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Political risk, Trump and polls - the threat of misforecasts

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Anyone observing the foreign exchanges at the moment will be reminded of the adage that businesses don’t like uncertainty. Over a tumultuous night on 8th November, we saw the Mexican peso first soar with enthusiasm and then deflate in shock as Donald Trump’s election as president became more assured.

 

After the candidate claimed victory, the US dollar moved sharply downwards and Japanese bankers and ministers assembled for an emergency meeting to discuss their currency’s rapidly (and entirely unwanted) appreciation. The Yen, much like gold, is seen as a safe haven in times of economic uncertainty.

 

Trump was seen, fairly or unfairly, as a major economic threat prior to the election. In March of this year, the Economist Intelligence Unit declared that the Republican candidate was one of the top ten leading political risks facing the world.

 

His ideas certainly ruffled feathers within the elites. He pronounced NATO – a cornerstone of Western security – as ‘obsolete’ and questioned whether the US should honour its commitments to collective defence.

 

But, for as much as the bellicose nature of his campaign speeches, the man is still constrained by the constitutional binding of the office. The founding forefathers anticipated the rise of a populist and forged a system of checks and balances to moderate any extreme executive action.

 

The supposed threat of a zealous Trump, an angst seeded by his political rivals, is likely to be resolved by the pragmatism of a businessman and the realities of the constitution.

 

Indeed, the reason for the markets’ turbulence today is explained more clearly by their general disdain for radical political change and the shocking inaccuracy of the polls. As the night wore on, and analysts realised the predictions of opinion pollsters were increasingly fanciful, trading positions saw rapid correction. Given the erroneousness of the forecasts, the market adjustments saw sharp movements. It is likely that the day, and maybe the coming day, will see a few more shocks.

 

This vote, following from the unexpected decision for the UK to leave EU in June, shows how unreliable political polls have become. In Britain, the inaccuracy is attributed to ‘Bashful Brexiteers’ fearing admitting a socially undesirable opinion to a pollster. In the US, this is sometimes known as the ‘Bradley effect’, which related to voters’ over-keenness to demonstrate their modernity by backing an African American for the governor of California in 1982. In the end, despite the polls, Bradley lost. Perhaps now we can talk of ‘Timid Trumpettes’?

 

Worryingly, a generation of businesses and analysts have learned to incorporate polls as fact in planning. The danger here is setting operations in place that too heavily rely upon forecast political outcomes in advance. Perhaps we are facing a similar reality dose as behavioural scientists of the 1960s that boldly claimed an ability to predict all social phenomenon. Then, as now, we are learning that the experts are also fallible.

 

Given a campaign that was light on policy and heavy on mud-slinging, it will be hard to predict the nature of a Trump presidency. However, we do know that the opinion poll industry will receive the harsh spotlight of scrutiny. As I went to bed at 3am, UK-time last night, the most-respected pollster, Nate Silver was predicting a 76% chance of a Clinton win.

 

The resultant challenger landslide exploded that myth. This campaign only goes to show that, if you think you have controlled for political risk, there is always new ways in which it can cause more uncertainty.


This article is a piece of independent writing by a member of Procurement Leaders’ content team.

Jonathan Webb
Posted by Jonathan Webb