiment, as a recent Public Issue poll shows that only 54% of the Greece population has a positive view on the euro currency versus 44% having a negative view. These readings are down from 66% and 32%, respectively, from just late last year.

Already, we have seen an instance where the installment of a left wing government has not necessarily resulted in the panacea that many in the Greek electorate may have hoped.


Obscured in all of the "Brexit" coverage in the U.K. (NYSEARCA:EWU) is the fact that Spain (NYSEARCA:EWP) also has its own general election coming up later this month on Sunday, June 26. Steadily rising in the polls is the Unidos Podemos party led by Pablo Iglesias. At present, the upstart left wing party that did not even exist until March 2014 (it was known as Podemos until last month's alliance with a number of other smaller left wing groups in Spain) is running second in the polls at 25.3% just behind the ruling People's Party led by Mariano Rajoy at 29.8%.

Unidos Podemos has thrived behind the growing mistrust of the establishment political parties. Their platform includes a rejection of the European Union including either curtailing or revoking the Treaty of Lisbon, which is the constitutional basis upon which the European Union exists, to renegotiate the austerity measures that were conditions of the post-crisis bailout, and to emphasize greater equality and wealth distribution.

Now clearly in second place in the polls, Iglesias is actively courting the Socialist party to form a collation government coming out of the elections later this month in a bid to take power as prime minister. For those monitoring the long-term viability of the Eurozone, this is an election worth watching closely in the immediate aftermath of the "Brexit" vote.


Italy (NYSEARCA:EWI) is scheduled to hold its next general election no later than May 23, 2018, which is still roughly two years away. The country remains under the leadership of Matteo Renzi of the Democratic Party, but a relatively new political party continues to make its presence felt. The Five Star Movement (M5S) led by comedian Beppe Grillo was formed in 2009 as a populist party outspoken against the European Union and the euro currency. This has included repeated calls for referendums much like the "Brexit" debate in the U.K. as to whether Italy should remain a part of the currency union.

The Five Star Movement led by Grillo finished in third place in the most recent general election in February 2013. And in polling for the next election in May 2018, the M5S remains solidly in second place and has steadily risen to the high 20% range, which is within percentage points of the ruling Democratic Party at just over 30%.

Another notable event for the Five Star Movement is set to take place this upcoming Sunday, June 19, with the mayoral election in Rome. Virginia Raggi of the M5S won the first round of the election on June 5 by a wide margin and appears poised to win the second round run-off this weekend over Roberto Giachetti of the Democratic Party. Notably more constrained than her national counterpart in Grillo, a victory this weekend in the Rome mayoral race will provide even greater legitimacy to the upstart party as they continue forward toward the next general election.


In Portugal (NYSEARCA:PGAL), the radical left wing Left Bloc scored a surprising 10% vote tally in the October 2015 legislative elections. They along with the Communists and the Greens are currently participating in an agreement with the Socialist party minority government, which shifted to pursue an anti-austerity mandate pushing back on the bailout imposed by the European Union and the International Monetary Fund in order to form the coalition government.

The Left Bloc will be holding their National Convention later this month where many are watching to see what conditions they seek to impose on the government as it moves forward with its anti-austerity efforts.

All of this leads us once again back to the United States

United States

Vermont Senator Bernie Sanders rose to prominence in the 2016 presidential election in what would be considered by many to be previously unthinkable ways. Sanders, who as an independent is not even an official member of the Democratic Party, ran against a once presumptive lock for the nomination in Hillary Clinton and took the race all the way down to the final primaries in early June with victories in 23 contests along the way.

The fact that so many voters in a capitalist country like the United States (NYSEARCA:SPY) that is still not far removed from the Cold War with the Soviet Union were eager to support a candidate who is a self-proclaimed democratic socialist was notable in and of itself. And while Sanders would likely be categorized as a more moderate socialist by European standards, he still campaigned on many of the same underlying principles that have supported many of the far left candidates in Europe.

While he ended up losing to the more moderate Hillary Clinton in the Democratic primary race, his influence is likely to remain strong as the party seeks to unify ahead of the general election in November. His successes as a socialist candidate during this cycle has also paved the way for others such as Massachusetts Senator Elizabeth Warren that uphold many of the same beliefs in future elections.

The Bottom Line

A political transformation is taking place around the world. On the right, we have a push toward the far right including greater nationalism and protectionism infused with elements of populism. On the left, we have a shift toward more left wing populism and more broadly defined socialist policies. The traditional establishment candidates in many developed countries are being cast aside in favor of upstart candidates with new ideologies that are pushing further out to the ends of the political spectrum in many cases.

This shift on both the left and the right is the direct result of an understandably deeply frustrated general public that's increasingly feeling that the political system is no longer working and is overdue for a more dramatic change.

Whether the policies once more of these outside parties and candidates finally seize power result in the changes for which people are hoping remains to be seen. But just as more isolationist and anti-immigration policies on the right typically have not resulted in superior long-term economic growth, so too have the more populist and command oriented economic systems struggled in many cases to thrive and increase the overall standard of living over time. Most governments and elected officials are typically not the most efficient allocators of scarce resources. And excess government intervention into markets can often lead to wild distortions that can become painful to unwind.

Overall, a shift toward more left wing populism and its accompanying uncertainties is not something that will necessarily be supportive of financial markets over time. For issues such as increased regulation and higher taxes that result from greater government intervention are the types of forces that causes capital to shift elsewhere. And if the long-term fate of the Eurozone starts to become increasingly in doubt, then all bets are off for the foreseeable future in terms of macroeconomic forecasts and financial markets.

As a result, it will be worth watching over the coming days, weeks, and months whether the populist movement on the left is able to gain an increasing hold on power in the developed world. In particular, if future elections in major economies like Spain and Italy give greater power to the far left, it provides a natural set up for the next steps in the debate about the sustainability of the Eurozone beyond the "Brexit" vote later this month. Stay tuned.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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