Twilight of the Central Bank Era? The Rise of Populism

It’s always a fraught exercise distilling weighty conclusions about the future of global events by over-extrapolating from a few key data points.

But when we see signs of what might be a sea change, it warrants mentioning, even if it ends up being a mirage. And since the end of the year is both a time to take stock and to look ahead, why not offer some predictions?

At the very least, we probably can’t be more wrong than the US pollsters have been of late.

So the question: Are we entering a new era in global finance?

I say yes.

Think about the markets since the financial crisis. What has defined the era? Two words: monetary policy. Central banks — more than economic growth or any other factor — are what have moved the markets.

But central banks may no longer hold such preeminence. At least not to the extent that they have the last eight years.

The evidence: a poll of CFA Institute Financial NewsBrief readers on what was the most consequential financial news story of 2016.

If we had asked readers the same question each of the last six or seven years, or even six months ago, the most popular answer likely would have been some variation of interest rates, central banks, or monetary policy. How could it not be? Negative interest rates are historically unprecedented. Nobody knows what their long-term consequences will be or when they will end. When you’re sailing in uncharted waters, that’s usually the story.

But over the last six months, even bigger things have happened.

What is the most important financial news story of 2016?

In June, the United Kingdom voted to leave the European Union. Among our 860 poll takers, 22% believe that was the story of the year. Clearly, it was a big one, calling the future of the European experiment into doubt, redefining the United Kingdom’s role in the global community, and perhaps ushering in a slow-moving stampede toward the EU’s exits.

Then, just one month ago, the United States voted to elect Donald Trump president. More than half of all poll participants (51%) believe that was the most momentous financial news event. Momentous or not, for now, the markets have responded well to his election, and 51% of CFA Institute members in the United States believe Trump will have a positive effect on the financial sector compared to 13% who anticipate a negative one.

Add the Brexit and Trump stories together, and 73% of respondents are saying that political developments, particularly populist-inspired movements, defined financial news in 2016.

And it’s not as if the Brexit vote and Trump’s election occurred in a vacuum or are the culmination of a cresting populist tide. Just look at the news of the last week: In Italy, voters overwhelmingly rejected constitutional reforms backed by the country’s political establishment and the EU leadership. In Austria, a far right candidate was narrowly defeated in a run for president. A defeat is a defeat, but his party is expected to perform well in upcoming parliamentary elections.

Wherever you look — upcoming elections in France, the Netherlands, etc. — the populist surge doesn’t look likely to subside anytime soon.

All of this is not to say that now central banks are irrelevant or that the easy money era is over — though the European Central Bank (ECB) did just announce it would taper its stimulus program, albeit with an extension through the end of 2017. Indeed, 18% of poll participants cited negative interest rates/declining bond yields as 2016’s most significant story.

But let’s be clear: The last six months comprise just the first act of an unfolding populist drama that will reshape the financial markets and the global economy for years to come.

And for the first time in a long time, monetary policy may only be playing a supporting role.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.