The world is changing fast and to keep up you need local knowledge with global context.
Deon Gouws is not your typical money manager. A best-selling author and voracious reader, the chief investment officer of Credo gives a wonderful interview. And has done so again as he returns to the global divide – “tree” and “boat” people – to help us understand why Donald Trump’s shock victory is confirmation of a world experiencing a major transition. Gouws has some rather forthright ideas about how our lives will be changed by these megatrends that will have enormous impact on business, investments and our way of life. – Alec Hogg
Alec Hogg is with Credo’s chief investment officer Deon Gouws. Deon we’ve spoken previously about “tree” and “boat” people. How does this relate to the shock Donald Trump victory in the US presidential election?
I read this article by Charles Gave about six months ago. It was actually at the time of London Elections for the London Mayor, Sadiq Khan who eventually won there and Charles Gave basically explained it in terms of the analogy of this village where essentially half are tree people, half are boat people. The ones who are the tree people are in love with the tree in the middle of the village, so they don’t really want to go anywhere else; they want to wake up in the morning, go, and sit under the tree, go back at night and do it again tomorrow. The boat people, on the other hand are a little bit more ambitious. They look at that same tree, they see a good piece of wood and they think “We can make a boat out of that and then we can sail across the world and we can have all sorts of interesting experiences, we can be educated and maybe we can come back and add value to our home village again, to those people who stayed under the tree”.
For a long time it worked like this in the world, for decades, for the second half of the last century and up until recently, they were the international elite, they were the well-educated, they were the well-travelled, the well-heeled and they were in charge because it basically went quite well with the world for quite a long time. We’ve had good economic growth, we’ve had a decrease in poverty, increase in life expectancy and living standards, and therefore, the tree people kept on agreeing “These boat people are smart, we’ll trust them and we’ll elect them into power”.
Or not even vote and just let them carry on.
Essentially yes, not all the political systems are the same, but then in, let’s say the last ten years we’ve had the rise of the one percent movement. Thomas Piketty spoke about inequality, very slow economic growth around the world in the wake of the financial crisis and all these things essentially conspired, I guess, to come back to the tree people and the boat people, to the tree people starting to say to themselves “Wait a minute, maybe these boat people aren’t so smart, maybe the systems that they have put in place are not so good for us anymore and maybe we need change, maybe we need to vote them out and maybe we should put the tree people in charge and see how that works.
If you go back to the London election for a mayor, Sadiq Khan, the ultimate tree person, son of a bus driver and Zack Goldsmith, the ultimate boat person, son of a billionaire, in Brexit it’s less personal, but we know now in terms of the analysis post the event, that that’s in large part how people voted. The intellectual intelligentsia, you know, business people and the like on balance voted for the remain side, but a lot of people in the sort of more working class parts of Britain were Brexiteers and they voted with emotional arguments such as immigration in mind, amongst others and now I guess, in the States and this is what we spoke about four months ago.
Trump himself, ironically, one wouldn’t describe necessarily as a tree person if you look at his CV and you know, his CV of big business and big money, but he certainly adopted those tree people policies, so he spoke to the populace and he went back to basics in terms of his policy, whereas Clinton of course is the ultimate boat person, you know more of the same in terms of what we’ve had from the democrats for many years.
The interesting thing about Trump was that he got the vote out, he got the tree people to leave their homes and in fact, come and make their voices heard, a record turnout in the United States, and it worked in his favour.
Yes, that is true. You know, I think the fact that he appealed to the emotions of so many people has surprised a lot of analysts. In the end if you go and look at it afterwards, I think some of the biggest arguments that have received the press in the last few weeks, the last couple of months really, which boils down on the one hand to essentially Trump’s sort of sexism and political incorrectness on the one hand and then in the case of Clinton, the famous story about the emails and the FBI.
I think both those arguments probably only made a very small difference on the fringes. It may have made a difference of one or two percent, I guess, depending on how the news flow went in any given week, but the core voters for somebody like Trump made their minds up six months ago and it didn’t matter what happened after that, it didn’t matter which video clips came out and what he had supposedly done and said about women and others at any point in time. People were just voting for some sort of change. We’ll see now what sort of change it can actually make, but people were essentially voting, I think with lots of emotional involved.
One of the issues that I found very interesting with this election was from you yourself when we spoke in August, you’d actually got back from the US recently, and you said you met a lot of Trump supporters. On the day of the US election I had two meetings, two people, both of whom went to the United States, one who took a 3700 mile road trip from Florida all the way up to Denver and back and met lots of people along the way, the other one had been driving around the South. Both of them came back with the same story you did, they just met Trump supporters and yet both of them believed Hilary Clinton would win. It almost reflects the influence that the media has had and the pundits on this where with your own eyes you saw these Trump supporters and yet your intellect was telling you there’d be a different result.
That is true Alec and it reminds me of this other article that you and I shared in the last couple of days and which I originally read about two months ago written by Nassim Taleb, where it’s just a different version of the tree people and boat people argument really in a nutshell, but the article that he wrote about the so-called “Intellectual, yet idiot” and what he was writing about is, he said that most of us talking to each other here, you interviewing me, the typical listener or reader that will probably engage with this article or this interview, people in academia, people in politics, people in media, we’re all essentially from the same class.
We have a similar background. We influence each other and we end up believing that, that is the truth but there’s a whole swathe of society, a very big one that we don’t know and those we don’t relate to and that we essentially ignore in our analysis. That ultimately is true for the pollsters as well. The pollsters are also people like us, they’re also boat people for the most part, and as Taleb says, in a very sort of scathing way, he basically points a finger to all of us and he says “You’re all intellectuals, yet idiots and you simply don’t get it, but take notice what’s happening in the world, it’s changing”.
Indeed it is a very comprehensive one for Trump. Better he got more votes that George W Bush got in the last election and no one would have written Bush off at that point, so the investment case though post-Trump’s election, it does remind one a little of Brexit, lots of fears before the event, immediately after though, a quick, short sharp reaction and then almost business as usual.
Yes, I think to be frank it’s too early really to analyse it now. We’ve only had one day’s trading in the States, but I was personally, even though I have my own views about who should have won and who I thought might have won, personally I’ve never been too fearful of the investment case and certainly, and this is something we debated actively within our investment team. If you asked me this question two days ago or two weeks ago, I would have given you the same answer to say that objectively speaking if you ignore the noise and the emotion in all likelihood the better person for the markets over the next number of years will be Trump. Simply A, because he’s a Republican and Republican policies are typically more business friendly, more economically friendly and therefore more market friendly, more sort of expansionary.
If you go into some of the detail, of course, there are specific asset classes that may suffer in the process because it’s also more inflationary. Inflationary is not good for bonds and that’s why we saw the spike in bond yields yesterday in the States, so there’s some detail that clearly will need to be analysed carefully and will take time to play out, but in a nutshell I am not really scared of Donald Trump as far as the markets are concerned, but the one big footnote, which is that he doesn’t press that nuclear button because as I think we discussed last time as well, you know, Warren Buffett famously said “Nuclear war is bad for business”.
Given that the Russians have welcomed his election, given that they’ve played a big role in this, or so the media tells us by hacking into the emails of Hilary Clinton, hasn’t that nuclear threat perhaps subsided?
I would hope so. I mean I’m no political expert but one would hope so and ultimately I think if you go and look at all the pronouncements that Trump made, we can forget about Hilary’s now, they’ve become irrelevant, the bottom line is this, we always knew that lots of things that he said were impractical. Therefore, the fact that he hasn’t yet thrown Hilary in jail, the fact that I don’t believe work has started on a wall and I’d like to suggest that it never will, you know people are going to forgive him for that.
We all know it was a hyperbole, the fact that some people will say that he lied in the process, we knew that. It was a hyperbole. Ultimately, when you’re in government, it all changes. You know I want to quote your own article back to you, which I read this morning, which is the quote from Dr Rupert that “When a foot soldier gets promoted and he becomes an officer, he stops thinking like a foot soldier” and I think Donald Trump, for the most part at least, will think like an officer and maybe he surprises most of us in the process.
Do you think there is this special relationship potential that the Brits are talking about between the UK and the US given that Trump’s mother is Scottish and that he in fact, came here at the time of Brexit?
Perhaps, I think this is one of those things where we probably, and I say this with my beautiful British accent, myself and having lived in the UK for most of the last 15 years, I think it’s something that’s more important for the Brits than it is for the Americans, I think it’s something that if you mention ‘special relationship’ to the typical person in the city, they know exactly what you talk about, whereas if you did the same thing in Manhattan they possibly don’t. It’s a little bit like South Africa being part of the BRICS, being the fifth letter in the BRICS acronym; I think most people in South Africa know about that, I think most people around the world don’t.
Somebody like the FT for example, to this day it doesn’t recognise that acronym, they will always only have the four letter BRIC acronym as opposed to the BRICS one that we will always see in South Africa. So yes, I think it’s more important for the UK. The UK is very much the junior partner, you know if you look at how the two countries have developed over the years and it really is something that you really hear about mostly when there’s real due political tension and a potential war. So is there a special relationship? You know as a Brit I would say I hope so, but we’ll see how that plays out. The fact that Trump has some British roots and a golf course in Aberdeenshire, I’m not sure how relevant that is.
What is relevant about all of this though is that Brexit is now happening; it is certainly an aggressive line being followed by the Prime Minister here. She would be able; presumably to strike a new deal with the United States and if that were to be a special relationship type deal it might help both countries.
I think that’s very valid and I think that’ll be a fantastic coup for her and she must have a decent chance now. I mean if you embrace Trump and handle him well enough, who knows what that could lead to. There is of course the slight complication of the court case we saw in the UK a week or two ago with Gina Miller winning that case, that it now has to be a parliamentary decision process, something that Theresa May never wanted and they’re still resisting, you know it’s going to appeal. I think that’s another interesting court case that we need to watch.
You mentioned South Africa, there are many developments going on there. You still do have South African clients and you watch it closely. Do you have any thoughts about the relative performances of the currencies post-Brexit where the Pound has fallen and the Rand in fact has strengthened?
Yes, I think most people will agree that the Rand’s performance for most of this year has been amazing. I think depending on exactly which measurement period you choose, the Rand is up there with the best performing currencies in the world this year. The fact that the Rand is as strong as it is today against all currencies frankly, not only against the Pound, in relative terms, that is if you look at the last six to 12 months and you look at that strength and you consider that in light of the fact that the majority of people seem to believe that downgrade is not likely, that is even more amazing.
If you then start unpacking it, perhaps it relates to a carry trade which has started picking up again because with the bond yields in South Africa being where they are and where they have been, perhaps and bearing in mind that the bond yields have adjusted essentially in accordance with an expected downgrade, so South African currency doesn’t look like downgrade currency, but the bonds do trade at essentially junk levels. So maybe there’s been big bond managers piling in and that could explain some of the Rand’s strength, so yes the Rand has been quite strong, stronger than we thought it would be and it’ll be interesting to see how long that lasts.
The impact of the geopolitical issues or more particularly the hard, political issues in South Africa, Pravin Gordhan, one day he’s going to get charged when the charges are dropped, the Rand improves, when he’s charged again, the Rand falls. Is that just Mr Market overreacting?
I do think so and I think when it comes to these arguments I typically take a glass half full point of view and I have this debate with lots of my South African clients and friends. When I speak to them, typically you just hear the glass half empty arguments. You know, isn’t it a bit of a basket case that this is happening and the next thing is happening and my response is “Yes, you know, these are not great things to witness on the one hand, on the other hand I think the glass is actually half full and why, because we’re still a free press that is reporting things and doing so quite aggressively and not being shackled in that regard, we still have the rule of law which sometimes gets tested and you know, people like Sean Abrahams’ role in that, I think is not great, but eventually the process works.
Sometimes it takes a bit of time and it causes unnecessary stress and noise and time delays, but ultimately it works. When you have a free press, when you have the rule of law, when you have democratic institutions that do work, we had fantastic municipal elections results, the handover process and the like, I think the glass is actually half full, you just sometimes need to get a bit of perspective.
Is there a “tree people, boat people” argument for South Africa?
Absolutely, my fear is that in the same way that you just had what many people describe as the two worst candidates in US political history, vying for president, is that we end up in the same way in three or four years’ time in South Africa and we end up having a run for president between Steve Hofmeyer on the one side and Julius Malema on the other side, you know they’re both essentially tree people, but they represent the sort of extremities in terms of the political spectrum and that’s ultimately my fear.
What about the boat people in South Africa though, there are many who are looking for more liberal ways of doing things, a globalisation kind of agenda, is that falling off the table?
No, I think the boat people are intact and I think they are keeping the fabric of society together. The boat people are the captains of industry, they are employers of tens of hundreds of thousands of people, they oil the wheels of the economy, and they keep the institutions sane and honest and working, all those things that I said when I see the glass as half full. The problem is that when it comes to the ballot box I’m not sure they’re in the majority.
What do we learn from what we’ve now seen at Brexit and with Donald Trump’s appointment as president in the United States, what lessons do we take home from that?
I think the bottom line and we’ve had a number of signals and perhaps you know, I’m guilty myself that I ignored some of the early ones at my own peril, but is that this whole populism argument, the whole inequality kind of imperative, the one percent as they used to call it ten years ago, is important, we need to take note of it and if we don’t we do so at our peril. I think the political landscape is changing and therefore, the kind of political interventions that will happen going forward, I think are maybe quite dramatic compared to what we may have expected.
We haven’t spoken about Europe today but I think in Europe there’s a lot of turbulence lying ahead. I’m now more convinced than ever (and maybe I’m over-adjusting to the other side now), that a country like Italy will want to leave the EU and will want to do so sooner rather than later and maybe it will happen and one by one when these countries start going and you know, when there’s a hole in the wall, the floods can come through pretty quickly.
First Italy, then France, then perhaps countries to the East, it is a very difficult period to be a European or to be driving the European Union, but what about the Euro?
Well, I think the arguments go hand-in-hand. Bear in mind that the biggest, strongest partner within the EU and the Euro ultimately is Germany. Germany, Merkel, all the politicians in Germany will do whatever they can to keep Euro together and to keep the Euro as the common currency. Something we may have discussed in the past, the biggest beneficiary of the Euro has been Germany. Why, because if Germany was on its own today with its strong economy, its strong export led economy, it would have had a much stronger currency on its own.
The Deutsche Mark, if it still existed, would have been much stronger today as the weighted average basket of currencies which is the Euro and if you have an export led economy like they do, they’re one of the biggest net exporters in the world, guess what, I mean that’s fantastic for Germany and from that perspective they will do whatever they can to keep it together and they will bail out Greece again if they need to, even though they’ll do it with pursed lips because they are the biggest beneficiary.
Just to close off with and getting back to the whole issue that you raised a moment ago about inequality and governments maybe interfering more, are you anticipating in the tax rates are going to be going up rather than down, that maybe company profits are going to be going down rather than up?
Well, tax rates certainly. I know that I’m going against Donald Trump’s promises in terms of his campaign, we’ll see if he can really lower taxes because all the things that he’s promised, we know that his package of promises was just a fiction. The question is which of the promises will he be able to keep and the tax rates one, even though he promised it and even though it is fundamentally Republican policy, I’m not sure he can afford it. We’ll see.
He may get away with it in the short-term because he’s Donald Trump and he thinks he can do everything, but if we stand back from it and we take a more holistic approach and we look at tax rates on the whole in the first world including South Africa for that matter, certainly the UK, I do see them going up, I do see wealth taxes in some form or shape. A, the money is required in terms of the kind of fiscal reality and B, from an inequality point of view, it will be a very popular policy with most people who have a vote.
Inequality is one of the big issues for politicians and in fact, for society.
Indeed and as I say, for me it’s usually ironic that the guy who sort of won a presidential election of the year is on that ticket. There’s somebody who was born with a golden spoon in his mouth.
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