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MitonOptimal Weekly Comment - Week 26, 2016In investment terms, particularly in toppish markets, the concept of ‘protection’ usually refers to strategies employed by asset managers to preserve capital, but more recently however, it is used in a socio-political context: Peggy Noonan of the Wall Street Journal re-coined the term to mean ‘those who are insulated from the effects of public policy’. On the other side of that coin, the unprotected are those who are most vunerable to the actions of policy-makers, have to live in and with it, suffering the most from it.

The majority of you reading this article are most likely protected to at least some extent as, even if you do not make public policy, you can afford to pay for schools for your children, private medical care, protect yourselves from crime and are able to buy legal assistance to get out of trouble. Noonan used the term to explain the rise of Donald Trump as the champion of America’s unprotected, but there are others examples springing up all over the world. The unprotected are exposed to their fixed incomes being eroded by zero interest rates, having their very livelihoods threatened by immigrants/refugees, they tend to be victimised by crime or have little chance of being employed at all, or in any job meaningfully relevant to their qualifications.

Curiously enough, their champions come from both the right and left of the political spectrum, depending on the region of their constituency, but their promises are eerily similar. They promise to “take back what’s ours” or “restore our nation to its former greatness”, which have massive appeal to the unprotected.

The cost of living for the unprotected is quite different from the protected, too. In the U.S., the official annualised inflation rate was 1.1% for the year to April 2016. However, that number is influenced heavily by living in urban areas. Even in those urban areas, the inflation basket of the unprotected is more heavily weighted towards shelter, transport and medical items, all of which rose in price by over 3% over the same period. Venture away from the urban areas and the heavily populated North-East and the overall rate goes up to as much as 2%, with food prices increasing by 1.4%, housing by as much as 4.9% and medical cost inflation reaching 4%. Tough for the unprotected whose real wages haven’t increased in years.

In South Africa, the unprotected pay more to live as well. Whereas the official (urban-areas) CPI was 6.2% for April, it was 8.2% for poorer people, compared with 5.9% for the richest, as measured by how much they spent. Food, which forms a larger part of the poorest consumers’ basket, was up 11% and rural areas suffered an inflation rate of as much 8.2%.

The protected, relatively secure in their jobs and living in their nice (sometimes fenced-in) neighbourhoods, are buffered against both the effects of central bank policy and remain unaware of the rise in numbers of the unprotected. They may be surprised by the identity of the next U.S. President or the results of the South African municipal elections, the Brexit referendum, the next elections in a number of European countries, or other changes in the social order.

At MitonOptimal our investment discussions revolve as much about economic and investment fundamentals as the socio-political factors. They are inextricably entwined. The investment fundamentals are easier to forecast though, more than the actions and emotions of the unprotected.

Are you Protected?


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