In his book, Only the Paranoid Survive, the former CEO of the Intel Corporation Andrew Grove asserts that “a strategic inflection point is a time in the life of business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end”.

By all measures of the news flow, we are at the political and economic inflection point in the US. And whether European investors like it or not, when America sneezes, Europe still catches the cold. Or more likely – a full-blown pneumonia.

The first black swan: impeachment and removal

In recent weeks, things have gone from bad to worse for the White House, with prediction markets now marking mid-October as the tipping point for the Presidency and, more importantly in terms of the US political institutions future, the Republican Party. Based on the Gallup polls, support for the President Trump’s impeachment and removal from office amongst likely voters rose from 45 percent in June to 52 per cent in mid-October. The inflection point here took place around September 24-25, when the support for impeachment jumped amongst all three key categories of voters, including the Democrats, the Independents and the Republicans. Neither the publication of the Mueller Report in April this year, nor the subsequent testimony by Robert Muller in Congress in late July had a similar effect.

“While the prediction markets are already pricing in more than 60 per cent likelihood of Mr Trump’s being booted out of the office, financial markets appear to be oblivious to this risk.”

Meanwhile, analysis of polls by Fivethirtyeight.com shows that the ‘generic ballot’ for Congressional elections 2020 is currently favouring Democrats over the Republicans by 6.3 percentage points. Meanwhile, the latest average of presidential approval polls, weighted to account for each survey’s quality, recency, sample size and partisanship, puts President Trump’s disapproval rating at 54.7 per cent, against approval rate of 40.6 per cent. Worse, White House’s disapproval levels amongst the likely voters are the same as those amongst the general voters, suggesting that his 2016 strategy of attracting disillusioned voters is unlikely to pay off in the 2020 election cycle.

Our first ‘Black Swan’ of political inflection risk, therefore, is the rising likelihood of impeachment and removal of Mr Trump. With the Democrats in control of the House vote, and with the Republican Party electoral fortunes being severely pressured, the Senate support for the President is eroding daily. While the prediction markets are already pricing in more than 60 per cent likelihood of Mr Trump’s being booted out of the office, financial markets appear to be oblivious to this risk.

The second black swan: Democrats’ 2020 dilemma

The second source of deep uncertainty is the eventual outrun of the Congressional and Presidential elections. Based on current polls, fundraising results and official endorsements counts, there is a growing chance of Elizabeth Warren and Joe Biden going head-to-head for the Democratic Party nomination. Absent a ‘poisoned pill’ of a strong third-party candidate, this will leave the Democratic National Convention in July 2020 stuck between a rock and a hard place. If Mr Trump remains unimpeached by then, the chances of electoral fortunes favour Warren as a preferred candidate to face him in November.

If Mr Trump were to be removed from the office by then, it is more likely that the Democrats can play a ‘safe card’ and put forward Mr Biden – Official Washington’s preferred candidate. But to succeed in the White House, Mr Biden will have to shift left, politically, to meet the changing trends outlined below. One way or the other, changes in the electoral politics that have driven the Democratic Party field of candidates far left of the party’s traditional centre will have an impact on the November 2020 Presidential contest and will shape the next Presidential administration. This too remains outside the markets’ expectations that are pushing PE ratios to new local highs and stock prices ever higher.

The third black swan: Tectonic shift left

Lastly, there is the ‘perfect storm’ factor: the longer the Congressional Republicans continue to hold the line against impeachment of Mr. Trump, the higher are the odds that post-November 2020, the new U.S. President will have a Democratic majority in both the House and the Senate. And changing demographic makeup of the American voters will force the next Congress more toward the policies promoted by Alexandria Ocasio-Cortez, better known as AOC, and her “Squad” than the Old Joe Biden’s non-ideological centrism. The last election cycle of 2018 marked the first time Millennial and GenX voters outnumbering ‘baby boomers’ at the polls.

As the result, combined share of GenX and Millennial’s congressional votes rose from 28.2 percent in the 115th Congress to 37.5 per cent in 116^th Congress. The next electoral cycle is likely to see this rising to 48-52 percent, eclipsing the Boomers who are expected to see their share of the House falling from 62.1 percent in 2016 to below 50 percent in 2020.

Which brings us to the demographic drivers of future socio-economic policies post-2020. The Anxiety Generation, a combination of many younger GenXers, virtually all of the Millennials and the older, smaller sub-groups of Generation Z, is politically driven to support the populist left, similar to that of Bernie Sanders and AOC-led group of younger legislators. All are informed, albeit not fully embraced, by the ideological positioning of Senator Warren, who built her political capital on a series of active and highly popular campaigns against the growing market power of the banks and tech companies.

These voters are fully conditioned to embrace ideas of the Modern Monetary Theory, a macroeconomic worldview that suggests virtually unlimited reliance on monetization of public debt as the main means for supporting aggregate demand and public and private investment. They are also energised by the prospect of large-scale debt write-downs, favour extensive rent and housing subsidies, Government-managed and financed healthcare, and price controls in education.

On public investment side, they are enthused by the prospect of deploying trillions of dollars over the next 3-5 years to combat climate change. On tax policies side, they favour extreme levels of upper marginal income tax rates, a wealth tax, and a VAT-like sales levy. And they are adamantly in favour of severely restricting tax avoidance shenanigans of America’s largest corporations both at home (behold the New York City debacle with Amazon’s new HQs) and abroad (following in the footsteps of the Obama Administration efforts to create a unified internationally-arbitered global tax regime, spearheaded by the OECD and G20).

“Their core constituencies are the middle class and the skilled and unionised working classes – none of whom are enamoured with the idea of American companies outsourcing jobs, income and tax revenues to either robots or to Ireland.”

When it comes to international trade and investment, both financial and corporate, the ‘new era’ thinking favours selective and restrictive agreements on bilateral trade and capital flows, linked to environmental, social and governance impact tests. In other words, the world of the WTO- and Washington Consensus-brokered global and regional treaties on opening up of trade and investment markets is over. The world of selective protectionism is upon us.

The markets: canary in Europe’s mine

In economic terms, these policies envision fiscal deficits in excess of USD 1.5-2 trillion per annum into perpetuity and tax increases that will revert the current system of Federal revenues to the 1970s and 1960s. While the social impact of such polices is open to a debate, none of these moves will be easy to sell to the Wall Street. Even in 2019, well before the new politics of 2020, we witnessed rising risks of financial system chocking on the massive wave of debt issuance by Mr Trump’s Treasury.

According to the numbers compiled by the Global Macro Monitor, in the fiscal year 2019 the Feds issued US$ 1.052 trillion into the public markets, or 4.9 percent of GDP, against 1.4 percent in 2007, causing extreme seizures and convulsions in the money markets since the start of the Autumn, and prompting extraordinary interventions by the Federal Reserve.

“If the markets correction triggered by the ‘Black Swans’ factors outlined above were to be accompanied by a recession, there will be a financial bloodbath on the scale of the 2008-2009 crash.”

Meanwhile S&P 500 is booming. Based on the data from Factset and Bloomberg, margin-adjusted price to equity (PE) ratio currently stands at around 46.0 and the U.S. stock markets capitalisation is at 144 percent of GDP. Cyclically-adjusted PE ratio is at 33.2. The market is not simply overpriced, but it is overpriced beyond most previous bull markets.

Based on data from Fivethirtyeight.com analysis of the polls, we can estimate the likelihood of the three ‘Black Swans’ taking hold of the markets dynamics in late 2020 at around 30 percent. While it is perilous to attempt to forecast the exact potential impact of these ‘Black Swans’ on the markets, based on the past trends for the last two recessions, probability-weighted, we are looking at the expected repricing of the markets to the tune of 12-20 percent. If the markets correction triggered by the ‘Black Swans’ factors outlined above were to be accompanied by a recession, there will be a financial bloodbath on the scale of the 2008-2009 crash.

Europe: rising to a new high or heading for a new low?

Contagion from the US political cycle inflection to the left will be even more pronounced in Europe, which still lags behind the US in terms of economic recovery from the Global Financial Crisis, the Great Recession and the Euro area sovereign debt crisis of 2008-2014.

Until recently, Europe has been a net beneficiary of the Trump Administration’s trade war with China, picking up a large share of cheaper imports from Asia-Pacific and increasing its direct bilateral trade with the U.S., as well as exports through third countries. Europe has also been a net recipient of the U.S. foreign direct investment and financial inflows. All of this is likely to change if the ‘Black Swans’ associated with the political changes in America were to take root.

The winds of this change are already picking up speed. In exports, Trump Administration is raising long-promised tariffs against European exporters. For now, these apply to a relatively limited range of goods covering a small share of U.S. imports from the region. But, rhetorically, there is an ever present threat that Mr Trump may raise sweeping trade barriers against industries that do matter to the EU producers: automotive sector, industrial machinery, precision technologies and, the mother of all fears for the Irish policymakers, software, pharmaceuticals and financial services.

“The modus operandi in Brussels and Dublin is that once the ‘aberrational’ presidency term of Mr Trump ends, the US will fall back into the old orbit of the neo-liberal politics.”

If this is bad, what is coming down the line with the prospect of the political inflection process outlined above is outright scary. The younger cohorts of the Democrats hold zero allegiance to the old Washington Consensus that guaranteed Ireland’s place in the world of global commerce. Instead, they view exports to the US by both foreign and American multinationals with suspicion and distrust. Their core constituencies are the middle class and the skilled and unionised working classes – none of whom are enamoured with the idea of American companies outsourcing jobs, income and tax revenues to either robots or to Ireland.

On a long enough timeline, this new generation of American policymakers will take the reins of power in Washington DC. AOC and Elizabeth Warren, Bernie Sanders and the Millennials’ ‘Squad’ in the House of Representatives, all represent the new populist economics in which the status quo of American corporates squirreling taxable income from their global operations out of the reach of the IRS is simply not sustainable. Their social programs, public investment plans, green economy agendas and reliance on the promises to reverse the declining fortunes of America’s middle class all require a lot more tax to be extracted from the companies trading inside the US and those operating abroad.

Europe and Ireland have largely spent the last three years of the Trump Administration in the state of deep denial of the long-term changes sweeping across the US political environment. The modus operandi in Brussels and Dublin is that once the ‘aberrational’ presidency term of Mr Trump ends, the US will fall back into the old orbit of the neo-liberal politics. This strategy of ignoring the demographic drivers for both Mr. Trump’s 2016 victory and the dynamics of the 2020 Presidential election contest is bound to misfire.

As Andrew Grove would undoubtedly agree, facing a strategic inflection point requires any organisation to set its own path. Just as with the financial markets investors’, European and Irish policymakers’ wilful ignorance of the ongoing inflection in the American political to the left can signal “the beginning of the end” for the established model of economic development on the Continent and in Ireland.