As seen in the latest issue of Master Investor Magazine.
Political elites are crumbling before our eyes across the West because we are now living in a real-time Reality TV show. The West is becoming post-political. Let’s invest accordingly.
The medium is the message Marshall McLuhan, the Canadian intellectual, told us back in 1963 – the same year that, according to the great Philip Larkin, sex began in England. People have argued about what he meant. That was well before the age of the internet, smartphones and Reality TV.
But if it was not quite evident then, it is now. I don’t want to worry you, but the model has changed in a fundamental way.
What you used to watch furtively on late-night TV is now the fabric of our waking lives. Those Reality TV shows – Big Brother, Gogglebox, The Apprentice, Benefits Street – have, like independent life forms, stepped out of your flat screen and entered your living room. (My personal favourites are of the Obsessive-Compulsive Cleaners Meet the Slobs variety). They inhabit the world beside us. We are living in a hybrid Reality, like The Only Way Is Essex (TOWIE), which has changed the way people behave. Go to Essex – the young women really do wear dark glasses over orange tans.
The world of Reality TV is post-political. Mavericks, populists, game show hosts, cheerleaders, celebrity chefs (Jamie, but no doubt soon, Paul), opinionated BAFTA-winning luvvies and supermodels are where the power is. Only they can shift opinion, grab a headline or provoke righteous outrage on Twitter. Old lumbering political machines across the West with which I grew up, love them or loathe them, are in terminal decline.
So what? Why should you give a damn? Very simply, what I am going to explain here is why, in the era of post-Reality, no conventional power structures in the Western world are likely to survive unscathed. That has consequences for financial markets and asset values.
The US Republican Party is in crisis. Not because it is sure to lose the presidential election, but because it might actually win it. Last Christmas, I was predicting that the old guard of the GOP would stop Donald Trump as he was barely house-trained. (And he was studiously alienating the Black and Hispanic votes – not to mention women.) But I was wrong – he is now almost sure to get the Republican nomination, bar a last minute backlash by the establishment – in which case he might run anyway as an independent.
And during the campaign, The Donald will delve into the Pandora’s Box of the Clintons’ past like a Jack Russell down a rabbit hole. (Did you know that labour wages declined when Hilary was a director of Wal-Mart?) Do check it all out for yourself on YouTube – though you can skip the weirder claims about occultism and daemonic possession – they’re boring. But if The Donald works that material right, he could well make it to the White House.
Anne Applebaum, the veteran American journalist, recently speculated in the Washington Post[i] that a Trump presidency might entail the end of the West. She says: we are two or three bad elections away from the end of NATO, the end of the European Union and maybe the end of the liberal world order as we know it. The Donald, compounded with the distinct possibility of a disorderly Brexit, has liberal America wringing its hands.
It would be a global disaster if Mr Trump were to become president wrote Martin Wolf in the Financial Times[ii]. How did America get here? I believe that there are four main forces in play.
The first is the pronounced despondency of the American middle class, or more accurately, (though it sounds snobbish) what the English call the lower-middle-class: the skilled workers, truck drivers, micro business owners and junior managers. What Lenin called the aristocracy of labour. These people’s disposable incomes have been under pressure for years and particularly since the Credit Crunch, while the well-off have recovered and the plutocrats have re-rocketed to unimaginable wealth. These are the people most likely to be in debt, to face competition from immigrant workers and who no longer enjoy any prospect of lifetime employment.
The second is that America has fallen out of love with its political institutions, even its hallowed Constitution. It is not just despondent – it is angry. Until recently, virtually all Americans regarded the document drawn up by the Founding Fathers back in 1787 as the textual embodiment of American exceptionalism. These days, many Americans, not just cult followers and survivalist extremists, regard Big Government as the problem. A partiality for states’ rights is one thing; a belief that those who oppose gun control are the enemies of liberty is something else. To a degree, the Republican Party has fostered this anti-constitutionalist sentiment by allowing the Tea Party to flourish. A tendency that the elders thought would undermine the Democrats has turned around and bitten them on the bottom. The Donald himself seems entirely unimpressed by the Constitution – he doesn’t even seem keen on the rule of law; it is liberal America which now proudly drapes itself in the pages of the Constitution.
If America has lost faith in institutions, its politicians have fallen into near contempt. Mainstream politicians are regarded as smug, predictable, ignorant and corrupt. This is why Trump – who has questioned why Wall Street and the pharmaceutical industry need to make such generous donations to Congressmen’s campaigns – is regarded by so many as a breath of fresh air.
The third is that – it was going to happen sooner or later – America has allowed itself to be gripped by a mood of irreversible national decline. I wrote about this in the January edition of this magazine (2016: The Year of Living Dangerously). This is partly because President Obama’s hands-free approach to foreign policy has failed to project American power effectively. He studiously stayed out of Libya in early 2011 and now blames the Europeans for messing up. America used to be assertive; now it’s just passive-aggressive to its long-standing allies.
The fourth reason is that Donald Trump – who builds those flash hotels and golf courses – is, first and foremost, a Reality TV star. This is the key to understanding why he is about to seize the nomination of the Grand Old Party (GOP) of the USA as their candidate for 45th President of the United States.
What concrete solutions are advanced to counter America’s malaise? Senator Cruz wants America to return to the Gold Standard. Mr Trump just wants to make America great again, to build, Hadrian-style, a wall along the Mexican border, to deport eleven million people and to ban Muslims from entering America.
Meanwhile in Europe there is a corresponding seismic shift away from traditionally dominant political elites. The British Tory Party, one of the most enduring political entities of the modern world, is also in deep trouble, because factions of the coalition of interests it represents are veering in different directions. (The Labour Party is already de facto kaput.) The odds of a Brexit are narrowing: I believe that it is too close to call but that the momentum for OUT will build as spring turns to summer. Brexit will leave the Tory Party, as Norman Lamont famously said, in office but not in power. The man who would be king is, of course, Boris – a post-political, post-Reality politician who has succeeded brilliantly in building a personal political brand with appeal far beyond the traditional confines of the Tory heartland.
In France, the Presidential election of May 2017 is wide open and I believe that the chances of Marine Le Pen of the Front National actually making it to the Élysée Palace are much underestimated by the bookies. (Suppose there is another gruesome terrorist attack?) President Hollande, with abysmal ratings, has dragged the Parti Socialiste down with him. Yet the contenders on the right are either spent martinets (Sarkozy) or odious relics of another age (Juppé).
In Germany, Frau Merkel’s popularity is in free fall while Alternative für Deutschland (AfD), an explicitly Eurosceptic and anti-immigrant party, is gaining ground. Elections on 13 March in three German Länder produced a significant swing away from Merkel’s CDU in favour of AfD. In Sachsen-Anhalt AfD polled a quarter of the vote. This bodes ill for Merkel and the CDU in the Bundestag elections scheduled for September 2017.
The governments of Eastern Europe are moving inexorably to the right, especially since the intensification of the refugee crisis, which many central Europeans regard as the product of EU, and largely German, mismanagement. Viktor Orban, the Prime Minister of Hungary, has even said that his country might be better off leaving the EU and teaming up with either Mr Putin’s Russia or – very interestingly – Mr Erdogan’s increasingly intolerant Turkey. The new Polish government is well to the right of its predecessor and has made clear that it will not accept “quotas” of new (Muslim) migrants foisted on a conservative Catholic country. Switzerland has withdrawn its application to join the EU; and Serbia, once a keen aspirant for EU membership, is now having second thoughts.
Up in Finland, the anti-immigrant True Finn party is actually in the coalition government. Their leader, Timo Soini has been Foreign Minister and Deputy Prime Minister since May 2015. He stated recently that he will try to push for a referendum on “Fixit” at the earliest opportunity[iii].
It’s not quite right to characterise all this, as the traditional left usually does, as a lurch to the right. The new political populism is nationalistic in tone – from UKIP in Britain to Mr Orban’s Fidesz in Hungary – but it often has socialist-leaning economic policies as well. Take, for example the Front National’s pledge to nationalise the banks in France and to end “speculation” on financial markets. Of course, if we combine those two things – nationalism and socialism – we conjure visions of the Nazis, which in my view, would be to fall into the same trap as much of the liberal commentariat. Nigel Farage and Viktor Orban – or for that matter, Donald Trump – are not budding Hitlers; they do not want to put people into concentration camps. But they do represent a new style of anti-politics which feeds on the downside of globalisation.
The political-philosophical system that we call democracy is itself in transition. Electorates have been getting more fickle for years; but in the age of Reality TV, sustained loyalty to a single political party is becoming rarer. Just look at how membership of political parties in the UK has declined. The number of paid-up members of the Conservative Party has gone from over three million in the mid-1950s to less than 150,000 under Mr Cameron.
Add to that the phenomenon of lower voter turnout in elections, and the fact that politicians, by and large, have become objects of derision. Most people – especially those who survive on welfare – seem to believe that centre-right parties govern solely in the interests of the rich. At the same time as socialism has lost economic credibility.
If there is one global theme which unites the new right across the Western world it is hostility towards mass immigration. I believe that opposition to mass immigration which will fundamentally change the nature of society is reasonable; and that the attempts by the metropolitan elite to suppress all discussion of the matter by branding it “racist” was anathema – and had seriously deleterious consequences. It was Blunkett, Straw and Blair[iv] and co who created the ghastly English Defence League.
Dani Rodrik of Harvard University has talked about the political trilemma of the global economy: the mutual incompatibility of democracy, national sovereignty and economic integration[v]. So, it turns out that we simply cannot have it all: we have to choose. For better or worse, we are choosing to compromise democracy.
It is very tempting to take the line that politicians don’t really matter anyway. Economic and social policy is moulded by impersonal forces, so why bother to vote? Except that politicians do make decisions all the time which impact your life from how much tax you pay, how much is spent on what, where to locate an airport, to whether to use military force abroad. If you think politics doesn’t matter, just look at Brazil, where the advance of one the world’s major economies has been stymied by venal and mendacious politics; or Venezuela, where a major oil producer which once enjoyed middle-income status was plunged into poverty by a bunch of hysterical Corbynistas. (Mr Corbyn’s friend and advisor, Ken Livingstone, was a protégé and admirer of the late President Chavez.)
We have to acknowledge that the old representative-based model of democracy, to which people like me are so attached, is in transition in the internet age. How should we respond? How do we protect ourselves from the fallout of Reality TV politics?
If you can’t beat them, join them. Of course we have to learn to love social media – and to learn how to invest in it.
So here is my prediction. When it finally dawns on us that we are in a post-Reality, post-political age, conventional (non-digital) businesses will look vulnerable as against those who control the information flow.
For the foreseeable future, our lives will be shaped by companies that control the internet and social media. The two giants that control here are Alphabet Inc. stroke Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) which are powered, ultimately, by Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). And Amazon (NASDAQ:AMZN) sells huge volumes of products that people identify online. Then there is Netflix (NASDAQ:NFLX), which creates and disseminates original entertainment. Almost all other players are peripheral. Of course, the world might change again, in a way we could not possibly imagine. (If we could imagine it, someone would have already done it.) Until it does, these corporations are likely to be permanent fixtures.
Google is not just the most central information nexus in the world, the intermediator at almost every synapse of the global brain; it is also fast becoming the runaway leader in Artificial Intelligence (AI). If you haven’t yet heard of Demis Hassibis – Google him now! He is the co-founder of Deep Mind Technologies – which was bought by Google in January 2014. He is also the human brain behind the machine which recently has been beating masters at the game of Go[vi]. He is a genius who will change our lives for good or ill – and he is one of several geniuses within Google’s orbit. Google may well turn out to be the most momentous corporation in the history of capitalism. (Yes, I admit, it’s scary…)
In the information age, the internet predominates. Facebook’s Mark Zuckerberg – sartorially challenged in the global street-smart garb of T-shirt and jeans – out-trumps Trump in the information flow. Zuckerberg can speed-dial India’s Mahindra Modi or China’s Xi Jinping as quick as The Donald can press the Domino’s Pizza button.
I am not quite so bullish on Twitter (NYSE:TSTR). Stephen Fry recently flounced out of the Twittersphere with a harrumphing valediction – the digital equivalent of a slammed door. Gobby guru Russell Brand still has millions who consume his inane meditations broadcast across cyberspace, though he has never really recovered, so it seems, from his later regretted endorsement of Ed Milliband in last year’s general election.
Of all the pre-eminent social media firms, why is Twitter in trouble? I think it’s because all of the other giants provide masses of quality information which is overwhelmingly useful; all that Twitter provides is unauthenticated, subjective opinion. You learn things on YouTube (owned by Google) that you simply would not be able to read in newspapers – partly because of libel laws, and partly because there is a consensus in the published media to stick to mainstream material. I’ve never learnt anything from Twitter. Opinion is not information.
Microsoft, not long ago considered almost a spent force, has enjoyed a comeback under Indian-born CEO Satya Nadella. It has moved to exploit its unique position as the global provider of the software platforms with which we access the internet. I know that Microsoft is spying on me. Since I upgraded to Windows 10 they keep asking me if I like the screen saver, and then I get more and more of what I like. (Pictures of mountains, if you really must know.) But if they can do that, they probably know exactly what MS Office applications I use and even the amount of time I have taken to write this. Just as we leave our DNA everywhere in the physical world, we are leaving traces of our deep psyche all over cyberspace, every day.
Apple probably became the most cash generative corporation in the history of capitalism during Steve Jobs’ second reign as CEO because this corporate mega-star was able to engender an unrivalled level of brand loyalty. That’s why they can manufacture a smartphone in China for maybe US$30 and sell it for US$500 in a downtown American shopping mall. They are as much about corporate strategy as technology. And yet, for now, Apple’s business model doesn’t depend on mining and refining its customers’ data in the way that Facebook, Google and Amazon do. But that probably will change. Anyone can make smartphones – it’s about how you can affect the information flow.
Amazon is often regarded as the uber-internet brand but it has actually achieved its global dominance as much by aggressive acquisition as by organic growth.
And let’s not overlook Netflix. Lord Hall, the Director-General of the BBC recently said that the BBC, with an annual drama budget of £220 million simply cannot compete with Netflix which has announced plans to spend US$5 billion this year alone on new commissions[vii]. Increasingly, the BBC is co-producing its sumptuous drama productions. For example, of the £20 million cost of the recently broadcast The Night Manager, the BBC put up only £6 million – and shared both risks and rewards with other production companies (not Netflix). (You know that when R4’s Thought for the Day reflects and The Guardian pontificates about a TV series that we have got the most politically correct thriller of all time. Of course they have always conflated capitalism with arms-dealing.) But the BBC was outbid by Netflix for The Crown – an epic 20-episode series about the life of HM The Queen, to be shown later this year. Reportedly, Netflix paid £100 million for this project.
But you don’t have to be Google to make your mark in the age of the internet and Reality TV. There’s a girl of about seventeen who regularly uploads video blogs of herself sitting in her suburban bedroom doing her make-up. She’s called Zoella. And every week she gets over six million views. Her “channel” attracts premium advertising rates. So she’s probably making more than you are. Maybe Zoella will express her views on the EU referendum soon. Maybe she will still be famous when the Tory Party has been forgotten. Or maybe she will fade after her fifteen minutes of fame.
Internet dating – almost regardless of class, creed, income or even age – is globally, already the main way that young relationship-seekers find partners. Even in traditionally conservative societies like India.
The FBI’s assault on Apple over the decryption of the smart phone that belonged to the San Bernardino terrorists is hugely significant. Maybe this case will come to be called USA v. Internet. I had supposed that FBI-CIA were sincere in their desire to know what information the terrorists possessed in the cause of “security”. Until I heard a computer scientist named Ian Brown, Professor of Information Security and Privacy at the Oxford Internet Institute, explain that they could already extract this data from the wretched device with ease[viii]. What they really want is a “back door” into the internet, of a kind that President Putin probably already possesses. The traitor, Snowden, even did a little YouTube piece recently to back this line of argument. (From exile in Russia – funny he has nothing to say about what goes on there.)
Tim Cook, Apple’s CEO, in a recent interview with TIME magazine[ix], explained that if Apple were to commission a group of its engineers to give the US authorities the “GovtOS” (Government Operating System) that they want, Apple and its peers would lose the possibility to encrypt data altogether. So, if the FBI or MI6, or whoever, wanted to turn on your smartphone camera to take a sneaky peak at what you are up to, nothing could stop them. And the IRS (America’s version of HMRC) would not be far behind. (Apparently, HMRC already has a team scouring our Facebook profiles for evidence that we have under-declared our earnings.) In the event, the court case scheduled for 22 March was postponed at the request of the US DoJ. And on 29 March the FBI admitted that it had found a way to unlock the phone. Round one to Apple.
When the British lowered the Union Jack in Africa we left most of our former colonies with parliaments presided over by a Mr Speaker, wearing an 18th century gown and wig. Silly, you might think. So do the Chinese, who have now effectively taken over much of Africa: they think democracy is bunk. They teach children in primary school that democracy is a money-fuelled struggle for power between corrupt competing elites who win power by buying votes from gullible electorates with promises they cannot possibly keep. (Mind you, that was exactly the view of Joseph Schumpeter[x].)
The System is now bigger than the politicians. The System is framed by technology. Karl Marx said in the 1870s, that modern governments were merely the management committees of the bourgeoisie. He was wrong then; but he’s right now.
The medium – the internet – has become much more important than the political message. Even politicians like The Donald, hereon in, will only be able to alter political and economic variables at the margin. Representative democracy, in its 19th and early 20th century incarnation, is dead. Long live social media!
Action: In my opinion, investors should divide their portfolios into politically-sensitive and information-sensitive segments. Politically-sensitive stocks are things like utilities, the fortunes of which are driven to a high degree by governmental regulation; while information-sensitive stocks depend solely on technology or, more crudely, dominance of the internet. In my view, investors should now have at least half their information-sensitive segment invested in entities which already control the internet (Google, Facebook, Microsoft, Apple, Amazon, Netflix etc.), and the other half in the challengers and upstarts to existing business models – the brasher and more innovative the better.
One way to get comprehensive exposure to the information segment is via a good technology fund. The Henderson Global Technology Fund is one: a Luxembourg-listed SICAV with a track record going back to October 1996. They have nearly 10% of the fund in Alphabet-Google and about one third of the fund is spread amongst Google, Microsoft, Facebook and Apple. Other major holdings include Visa, Samsung, Cisco, Tencent and MasterCard. In total, it had 65 holdings at the end of January with over US$2 billion under management.
[i] Is this the End of the West as we know it? Washington Post, 04/03/2016: https://www.washingtonpost.com/opinions/donald-trump-and-the-end-of-nato/2016/03/04/e8c4b9ca-e146-11e5-8d98-4b3d9215ade1_story.html
[ii] Donald Trump embodies how great republics meet their end, Martin Wolf, Financial Times, 01/03/2016, available at: http://www.ft.com/cms/s/2/743d91b8-df8d-11e5-b67f-a61732c1d025.html?siteedition=uk#axzz42KAwBwUD
[iii] Interview with Stephen Sackur, Hardtalk, BBC World 23 March 2016.
[iv] See Broken Vows: Tony Blair and the Tragedy of Power by Tom Bower, 2016.
[v] See discussion in The End of Alchemy, page 348.
[vi] See: http://www.wired.com/2016/01/in-a-huge-breakthrough-googles-ai-beats-a-top-player-at-the-game-of-go/
[vii] The Sunday Telegraph, 20 March 2016, article by Patrick Foster.
[viii] Interview on BBC R4 PM Programme, 10/03/2016, available at: http://www.bbc.co.uk/programmes/p03m5sj8
[ix] TIME, 28 March 2016, interview by Lev Grossman, page 24.
[x] Joseph Schumpeter(1883-1950) was an Austrian-born American economist and political scientist whose Capitalism, Socialism and Democracy was first published in 1942.