At what point does populist politics become a problem for investors?

Treasurer Jim Chalmers has thrown a cat amongst the pigeons with his capital gains tax reforms. But their entertainment value might almost be worth the money.

The attempt to rebalance ‘intergenerational equity’ will not include existing landlords’ gains!!!

The young who are trying to save, invest and grow their wealth, will bear the brunt instead…

You couldn’t make it up if you tried.

It’s as bad as UK Prime Minister Sir Keir Starmer announcing closer ties with the EU after an electoral drubbing from the reincarnated version of the Brexit Party. Back to that in a moment.

Whatever tax reform gets announced today, the truth is that tax policy gets so complex it’s impossible to see through the net effect of the reforms. Even those doing the reforms don’t know how things will work out.

Besides, the labels used by politicians and the media are only designed to mislead.

I’ve currently got an inheritance tax liability in three countries, plus the choice of whether to remit what’s left of my inheritance to Australia or Japan. So I’m keenly aware of comparative tax law. And it’s pulled the wool from my eyes…

You might think Australia doesn’t have an ‘inheritance tax,’ but you’d be wrong in practice.

You might think that Australia doesn’t have an ‘exit tax,’ but you’d be wrong in practice.

You might think Australia has a low capital gains tax rate after the discount, but you’d be wrong in practice.

The labels like ‘inheritance tax’ and ‘exit tax’ are only there to mislead you. The truth, in practice, doesn’t care about the name of the tax.

In the end I expect the net impact of tax changes will be nothing like conventional wisdom or journalists’ articles would have you believe. And certainly not what Treasury modelling expects.

So, let’s not get bogged down in the details like everyone else.

What’s really behind the shift? What does it tell you about the future?

Populist policies arrive in Australia

You might feel like this tax raid is just the latest assault on investors. It follows reforms to Superannuation tax.

But Australian investors don’t even know what real political risk is.

I know. I left Australia 11 years ago because our politics is so boring.

I’m sure it doesn’t seem that way to you. But in Europe, politics and financial markets are in a constant state of proper war. Which makes investing a lot more nerve wracking. Just preserving capital is a success to Europeans.

While things are getting even more intriguing in Europe these days, Australia is only beginning to join the fray.

My point? It’s time for Australians to learn from long suffering Europeans.

This is a familiar claim. The investment strategist Russell recommends investors hire fund managers from South Africa and Argentina. They are familiar with what’s coming for the rest of us. And know what to do about it.

Things aren’t quite so bad in Australia just yet. But perhaps Australian investors need to start listening to those who navigated Europe’s messed up markets over the past two decades…

Farrer, Farage and the future

There’s no longer any doubt about it. The radical political change sweeping the developed world just hit our shores. One Nation got its first lower-house seat.

But who cares? It’s just one seat, right?

Political change is good at masking itself. It’s easy to stop caring between infrequent elections. The polls done in the meantime don’t seem to matter.

Until they do.

After the 2008 financial crisis, steady shifts in politics gave us a series of sovereign debt crises in Europe. The Italian one in 2018 gave us the worst period in financial markets since 2008 – something I predicted. And the Greek referendum crisis had to be papered over too.

Last week, we got two key election results that add another set of dot-points to the identifiable trend.

In the UK, Nigel Farage’s Reform UK party won council elections and performed well in Scottish and Welsh parliament elections. And One Nation won Farrer.

Meanwhile actual government policies are escalating fast too. America’s tariffs, UK taxes and now Australian taxes too.

It all reminds me of that famous billboard advertisement by Manhattan Mini Storage: ‘The French aristocracy didn’t see it coming either.’ Well, a socialist is now the mayor of New York City…

At what point does it matter to investors?

Some people still believe that it matters who you elect. Different political parties follow particular government policies that impact the nation in various ways.

But this is clearly rubbish. You don’t get what you vote for. Politicians don’t follow their manifestos, let alone political promises.

It’s not clear whether the UK Labour Party should pivot to the left or right given the drubbing they received. They’re outflanked on both sides. And the crucial Muslim vote has deserted them.

That’s why, after defeat at the hands of Mr Brexit, the UK Prime Minister announced he’s considering joining the EU customs union!

The Greek’s socialist government implemented an austerity program after its people voted against it in a referendum.

One Nation policies seem very reasonable. But do they matter? Do people vote for One Nation in the hope they will form government and implement them?

Ironically, it’s more likely that One Nation’s policies will simply be adopted by the mainstream parties. They don’t realise people vote One Nation out of hatred for the major parties, not their policies.

But back to the big question for investors. When do populist politicians begin to impact financial markets? If their announced policies don’t really matter, what does?

The growing realisation is that governments are controlled by civil servants and central banks. So, the real story is who leads those organisations.

For the likes of Farage and Hanson to actually have an impact, they will need to have as much turnover in the civil service as in parliament.

My friend Jim Rickards was busy pointing this out about Trump two years ago. He explained to readers of Strategic Intelligence Australia that Trump’s first term was a failure because he didn’t appoint the right people to the positions of actual power in the US government.

The President has a vast number of appointments to make for leaders of the US civil service. There’s an entire book full of positions to fill.

For the second term, Trump was ready with a book full of names. And now he has appointed his own man to lead the financial world from the head of the Federal Reserve.

That’s why Jim has invested a million dollars of his own money to profit from the reforms hitting the US economy now. Find out where he’s deploying his funds here.

The populists of Europe and Australia won’t be able to have much impact until they control appointments to positions like central bank leaders and positions in the treasuries.

In the EU, the populists would have to seize control of the European Commission and European Central Bank.

That is the moment when investors can expect to see change.