How to Survive in the Face of Political Markets

The heavy hand of politics is back, more than ever mingling with markets. When government statistics and even stock market levels are politicized, investors should remain cautious when faced with official reporting.

Myret Zaki

Deutsche Version

In times of peace and economic growth, democratic institutions and the rule of law function at their best. Some effort is done for information to be relatively accurate and pluralistic; economic data fairly reflect a country's performance; central banks operate with a degree of independence; and stock market valuations are based, at least for a good part, on fundamentals.

Myret Zaki

Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now a freelance columnist and a consultant in influencer and opinion leader strategies.
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But more often than not, «peace» is theory, and «war» is what happens. Since 2008, we have been living in «crisis mode» and under central bank administration, never quite leaving this regime, even though job figures and GDP growth in OECD economies seemed to tell a positive story.

Since November 2016, the heavy hand of politics is back, more than ever mingling with markets. We are witnessing overt trade wars, coupled with red-alert geopolitical tensions, and heavy social unrest.

In such times, the economy can no longer be considered free. We get politically biased information in the news. Trade gets political. Financial markets get political. The Dollar gets – even more – political. Interest rates get political. Faithful economic reporting turns into outright marketing. GDP figures serve as promotional flags against rival countries. Market indicators become power indicators. Stock market levels are used to signal strength and superiority.

The stock market as a political report card

President Trump was sworn into office at a time when the U.S. sought to agressively reassert its weakened position. Throwing away any restraint as to the independence of the Federal Reserve System, he repeatedly blamed governor Jay Powell, through a flurry of furious tweets, for not cutting interest rates quickly enough, threatening to fire him as if he were his personal driver.

So interest rates, after a prolonged 10-year period at record low levels, are back heading downwards, to serve mostly political purposes, i.e. the trade war with China. The paradigm shift towards perpetual zero rates is now official and complete.

Touting the stock market as a report card for his presidency, Donald Trump tweeted «Dow just hit 27'000 for the first time EVER!» on July 11, as if this were a shareholder meeting, or better, as if the level of the Dow were the ultimate validation for a head of state. On August 28, Fox News showcased him as the best-performing president in recent memory as the S&P 500 rose by 33% since his election.

Never mind that the market owes most of its record rise to record amounts of easy money, available for a whole 10-year period, and continuing.

When economic reporting is subject to a high degree of political influence and has to be always dazzling for purposes of comparison, old economic laws seem no longer to apply. Extremely low rates, coupled with full employment and economic growth, would be nonsense in a normal world.

With accelerated economic growth, inflation should rise, pushing interest rates rates higher. Money creation and excessive debt are also supposed to be inflationary. «But rest assured», we are told, «that inflation remains historically low even though record amounts of sovereign, corporate and household debt pile up year after year.» We also see huge technological advances, but with little or no observable productivity gains.

That's a lot to swallow. The figures don't add up. And economists, deprived of their old explanatory models, still try to cobble together rational explanations. But what if numbers were embellished?

Downward bias in inflation and unemployment numbers

Record low unemployment in the U.S., for instance, is clearly a gross underestimation. The published rate of 3,7% changes when we take a more honest view. If we include long term discouraged workers (defined out of statistical existence in a 1994 methodology change), and we add this to the U.S. Bureau of Labor Statistics' broadest unemployment measure (U-6) – which includes short-term discouraged workers and other marginally-attached workers, as well as those forced to work part-time because they cannot find full-time employment –, the U.S. unemployment rate then reaches 21% as of July 2019 (see

This is but one example of how totally different a picture we would get, should figures be expressed based on broader, more inclusive calculations.

The same reasoning goes for U.S. inflation figures. If we take the 1990 methodology, inflation in America would be around 5% today. With the 1980 methodology, the current figure would stand at 10%. It appears that methodological changes in U.S. government reporting have always resulted in a depressed reported inflation, moving the concept of the Consumer Price Inflation away from its initial purpose, which is to measure the cost needed to maintain a constant standard of living.

These examples show that statistical reporting hasn't waited for Trump's presidency to become more of a marketing tool: it has been a long, gradual process, not only in the United States, but also in European countries and in Switzerland, all of which underestimate inflation and unemployment.

These observations should lead investors to remain very cautious when faced with official reporting, as it will not get any better in coming years. Savers and investors should look at a multitude of other real-life retail and corporate indicators to complete and validate their view of the economy, and use varied sources of information in order to avoid the biases introduced by the comeback of the old cold-war, realpolitik necessities.