Brexit and the US election: Common themes, uncertain impact
25 November 2016 | Markets and Economy
This video is an excerpt from a live webcast that aired in the United States on 9 November 2016, following Donald Trump's victory in the US presidential election.
Jon Cleborne (moderator): One of the questions that came in before the webcast this evening was around Brexit. And thinking about the events of last night [the US election], comparing and contrasting them a little bit to what we saw with Brexit and maybe the market experience following Brexit, I'm interested in your guys' perspective. Is it similar to Brexit? Does it feel like it's going to be materially different?
Jonathan Lemco (Vanguard senior investment strategist): My own view is some of the conditions that led to the Brexit are very similar. Starting with this whole populist notion that we've seen in the UK, that we saw in parts of Western Europe and parts of [Latin America] and now we seem to be seeing in the United States as well. Part of it is fear, and [that] helped to prompt the Brexit as well. Just broad-based fear of immigrants, fear of what's going on in other countries, fear of trade, fear of change of everything you think you know. And so some of the conditions, I think, are underlying this, are there.
But a sense that your job is somehow not secure, which we heard so much during the US election campaign, with some of the same discussion that we heard during the Brexit debate as well. And why is it not secure? For all kinds of reasons. But maybe if you close your country off, you take a big step to protect your job, you protect your lifestyle, to protect what you value. So I think that underlying a lot of the typically right-wing populist moments that we're seeing around the world is this basic fear and this sense that if we close ourselves off to some extent, we protect what we have.
Joe Davis (Vanguard global chief economist): We did some research internally, Jon, and I think the one thing that has been lost – and I don't disagree with anything, Jonathan, you've said – So why, and why now? And I know there was a lot – and I've got to be careful here because it's a politically charged argument. But I think a lot of focus – and you heard it on both sides of the political aisle. We heard it in the Brexit. You hear it in other parts of the world – it's globalisation, treated as a zero-sum game.
And I think there's another force that has been at work for 20 to 30 years that, to my knowledge, was not uttered once by any political party over the past year, which I think correlates highly with both Brexit and what occurred at parts of the US election. And so we may see some more parts of this. And this is this disruption related to technology.
So it gets to the job-loss anxiety. I'm not saying there hasn't been a closure of a factory in some part of the United States that you could trace to some other part of the world. And I'm not – I'm just saying there's a broader force at work around automation, some will call it productivity, but in a global, digital economy. And that's why we've seen the income levels between those that have certain skills or work in certain industries outpaced by a significant margin over 40 years [by] others that have other certain skills or other certain education levels.
And we see this rise in income disparity across every single economy in the world. Which means it cannot solely be globalisation. There's a global force that's impacting on all economies. And by our research we've found that the technology, and technological advance, is good, but in a global digital economy there can be winner-take-all effects. And so I don't want to push this argument too much, but I think it's been slowly building [so] that you can miss [it] day to day. But I think, on a grand scheme of things, that relates to some of the voting patterns or the dialogue that we're seeing.
My only frustration as an economist: It is solely all those arguments are then hung on globalisation. When I said, well, there's a global force at work called technology, more recently digital technology, it could be automation, it could be manufacturing, and so that's a force that has been in play. And that is something I think will come out and be recognised more widely over the next several months and years.
Because we're seeing this. You're seeing it in parts of China now. So this is not a US phenomenon; it's not a United Kingdom phenomenon, and that's not to be an alarmist. I'm just trying to say what is going on here, and there's multiple forces well beyond just the economy that can play into a political sort of environment. But as an economist, I say, well, this is something I don't think is getting enough attention. And when you start to see these data points, which occur infrequently, you start to put that mosaic together that I think is helping to explain some of what's going on, to provide some context.
Allison Fisch (portfolio manager, Pzena Investment Management): I think that's a really interesting point. And beyond that, I think there are similarities and differences between these two events. And those are some similarities. So that's a really interesting point about technology I hadn't completely thought through. But I would say also, on top of that, you have this sort of force of people rejecting the establishment and rejecting being told what to do.
Here, it's fatigue with the status quo of Washington dysfunction. In the UK, it's not wanting to be told what to do by some people far away on the Continent. But I would say also what both of these events have in common is that they were a surprise. Nobody expected the vote to go this way as of yesterday afternoon. Nobody expected the Brexit vote to go in that direction.
In both instances, in the middle of the night – I'm sure this is true for all of you as well – I'm exchanging emails with my colleagues, and we're watching the markets opening overnight. And the whole thing is a big surprise. I think the difference though is that we had forecasts coming out of the IMF [International Monetary Fund] and other organisations about the effects of Brexit on the British economy. And that it would be very negative. So the dire reaction of the stock market post–Brexit vote sort of made sense.
Now contrasting that with what we experienced here in the US, we really don't know. We don't know. And so I think the see-sawing that we're seeing in markets makes sense.
Joe Davis: Yes, and we didn't see that initial immediate drop-off in the UK economy.
Allison Fisch: Yes, we haven't seen anything yet.
Joe Davis: Even though that was the forecast. Yes, we haven't seen anything yet.
Jonathan Lemco: So far it's held up, but these things take a while.
Joe Davis: Sure.
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