The US stock market is increasingly politicised

There are many complex reasons why Bashar al-Assad’s regime collapsed so suddenly in Syria. But one known factor has been the increasingly rapid demise of the Russian economy, which has required Vladimir Putin to pull back support for the Syrian government.

The fall of Assad was a complete surprise to most. The prediction markets that got so much praise for their forecasting power during the US election didn’t expect it. On December 5, Polymarket had the likelihood of Assad being ousted at just 21 per cent and by the eighth, he had fled to Moscow. 

However, the collapse of the Russian economy shouldn’t have come as a surprise. In August, The Squeeze reported that increased government spending to meet Putin’s war demands was driving a booming economy. Weapons manufacturers were employing more people, which forced private businesses to increase wages to compete with the subsidised public sector. However, there was only so long this could last. Sucking workers into the war economy meant less investment elsewhere. Similar to a company that cuts capex to boost cash flow in the short term, this would degrade productivity over time.

The market is now reflecting this increasingly grim reality for the economy. In the past six months, the ruble has fallen 20 per cent against the dollar and in response the Russian central bank has increased interest rates to 21 per cent. “Everyone expects that the worst is yet to come –which, I believe, is the main reason behind the ruble's collapse,” explained former Russian Deputy Minister of Energy Vladimir Milov.

Usually, the upside of a depreciating currency is that it makes exports cheaper, but the sanctions restrict the Russian companies’ ability to take advantage. Instead, according to Milov, this has led to “an endless stream of begging” for government handouts, with businesses complaining they “haven’t got investment, haven’t got profitability and haven’t got a workforce”.  

Russia is an extreme example of an economy run on government handouts. The country is fast-forwarding towards poverty, and the fall of Assad is just another symptom of Russia’s decline.

However, the US is increasingly falling into the same trap. As pointed out by journalist Fareed Zakaria on the Freakonomics podcast, the fawning of US chief executives over Donald Trump is evidence of an ever more politicised economy. Since his election, the share price of Tesla is up 70 per cent while Palantir is up 85 per cent. That is a combined market cap increase of $700bn for little other reason than these companies’ owners (Elon Musk and Peter Thiel) have a direct line to the president.

This isn’t even a specific Trump phenomenon. Yes, in his first term he increased national debt by $8.4tn, as well as handing out tariff exemptions to Apple because, as the largest company in the world,  its chief executive Tim Cook could get close access to him. 

However, the Democrat party under Biden was also prone to trying to pick industrial winners and expanded the deficit by a further $4.3tn. This spending included the Chips and Science Act which has given billions of taxpayer dollars to Intel. Yet two weeks ago its chief executive Patrick Gelsinger stepped down having laid off 15 per cent of its workforce following a collapse in profitability.

With Russia, some commentators were hailing its success in the face of sanctions, but economies rarely collapse in a pile. Instead, growing budget deficits drag over time via higher interest rates. Since 2020, the 10-year US Treasury yield has risen from 0.5 per cent to 4.5 per cent and is showing little signs of falling back. This is fine when nominal GDP growth is high but as the graph shows, US nominal growth is falling close to level with the 10-year yield making debt servicing increasingly difficult. 

Increasingly unaffordable debt is the price economies pay for misallocated capital. With the US stock market near a record high valuation, so far it seems to only have considered Trump’s winners. But in a centralised economy, when money is handed to one person it is taken from another. 

For now, the S&P 500 doesn’t seem concerned about this politicisation risk. It might believe Trump’s tax cuts and the emergence of AI will increase growth to a point where none of it matters. This optimistic take isn’t unfounded. But like for Assad, when things do eventually go wrong, they usually happen in a hurry.