Investment Implications of the Rise of the New Lumpenproletariat and Political Shocks

Yves here. It’s gratifying to see an article that uses as a central observation something we’ve pointed out: the first two generations of the Industrial Revolution led to a decline in living standards of most laborers, particularly in England. This piece looks at the parallels between the past industrial revolutions and the post-industrial revolution now underway, and anticipates that the results will include deglobalzation and more political shocks.

By David Llewellyn-Smith, founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Originally posted at MacroBusiness

It is ironic that the “millionaire’s factory” at Macquarie Bank has produced an uncannily similar strategic outlook to my recent discourse The Battle for Globalisation will be Lost in Europe using Karl Marx as its touchstone. It is essential reading:

‘Lumpenproletariat’ & deglobalization

In this latest issue, we discuss the impact of labour force structural changes on investment strategies. In our view, this is the key investment driver and whilst history never repeats itself, it does rhyme and tends to be an excellent guide.

Louis-Napoleon Bonaparte had the unique distinction of being the last French emperor and the first democratically elected French president. His sweep to power by a popular vote in 1848 was achieved by relying on what Karl Marx described as ‘lumpenproletariat’ vote. What is ‘lumpenproletariat’? In Marxist theory these are sections of society that slipped below conventional occupations, and hence no longer belong to either proletariat or capital and financial classes. As described in greater detail in the note, according to Marx it includes various groups, ranging from “discharged jailbirds and vagabonds to pickpockets, tricksters, pimps, porters, tinkers….disintegrated mass, thrown hither and thither.’ It was the same group that concurrently fuelled the rise of the powerful ‘anarchist’ movement, dedicated to ‘blowing up the system’, heightening social and geopolitical tensions led mostly by well-to-do and educated elite.


Does this sound familiar? It should, as essentially in modern terminology, Marx was describing disintegration of a traditional order under the pressures of the First and Second Industrial Revolutions; societal dissatisfaction and the rise in income & wealth inequalities, culminating in the ‘gilded age’ of the late 19th century. Given that modern economics is purely a flow science and does not recognize structural shifts or social classes, the term ‘lumpenproletariat’ has fallen into disuse. It is a pity, as we believe it describes much better the dislocating changes occurring in the labour force and its social and political implications, than modern preferred alternatives (‘gig economy’, ‘fissured employment’, ‘angry white men’) and its impact on political process in countries as diverse as the US, UK, France, Austria or Turkey. As electorate shifts either to the right or left, the underlying drivers are identical (structural changes under immense pressures from the Third Industrial revolution and what we describe as declining returns on humans that are permanently altering nature and value of human inputs). We are even acquiring a growing number of our own ‘anarchists’.


In this note, we used BLS stats (US) to estimate the extent to which the structure of the labour force is shifting towards the modern equivalent of ‘lumpenproletariat’ or more contingent and least-paid occupations. Our estimates indicate that its modern equivalent in the US could account for as much as 40%-45% of the labour force; around half of incremental growth and low productivity occupations constitute ~70% of employment. The same trend is evident in most other developed economies. Indeed these estimates understate the real impact due to lower benefits attached to these occupations; inability to secure jobs in line with qualifications or erosion of job and income stability. Investors might argue that this is just a reflection of an accelerated shift towards services and that new higher value jobs will eventually emerge. We agree but as societies in the 19th century discovered, eventually could be a very long time.


What are the investment implications? As discussed in our prior notes, we believe investors are entering a world where the pendulum is swinging rapidly in favour of the state, as a multiplier of demand, provider of capital and setter of prices. We also believe that we are entering the age of de-globalization, as societies demand (and get) greater protection from competition & immigration as well as greater support for local industries and employment. This implies that ‘Follow the Government’ and ‘Buy least efficient and most protected’ local stocks could emerge as the key strategy, replacing popular globalization themes.

I agree on everything argued here but diverge a little on the investment implications, as I wrote in my own note, the crucial difference is that where Macquarie sees an uninvestable environment in which nothing returns to mean pricing (that is, the end of the business cycle), I see an environment in which Black Swan events become more frequent and more extreme as political event risk overtakes the delicate machinery of financial globalisation:

Markets did not react at all to the French atrocity. They can’t. They do not know how to discount political risk, have virtually no way to hedge it, and they either won’t or can’t countenance asymmetric risk (that is “Black Swans). Rather quaintly, they believe central banks will protect them.  It is not that markets are a good judge of these things, they are not, and you should not believe that no movement in equity or other prices is a guide to the events of Europe being marginal. They are not.

The first point to make about asset allocations in this emerging environment is that it is as much higher risk of asymmetric shocks than the decades that preceded it. Thus the strategic narrative for allocations should reflect that risk. In general terms that will mean:

  • avoid leveraged and illiquid assets;
  • safe haven assets will trade at a premium, and
  • cash and cash-like instruments should occupy a much larger percentage allocation than in the past.

The second way to play deglobalisation is tactical. It is to go long (or short) on authorities response to the breakdown of their hopes and dreams (this is more the area that Macquarie occupies).

For Australian investors I see a persistently deflationary context as commodity prices keep falling (not all but the bulks important to Australia):

  • iron ore has far to go yet in its glut as supply keeps coming and China keeps changing;
  • for coal, thermal is structurally buggered, coking will follow iron ore, and
  • LNG is facing an epic glut that will dislocate its pricing from oil.

The post investment boom volumes will keep flowing for another two years offering support to GDP but income is going remain very hard to come by. After that the volumes will begin to fall as China keeps slowing and changing and incomes will improve a little. But then we’ll face a very difficult challenge of how to grow at all given:

  • tradables have been horribly hollowed out;
  • services rely on asset inflation that is topped out with peak household debt;
  • the residential construction boom will be over and immigration under intensifying pressure, and
  • fiscal policy will remain constrained.

Allocations are very dependent upon time frames, risk appetite, stage of life and other factors, and this post is an opinion not advice, but in terms of the deglobalisation trend that I now see as the dominant theme of the decade, I remain comfortable with:

  • buying the dips on gold miners and bonds;
  • holding off equities until we see a substantial correction and then look to get long dollar-exposed industrials;
  • avoid or short banks, miners and the Aussie dollar depending upon your risk preference;
  • reduce property exposure and leverage whenever and wherever possible, and
  • long cash.

The main risk to this outlook is that the globalisers panic earlier and harder than I expect. That would mean widespread “helicopter money” likely poured into infrastructure worldwide. That would present a better outlook for Australia as bulk commodities would be in higher demand, holding up prices, interest rates, the Budget and the dollar, as it improves the income outlook of the nation. Even so, I do not expect that to benefit property, it does not change the allocation to cash, bonds would fall but gold would rise.

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  1. Chris

    I think you are forgetting about war. The breakdown of globalisation will also destroy conflict resolution mechanisms between the newly empowered states and make it more difficult to estimate the actual power relations. The people who will be charged with deglobalization will most likely be despotic and incompetent. They will be despotic, because they have to overcome entrenched capital and class interests and they will be incompetent, because they are political newcomers. I therefore regard major wars to be very likely.

  2. tegnost

    Yay for deglobalisation but I expect the authors risk conclusion will come to pass as the globalizers will throw everything they’ve got at it to save Disneyland.
    “The main risk to this outlook is that the globalisers panic earlier and harder than I expect. That would mean widespread “helicopter money” likely poured into infrastructure worldwide”

  3. craazyman

    Evidently the author of this post believes 40-45% of the labor force are ““discharged jailbirds and vagabonds to pickpockets, tricksters, pimps, porters, tinkers”.

    That could be true.

    It’s amazing what a good job and a good mood can do for a man. Here’s another description of the same cross-section of humanity at about the same time:

    Now I am curious what sight can ever be more stately and admirable
    to me than my mast-hemm’d Manhattan,
    My river and sun-set, and my scallop-edg’d waves of flood-tide,
    The sea-gulls oscillating their bodies, the hay-boat in the twilight, and the
    belated lighter;
    Curious what Gods can exceed these that clasp me by the hand, and with
    voices I love call me promptly and loudly by my nighest name as
    I approach;
    Curious what is more subtle than this which ties me to the woman or man
    that looks in my face,
    Which fuses me into you now, and pours my meaning into you.
    -Walt Whitman, Crossing Brooklyn Ferry

    Somehow they would say the distribution of money is at the center of both of these ideas. What is money then other than an expression of an idea of order? The order itself comes from outside of money, or rather from the same place that money comes, from nowhere and everywhere, invisible, formless, timeless, outside of space and time, and the money becomes the visible surface of the idea, or one of the surfaces of a multi-dimensional manifold of ideas in imagination space that take their form from some underlying phenomenon of being and relation. That’s all it is. Why do they make it so complicated? Oy Vey! hahahaah

    1. grizziz

      What happened to money as a social construct for freeing humanity from searching in period one into period 1+n before the surplus degraded under the physical law of disorder?

    2. ckimball

      “Why do they make it so complicated?”

      They have forgotten about essence and lost themselves to a different strata of
      reality. The possibility of the art of poetry and music to take us beyond the stuck places to encompass a more whole perspective is what you have given
      me this morning. Thank you. I vote for Bernie Sanders and you for President.

    3. Synoia

      Evidently the author of this post believes 40-45% of the labor force are ““discharged jailbirds and vagabonds to pickpockets, tricksters, pimps, porters, tinkers”.

      It is an Australian study, so that assessment of its society could be true. Or England in the 1890s.

    4. S M Tenneshaw

      Clarence Henry expressed it best:

      Well, I got a voice
      And I love to sing
      I can sing like a bird
      And I can sing like a frog
      I’m a lonely boy
      I ain’t got a home

  4. oho

    The past 200 years has been very kind to Western civilization—-in the sense that America, Canada, Australia (w/a bit of South America) provided a big fertile, tabula rosa (sorry natives) safety valve for Europe and helped mitigate the policy errors of European elites.

    19th century Europe was chaotic enough as is—with net outwards migration.

    The world is full-up with a tone deaf 0.5% elite.

    Ideally the world will stumble on through the rest of my life. The US will be ok (thank you two oceans), but it’s not inconceivable that some European nations pull a very hard political right turn.

  5. tommystrange

    Love challenging articles like this on NC, but one big disagreement. Almost all of the still read anarchists were skilled and or even could be called middle class respective to their time periods. The rank and file whether of the CNT, the original syndicalists in France, Italy and the IWW here, the hundreds of thousands that Lenin and Trotsky had to kill, were made up of a fairly even mix of professionals, and skilled laborers and (in Spain and Russia) peasants. Emma Goldman was dirt poor, but became a nurse, and was supported by her writing and speeches the majority of her live. Malatesta got a trust fund from his father, which of course he quickly ran through funding papers etc. Kropotkin was Russian royalty. Rocker was a typographer, poor, but still able to ‘tithe’ himself to fund the papers he edited and wrote for in the UK before WW1. Reclus graduated from two universities. Carlo Tresca, newspaper editor. Landauer’s father was a shop owner that sent him to university. Ricardo Flores Magnon, of the still most respected down south (places like Oaxaca still name assemblies after him), graduated from law school.
    By the 2nd international the euro libertarians left did not use the term ‘lumpen’ for a reason. As Emma Goldman said, “people that work in mines 60 hours a week, will not lead the revolution”. The term “social revolution” started over 130 years specifically to counter the ‘vanguard of the proletariat’. No anarchists ever thought a real free society could arise from a minority acting in rage. A social revolution comes from free association, bottom up democracy of the dirt poor to the middle class.
    As Chomsky has been saying since the 1960’s, only in the USA, and the UK, do you find ‘leftists’ mixing up the vast anarchist/libertarian left with leninist and maoist catechisms, and vulgar class-ist terms. The anarchists of spain were singular responsible for drastically raising the literacy rate in Spain, spreading theater, fighting worker on worker crime and grifting, for 20 years before 1936. There is a Lenin quote very telling, that I can’t find now, but goes something like this, ” anarchism is the just the bourgeoisie playing at revolution”. His problem with us, of course, is that his top down theories of revolution, could only be instituted if the intellectual class of libertarians were wiped out. I don’t think it’s much of a leap to say, the only people that use the lumpen term are academic liberals, or vanguard marxists. Council communists and lib. communists don’t use it. There is no hard line strafication between any ‘segment’ of the working class, as we see today.

    1. Alice X

      If you have not read it, you might find of interest the piece by Maurice Brinton: here. As for the quote by Lenin there is something akin to it in the here. The CNT in Catalonia was very effective but made the mistake of not seizing state power. That was by philosophy and their very definition. The precise type of failure that Lenin would have predicted in his work just referenced.

    2. reslez

      It’s important to distinguish the word ‘libertarian’. In historical contexts it meant something much closer to anarchism. Today it’s been completely stolen by corporatists (whether they admit it or not, that is what they are).

  6. flora

    One of the big political shocks on the horizon is depletion of the worlds major aquifers upon which 30% of the world depends for drinking water and agriculture: the US midwest Ogalla and California Central Valley, China’s North China Plain, India’s Ganges River Basin and Indus Basin. These aquifers are being pumped to depletion. In the 1980’s and 90’s Saudi Arabia pumped the huge Arabian aquifer to grow grain and became a major grain exporter for a short time. By the end of the 90’s the aquifer was played out. Then food (grain) prices started to rise.

    1. flora

      adding: it’s always poor and marginalized who feel the shocks first. The options then are migration (legal or illegal, and usually by the young) and/or political instability.

      1. ambrit

        The two, migration and political instability go together. Migration can ‘export’ political instability. Often, as in the American south today, migration enhances political instability through depressing living standards for the previous “lower classes.”

  7. digi_owl

    The annoying part about that segment of society is that they will more often than not vote against their own interests. This because they seem wholly enamored by populist right wing rhetoric, as they identify themselves as independent business people rather than indentured servants.

    1. Murph

      Yes, it’s absolutely incredible how successful neoliberalism has been at convincing average people that they have more in common with Jamie Dimon than their own homeless second cousin.

      1. FluffytheObeseCat

        Neoliberal propaganda has succeeded in convincing a vast swath of regular men they have more in common with Jamie Dimon than with their own couch-surfing brother. Screw “second cousin”. The unChristian falsehoods lapped up by the “successful” members of my extended family (in deep flyover country) are far more effective than that.

      2. animalogic

        They have, and do, divert our attention from our own interests by hyping (and linking THEIR interests) to any number of relatively or essentially trivial cultural matters.
        Republicans were past masters of subtly linking “Liberal” with Democratic Party, with Hippy, anti-American, atheist, black, pot smoking, welfare dependant, etc etc persons….

    2. Dark Matters

      The great effort expended to box in their/our thinking has paid off:

      Being conscious of class would be class warfare and that would be Communist!

      Familiar line in the propaganda song.

    3. reslez

      You know what I realized? It’s easy to kill n***s, man. It’s easy to kill n***s cuz they look like you, smell like you, shit, they even live on your same motherf***in’ block. The only problem we have is killing the people who don’t look like us, who oppress us. If you want to impress me, shoot the motherf***a who turned off my lights. If you wanna impress me, shoot somebody who’s making my bills high all of the time. It’s easy for cats to kill other cats…It’s just the dogs they’ve got trouble with.”

      — Wyclef Jean

    4. Knute Rife

      They’re all just temporarily embarassed millionaires. Gotta cling to that dream.

  8. Synoia

    Markets did not react at all to the French atrocity. They can’t. They do not know how to discount political risk, have virtually no way to hedge it, and they either won’t or can’t countenance asymmetric risk (that is “Black Swans).

    I don’t know what “asymmetrical risk” means, but I do understand Chaos. (Aka “Acts of God). No one knows how to hedge “acts of god.”

    By definition Unknowable.

    Legal Dictionary:

    An event that directly and exclusively results from the occurrence of natural causes that could not have been prevented by the exercise of foresight or caution; an inevitable accident.

    a direct, sudden, and irresistible action of natural forces such as could not reasonably have been foreseen or prevented

    aka: Chaotic Event.

    We live in a Chaotic system, where our only possible response is to react. The underlying moral question is: Can we react for the greater good?

    Or are our reactions, and those of our leaders, also chaotic and any good is random? (lucky for some).

    1. Tim

      I focused on that quote too. Brexit was much the same. There was an initial freakout by liquid investors, but the long termers stepped in and said “so what, we can’t price political uncertainty” and bought everything up as a value opportunity.

      It also shows that 0% interest rates drive people to discount risk vs realizing the opportunity cost of being out of the market earning nothing.

      For all the scenarios presented Gold souinds like a very good option. I it has always been presented as a investment against inflation, but it is most correlated to an investment against political risk.

      1. sunny129

        ‘It also shows that 0% interest rates drive people to discount risk vs realizing the opportunity cost of being out of the market earning nothing.’

        This sound credible as long as coordinated efforts of CBers will be there to ‘infinity’ with ZRP, NRP and the Heli cop miracle! Negative short term effects Brexit were tempered by CBers but will be challenging, here afterwards!

        Mkts have discounted everything except Monetary infusion of any kind especially after 2014!

  9. dk


    A species suffers the inevitable consequences of its own overpopulation. Some members, steadfast in their self-righteous denial (of fact and role), blame other classes and consider… the investment implications?

    What a clown show. Not really my kind of entertainment but there’s no accounting for tastes.

    This is what happens when one fetishizes one’s own life to such a ridiculous extent.

  10. Roland

    While I am pleased to find Marxist terminology back in use, nevertheless I object to the Macquarie analyst’s (and perhaps also Llewellyn-Smith’s?) use of the term lumpenproletariat.

    Unemployment or erratic employment, by themselves, don’t make you a lumpenprole. An unemployed prole is just a prole who can’t find work. The prole is able to produce, the prole wants to produce, but Capital won’t allow him or her produce. How can unemployment, then, change the proletarian’s relationship to the control of the means of production? Because that is what defines which class you’re in.

    Here’s the breakdown:

    Bourgeois: controls capital, doesn’t need to work.

    Petty Bourgeois: controls capital, but does need to work.

    Proletariat: needs to work, no capital.

    Lumpenproletariat: no capital, but doesn’t work, either.

    How do lumpenproles live, then? Answer: by crime, by charity, or in some cases, by what you might call, “the miscellaneous production of the Bohemian demimonde.” The quote from Marx in the article gives many examples. The number of people in any society who can be supported in such fashion can never be very large. The lumpenproletariat is almost always a small demographic slice, one or two percent of the population.

    The lumpenproletariat interfaces with all other classes. e.g. One can go directly from bourgeois to lumpenprole without passing through any intervening social stage. Thus the lumpenproletariat is a more variegated class than most others. This is part of their cultural interest. For example, the number of artistic, literary, or cinematic works which feature the lives of the lumpenproletariat is quite out of proportion to the size of that class. Indeed the lumpenproles get celebration which is usually reserved for members of the dominant classes. As a proletarian, I don’t grudge the lumpenproles the attention they get, for I too find them an interesting class.

    The only class characteristics, therefore, that the lumpenproletarian has in common with the proletarian, is that both prole and lumpenprole are usually poor, and without political power.

    It’s almost a slander to suggest that the types of people who have suffered the greatest loss under globalization are now lumpenproletariat. It’s just another way that the bourgeoisie try to dismiss the proletariat as a social and political reality.

    For example, people today talk about “crisis of the [so-called] middle class,” or they talk about “precariat,” and now, the Macquarie author now misapplies the term lumpenproletariat. People seem to do everything they possibly can to avoid the subject of the largest element in the society of the developed world: the Proletariat proper, i.e. those who live by selling their labour to capital.

    The relations between the proletariat and lumpenproletariat are often quite tense. The two classes, while not necessarily class enemies, are seldom class-allies. For example, the bourgeoisie sometimes recruit their “enforcers” from among the lumpenproletariat, and use them against the proletariat.

    Because the lumpenproletariat does not, as a class, desire to control means of production, they are seldom a revolutionary class in their own right, serving instead as occasional adjuncts to one protagonist or another in a class war.

    To illustrate class struggles involving proles and lumpenproles, and the sorts of class alliances that can occur in history, consider the following interpretation of the right-wing “tough on crime” agenda. I would argue that the “tough on crime” agenda was a successful effort by right wing politicians to form a class alliance between the petty bourgeoisie and the proletariat, against the lumpenproletariat.

    Both the wage-worker and the small businessperson are often exasperated by the random depredations perpetrated by the lumpenprole. You put up with crap all day from the bourgeoisie, and then get home to find some lousy lumpenprole has stolen from you, too.

    While proletarian losses at the hands of the lumpenproles are trifling compared to the exactions made by the bourgeoisie, it’s case of insult on top of injury.

    While the proletariat usually find themselves alone and weak in any confrontation against the bourgeoisie, the proletariat could find a class ally to help them attack the lumpenproles. Right-wing politicians in the developed world were effective in gaining support through fostering a limited class alliance between proletariat and petty bourgeoisie. It’s a minor but interesting example in the recent annals of class warfare..

  11. Adam Stachura

    Higher unemployment. If output falls, firms will produce less goods and therefore will demand less workers. Improvement in the current account. Higher rates will reduce spending on imports and the lower inflation will help improve the competitiveness of exports.

    1. Yves Smith Post author

      The last part of your argument is incorrect. When the pound has fallen in value, which has a much more direct impact on export pricing, the UK didn’t show an improvement. Basically, the UK doesn’t export anything much besides financial services to benefit, as in the main reason for exporters to be located in the UK is for easier labor rules + access to the EU. So they’ll lose exports as those exporters (mainly in the transport sector) migrate production out of the UK.

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