In recent Commentaries I emphasised how understanding “Policy Innovation” has become important to economic and investment analysis. In particular, I argue many countries have begun operating “policy ratchets” where nominal assets such as bank deposits and bonds will be systematically undermined (by e.g. negative real interest rates). As a result returns of real assets, such as equities and farmland are likely to outperform. My purpose has been to “tempt” bond investors out of bonds and bond-like investments and into real assets. I have repeatedly reminded investors of Keynes’ recommendation of a “euthanasia of the rentier”.

Now that a new style of more populist governments are getting elected (a movement I will label “National Capitalism” in the body of this Commentary) what sort of policy innovations might we expect? As the Trump and May leadership styles become clearer in the US and UK in 2017 I will attempt to follow these in a series of Commentaries.

In this Commentary, I examine the main features of the “new politics” and explore possible policy directions and outcomes.

At the end of the commentary (Appendix I) I give an update on the Craigmore Group. Both our first Farming Partnership (now well developed) and our new Partnerships currently in fundraising (Dairy II and Permanent Crops) are set to benefit from strengthening markets for NZ produce. I also briefly update on the Map of Agriculture farm information platform, which is growing well. 

Warnings and predictions from my 2015 and 2016 Commentaries

Now they have been implemented 75 years after his recommendations, widespread government / central bank investment in fixed income assets all along the yield curve turned out to be just the powerful medicine Keynes predicted in his 1936 General Theory.

These “quantitative easing” programmes have ushered in the systematic government boosting (nationalisation if you like) of the lending markets that Keynes indicated. A bold transformation of the credit markets from what he viewed as fickle dependence on the animal spirits of the private banking and credit system to a government controlled money market.

This radical financial policy innovation has been implemented progressively over the past seven years not just in the UK and US but also in the euro-zone and Japan. And also in China, albeit slightly differently – given higher levels of inflation, economic growth and interest rates there.

In the fiscal realm I also predicted (see May 2016 commentary) that populist politicians like Trump or Saunders (and probably also May in the UK) seemed likely to pursue another of Keynes’ prescriptions: stimulation of the economy via deficit spending. If this is implemented along with on-going quantitative easing (which seems likely), this may lead to a rise in inflation.

This would have a feed-back effect on financial markets. This is because, although so far the policy ratchet has not “hurt” fixed income investors (only to their income account), because falling interest rates have flattered and offset the pain via gains in their capital accounts, expectations of rises in inflation (and rising interest rates) will apply the negative policy ratchet to the capital account, i.e. knocking down the value of bond portfolios. The end of a 30 year bond rally might be a shrewd time to sell bonds and recycle capital into real assets which are likely to benefit from rising prices.

Figure 1: US 30 Year T-Bond Futures Prices – USD (Jan 1988 – Jan 2017)

Source: CME

Zooming to the present

In the US and UK these predicted events, both monetary and fiscal, are now coming to pass. The soon-to-be President Trump has announced he will cut taxes and expand government spending (on defence and infrastructure), while in the UK, Prime Minister Theresa May’s government have announced an end to the (anyway not very strict) “austerity” of the Cameron years. She is talking instead of government-backed industrial policy*.

As a result of anticipated widening of fiscal deficits, prices of bonds in the US are falling while prices of equity securities are rising (Figure 2).

* Entrepreneurs like me are getting quite excited (technology companies, in particular, seem likely to be recipients of UK government support) but which will surely lead to larger government deficits.

Figure 2: US 30 yr T-Bond prices (USD) vs. S&P 500 index (Jun 2016 – Jan 2017)

Source: CME,

UK equity prices have also risen while gilts have fallen:

Figure 3: UK 10 yr Government Bonds (USD) vs. FTSE 100 June 2016 – Jan 2017


Source: Thomson Reuters,

What next?

Although we can speculate we do not yet know the policies that will be pursued under Trump and May**.

** E.g. what is the likely fate of the policies of quantitative easing? I expect the next appointees (by Trump) to the Federal Reserve to bring a less “neo-Keynesian” tone to monetary settings. E.g. if the relatively hawkish Stanley Fischer is appointed as Chair, he may bring back a neo-classical scepticism about policies of negative real interest rates and government monetary largesse up and down the yield curve. If that were to happen the resulting blood-bath in fixed income markets could be legendary. However, that has not happened yet. This comment is a speculation, rather than a prediction.

In the remainder of this Commentary I prepare the way for the twists and turns of the actual policy announcements by clarifying my own thinking as to the style of government we can expect, especially in the US, but also in other countries (Britain but also, potentially, France) lurching away from their previous political moorings.

The big events of 2016: Brexit and Trump

The 2016 successes of UKIP/Brexit in the UK and of the Tea Party/Trump in the US were fuelled by frustration that incomes and wealth of ordinary people have been flat while those of metropolitan elites have risen sharply over the past 30 years, the differences growing more sharply since the GFC of 2008. Also that the metropolitan leaders on both left and right (people like Hillary Clinton, Jeb Bush, Tony Blair and David Cameron) were focusing on a liberal agenda that did not reflect the everyday concerns of ordinary Americans and Brits. This underlying feeling of unfairness and lack of representation has expressed itself in political concerns about:

  • excess immigration
  • off-shoring of jobs and consequent cheap foreign imports, and
  • governmental capture by corporate/metropolitan/liberal interests

Although a myriad of other concerns and aims also contributed to the rise of Trump and Brexit, the driver has been particularly the feeling, in each nation’s non-metropolitan heartland, of being “left behind” by a governmental approach that people did not seek and do not approve.

Direct (and targeted) communication from politicians to voters

Communication around the issues of 2016 did not always take place in traditional media. Instead it flowed via new knock-about forms of political “direct communication” on social media, which was often only reported in traditional newspapers and TV (sometimes as “false news”) only after flowing on the social media. This is yet another example of how the internet is changing society and the economy. An adequate theory of the new style politics will need to incorporate a theory of how direct (and also personalised) communication is changing politics.

A rise in Nationalism and Anti-Elitism

Nationalism (especially a desire to protect domestic jobs) and anti-elitism are common denominators in these trends. The debate around Brexit explicitly raised questions of who belongs in the UK. The answer was a referendum majority in favour of closing the UK’s border to current unlimited EU immigration. In the US issues of nationality (“us Americans vs them Mexicans and Chinese and ISIS etc.”) were richly evoked by Trump.

In such overt discussions of race, belonging, and “anti-internationalism” Donald Trump in the US and UKIP in the UK broke decisively from the liberal post-war political convention (dating back at least to the Marshall Plan) that internationalism is good and that politicians should not vilify according to race. While unappealing to liberals (like me!) it became clear during 2016 that Trump and UKIP had identified unrepresented political constituencies who have tired of abstract liberalism.

The pendulum of the historical centre is thus swinging away from liberalism and internationalism toward a more immediate, more populist and more nationalist type of politics. But it is requiring disruptive, firebrand communicators like Farage and Trump (and in France Le Pen) to break these conventions. Hence the use of “direct communication” over the heads of the party establishment*** to first drive Trump’s triumphs over his less vehement Republican opponents in the Primaries. And then, most famously of all, over Hillary Clinton, whose entire campaign – centred around minority rights – was a hymn to post-war liberal ideas of inclusiveness, making it hard for traditionalist non-metropolitan voters, when alone in a polling booth, to associate her with their aspirations.

*** Of course it was Obama himself who first rose to power on these platforms, out-manoeuvring the Democratic establishment to be nominated ahead of Hillary Clinton via direct support of party members. However, the lesson has now also been learned on the right so that e.g. Vote Leave in the UK used targeted Twitter attacks on Remain leaders in a technique they learned from the success of Trump’s similar attacks on his opponents in the Primaries – see this Radio 4 profile on Arron Banks, Co-founder of the Leave.EU campaign
Remarkably Trump spent about USD 74m on TV ads, only about a third as much as Mitt Romney when Republican challenger to President Obama in the US elections of 2012. Direct communication with audiences via social media (which stories then get picked up and carried on traditional media, anyway) is now, to coin a phrase, emphatically “trumping” traditional communication.

What economic policies will accompany the emergence of populist politics in the west?

Nationalism and anti-elitism are not in themselves economic doctrines. Reforming populists at some point need to attach themselves to some economic policies. Often these are the rising economic ideas of their age. The following table lists historic reforming movements in the left hand column, the key economic problems they sought to solve, the economic ideas adopted, and the eventual beneficiaries of the policies.

Trump’s administration will take a “capitalist” approach to economic management

Many of Trump’s policies are reminding the markets of the Reagan administration. Property rights will be emphasised, taxes lowered and investments made in defence and infrastructure. As noted we are likely to see large US government deficits once again.

In fact the pendulum under Trump may be swinging to a more thoroughgoing capitalism than even Reagan’s. Under Trump corporate tax rates (i.e. taxes on income flowing to capital) will be lowered to rates well below that on income flowing to labour. Interestingly this follows New Zealand’s approach (which introduced zero capital gains taxes in the 1990s during its own dramatic shift toward a more libertarian economic regime). It is also fascinating for a kiwi to hear the Republican Party is talking of abolishing death duties and introducing a Federal Value Added Tax, both reforms adopted 20 years ago by what is now a low tax, dynamic NZ economy.

A likely rise in US inflation rates

One likely difference between Reagan Trump is, unlike the Reagan period where Paul Volcker “killed inflation” by allowing real interest rates to rise to high levels, it seems likely current accommodative monetary policy settings will continue under Trump. If they do not, and if “hawks” take over the Federal Reserve, then expect to see another major financial and credit market crisis in the next five years as credit support is withdrawn.

Until we see a clear change in the policies followed by the Fed then, as argued in previous Commentaries, inflation is likely to arise in economies where governments run deficits and where these are financed with printed money i.e. with central bank “credit” financing of the budget deficit. I therefore expect we will, within Trump’s first term, finally get some of the inflation that has been (so far) incorrectly predicted by my Commentaries.

Summary view – property rights are moving to the centre

The economic policy pendulum that in the early 1980s began to swing back from mid Century forms of mixed capitalism and socialism may swing further to the right under Trump. The equity capital markets are, unsurprisingly, liking this and have risen sharply since his election. The debt markets are another matter since his policies are likely to be inflationary. And will therefore likely bring to an end the 30-year bond rally that peaked earlier in 2016.

Trump’s cabinet choices would seem to reinforce this “ascendancy of the capitalists”. Never before in the history of the US will the US administration be made up of so many millionaires and billionaires drawn from the private sector.

The above are the reasons I name this new political movement (at least in the US) “National Capitalism”. If this characterisation is correct then the current reforming movement and it’s economic policies might look as follows: A marriage of a resurgent, populist nationalism and a well organised (and to be fair, widely respected) capitalist leadership class that has begun moving seamlessly from the board rooms of US capitalism into government itself.

If this characterisation is correct then a summary of the current historical marriage of reforming movement and it’s economic policies might look as follows:

What about the UK?

At first sight May and Trump appear to be heading in different economic directions. May is talking about modifying capitalism to make it work better. E.g. placing limits on executive pay awards and introducing worker representation in board rooms. Neither are sentiments we are hearing from Trump! However these two populist leaders may have more in common than May’s rhetoric would suggest. Both have vehemently criticised metropolitan, internationalist, liberal elites. Both are likely to place limits on trade and immigration. Both are likely to see inflation come to their economies, Trump for the reasons discussed above, May because the pound is falling and the UK is an open economy, so will see prices of imports and exports both rise.

One striking “supply side” reform looming in the UK is the likely reduction in per acre subsidies to farms. I was at the Oxford Farming conference this week and the Minster of State, George Eustice, was emphatic on the injustice of direct subsidies. They favour incumbent landowners and stifle innovation. He would rather subsidies are paid for environmental services performed by farmers. Bravo George!

Leaving aside a possible post-2020 reform to UK farming, so far it is only Nationalism, not National Capitalism that has come to the UK. 2017 will be a fascinating year, as the populist impulse works its way through the UK system. UK soil gave rise to the original policy innovation thinker, John Maynard Keynes. It is possible the UK does not follow the US in a more capitalist direction at all, but after the shot in the arm that a major fall in the pound has wrought wears off, may revert to “Keynesian” style innovations via government fiscal and monetary largesse to off-set nervousness around Brexit. i.e. more attempts by central economic authorities to pull the economy up by its own bootlaces.

On the other hand it is also possible a UK-US free trade agreement will be rushed through. Trump has indicated the UK will be top of his trade negotiation list. This could shift political alliances within the west. Current groupings centred around each of Europe and the US could morph to an “Anglophone” zone made up of e.g. US, Canada, UK, Australia and NZ, and a European economic zone centred around Germany and France. The latter is likely to be held back by friction as the southern countries of Europe attempt to deal with their own earlier excess credit expansions.


So far “National Capitalism” is only clearly identifiable in the US. However, in the absence of strong economic alternative ideas (the Left is in disarray in many countries), reliance on a more thorough going capitalism (and economic nationalism) may take root elsewhere. In part it may be imported from the US via trade alliances with that country. 2017 promises to be a fascinating year.

Appendix I: Update on Craigmore Sustainables

1. Commodity Prices

Two years of depressed NZ farm commodity prices (milk in particular) began to end around the time oil prices rose in mid 2016. By end-2016 NZ farming was back in a strongly profitable phase. The reason this happened is world farmers did what they always do (outside subsidised sectors and adjusted capacity in response to market signals. Reductions in supply (in dairy, drops in production lag price troughs by 2 to 5 years) and steadily growing demand mean NZ dairy, forestry and horticultural produce are now in positive cycles (as a result I would not want to bet against the NZ$ for the next couple of years).

These commodity price upswings are coinciding with solid productivity growth following Craigmore’s substantial (over NZ$ 80 m) earlier investment in our farms and forests. As a result we expect 10% to 15% net financial returns from our various farmland portfolios in the current farming year. Approximately half from cash flow and half from capital values.

2. Forestry Redemption

2016 saw the sale of most of the remaining forests in the Craigmore Forestry Fund and re-payment to investors of approximately a 135% of their investment (150% in EUR). This fund generated 6% to 8% annual net returns for investors when measured in NZ$ over its five year life.

It has been pleasing to see the capital returned to international investors with zero withholding tax on gains. NZ has no capital gains tax for domestic asset owners and this boon can be in effect extended to off-shore investors – giving them an almost unique ability to invest in a sound country, to make gains, but not to be withheld on those gains. Of course, international investors pay NZ corporate taxes on income (at the same 28% rate as kiwis) but they enjoy the same zero treatment as NZers on capital gains.

3. Craigmore Farming Partnership

The quality of this portfolio of 26 farms, most of them acquired during the tail of the last NZ dairy farm price downturn (2010 to 2012) is now beginning to show. The more mature farms in the portfolio (following 3 years of intensive investment and management attention) are now achieving costs of production significantly below $4.00 per kg of Milk Solids. Two tough years of a commodity downturn, where milk prices trended as low as $3.90 per kg, tested the portfolio and team. However, they also helped us drive a lot of cost and capex discipline. Fortunately a period of chronic oversupply in world dairy markets is now over. Dairy commodity prices in the 2016-17 year are tracking long term averages of over $6 per kg (indeed Craigmore is selling milk in the forward market at prices well above this). As a result, this Partnership will pay a substantial dividend this year. As NZ land prices fell, capital values of this Partnership were written down on an unrealised basis in 2016. These will be written gradually up again in 2017 and 2018 as liquidity returns to the NZ dairy sector.

4. New Partnerships open to investors

Craigmore has secured commitments enabling over $150m of investments by a second Dairy Partnership, which purchased a number of new farms in 2016. Craigmore also has commitments to a dedicated horticultural land portfolio called “Craigmore Permanent Crop Partnership”. This CPCP is a landlord in NZ Apple and Wine Grape strategies and takes operational exposure to kiwifruit. Due to the strong cash flows of NZ horticulture, which is well positioned to supply premium produce to a rapidly growing quality and health conscious Asian middle class, CPCP will pay a dividend from its first year after final close.

5. The NZ currency

The NZ dollar is at multi-year low against the US$ (see Figure 4).

Figure 4: NZD/USD Jan 2012 – Jan 2017


Source: RBNZ

NZ runs a far more fundamentally sound economic policy than any other country I know. Further, dairy markets are improving. The historic correlation between NZD and USD prices of dairy are, in my view, likely to support the NZD in the next couple of years.

Figure 5: Fonterra milk price (in USD) vs. NZD/USD


Source: RBNZ, Global Dairy Trade

We certainly do not provide currency advice at Craigmore (we are farmers not currency specialists). However a “long exposure” to the NZ$ may not be imprudent given the policy advantages of NZ. A country with zero appetite for quantitative easing. NZ’s new PM Bill English has been a responsible finance minister for eight years. English was the architect of NZ’s fiscal surpluses and low government Debt (24.6{% of GDP). The NZD has been weak since the resignation of John Key who resigned for family reasons in favour of English who was his Deputy.

6. Map of Agriculture

Map of Ag is a young company, investing heavily in R&D. Map of Ag revenues grew at an 80% annualised rate in the year to date. Revenues are now being earned in four countries – we expect to soon add a fifth.

A successful fundraise (which we expect to close off soon) is enabling us to continue growing our team and hence ability to publish (increasingly) real-time data to our clients (themselves a roster of some of the biggest names in global ag). The mission of Map of Agriculture is to use the value of this data to build strong tools to help the farming industry, and give farmers control over the destinations of their data.

8. Investment documents

If any readers would like details of either the Dairy or the Horticultural Partnership or of Map of Agriculture please get in touch.

Thank you to those who took time out during your busy start to 2017 to read this long(ish) Craigmore Commentary.

Wishing you all a healthy and enjoyable year,

Forbes Elworthy.
Partner, Craigmore Sustainables and CEO of Map of Agriculture

Published: 5 January 2017