In Louisiana there was a very high stakes governor race that concluded with the incumbent Democrat prevailing. The issue I’m going to bring to light has nothing to do with any “Left vs Right” argument or ideology. What I want to argue are the implications that this latest gubernatorial election has in respect to the capital markets, along with any possible trade dealings going forward. In other words: Baton Rouge may have just tilted the presumed world off its current axis.
Again, to be clear, this has nothing to do with what side of the aisle one stands, whether or not one likes the current president etc., etc. What I am speaking directly to are possible implications and consequences that now need to be calculated, for those possible consequences directly impact everything. And by that I mean just that: everything.
As we sit here today the major indexes of the U.S. stock market are residing at levels never before seen in the history of said markets. It all sounds fantastic until one delves a bit deeper into the details (which the mainstream business/financial media will not).
Everyday it seems hard to evade another talking head or buzzer-banger tout how well the markets are performing. “We’re up some 20% for the year!” is just one.
Is it correct?
Factually, yes. However, that’s because, at around this same time last year, the markets were spiraling toward the abyss shaving off some 20% from that years prior high.
How did the markets arrest and subsequently reverse from such a swift plunge? Hint: The Federal Reserve signaled, then implemented, a complete and utter reversal of all prior proclamations. i.e., They went from raising rates, to cutting rates. From shrinking their balance sheet to, once again, growing it. The result?
Using the S&P 500™ as the example, the markets currently stand only 180 points higher than they were in October of last year. That’s a bit under 6% (e.g. 3120 vs 2940). Hardly does this equate for the sheer sycophantic palpitations expressed by nearly every next-in-rotation fund-manger paraded across the financial/business press. But it is, what it is.
The issue that all the above relates to, is that it’s needed as a backdrop to help understand just where we are and where things might be heading in the business economy going forward. Because what got us here, (i.e., as in stock market highs) may not be able to keep it there. For Louisiana truly changes the dynamic for both interpretation, as well as positioning. Here’s why:
The Louisiana gubernatorial race was made out to be some form of signal marker for the national election due in Nov. 2020. Both sides of the aisle vociferously argued to both their constituents, as well as the general public as a whole, that their side needed this win to “set the tone” (as well as ramp up expectations) going into 2020. Even the President threw all his political weight into it trying to make it more of a “national” race of implications.
The problem is, it did just that. And now the results are going to be positioned for where they may matter a whole lot more than just in “The South.” i.e., The global stock markets. For this now has global implications.
Currently two of the three front-runners of the Democratic Party (Warren, Sanders) are both arguing and articulating how they will bring about communism and socialism to the United States. As crazy (or terrifying for those still sane) as that may sound, what’s even more nuts about such an absurdity, is they are being received with standing ovations and calls to action from a growing number of followers. Meaning: if one of them wins – then what? Hint: Money and stock markets will show it, well in advance.
Louisiana may push that move into the now.
Again, regardless of whether or not this recent election solidifies the prospect for one party or the other is not relevant to what’s at hand. This is about what has to be calculated and positioned for, now.
The present summation when looking at the latest results are that the Democrats are still able to win mighty contested (and funded) high office. They now have two in a very public “win” column. This solidifies the much anticipated pre-signaling for money and markets. i.e., That the President is vulnerable, very vulnerable – and that means a candidate running on “Free everything to everybody via taxing the rich into oblivion!” now has a more than 50/50 shot at winning.
Louisiana just made that calculation far more important.
Does this mean the President is doomed? Far from it, and that’s not what I’m arguing here.
The Louisiana election may be just what these type of races always are: local. And the President could go on and win in a Reaganesque styled landslide. But (and it’s a very big but) that’s not how money (especially stock market money and wealth) and businesses work. They have to plan on the possibility of the now. And that “now” is the possibility of a Warren or Sanders presidency.
To repeat, it’s now moved from a possibility calculation – to a plausibility one. And that single move and calculation has implications for everything. Again, emphasis on everything.
One of the current myths still held closely by much of the general public is that “long term investors” is a term that signifies “long” as something dealing in years if not a decade or more.
Buying for the “long term” or “investing” once meant meant one bought and held for years. That is no longer the case, for today most indexes are nothing more than trading vehicles rife with speculation where the term “long” now equates to weeks or months. And no, that is not an overstatement. Four months is now the “long term” average. The reason? Rhymes with “Central Banks.”
Currently the entirety of the “markets” (yes, it’s now so bad that markets needs to be in quotes) are nothing but one big front-running exercise powered by central bank largess. Without it? Hint: Pull out your year-end statement of your 401K or IRA balance ending 2018 for clues.
The reason this is important for context, is that the latest 180 point surge into “black-sky” territory is that term “central bank largess.” Because over the last couple of months the Federal Reserve has pumped over a quarter of $Trillion (e.g., $250,000,000,000,000.00 plus) in repo-operations and what they will not call “QE4” (even though it is).
Remember: it was just this time last year this same central bank was arguing why rate increases were a good thing, along with why reducing their balance sheet would be the equivalent of “watching paint dry” so much so that the term “on autopilot” was used as a descriptor for the process. All the while reminding everyone that there wasn’t the possibility of another financial crisis “in our lifetimes.” Even though it’s been Crisis-R-U.S. ever since.
Again, if you think that’s hyperbole? May I ask you to reread the paragraph above containing all those zeroes.
So now that there’s two very distinct representations (LA and KY governorship outcomes) for the plausibility of a socialist and/or communist bent winning the presidential election (whether it’s far fetched or not). Money and markets will begin to move toward the channels that it believes offers the best protection.
The issue with that is what that “protection” may mean, as in, out of the markets and straight into cash.
If this happens (and the faster it does, the worse it bodes) the markets could see itself in a sudden panic mode, where all that “fast-money” suddenly runs for the exits.
The other issue is that the Fed has already thrown more money at once into the markets than at any time. Yes, even during the entirety of the Financial Crisis.
Again: currently over $250 Billion in as little as two months. And they still don’t know if this will be enough. It all started at $60 Billion and was told/sold as “nothing to see here, please move along.” Now it’s $60B a month, every month. a $75B one or two day insurance marker, has become a daily “at least” $125B made available every night or the repo-market collapses, and it’s already proved to be not enough being oversubscribed to the tune of $137B.
Why do I say “still don’t know?” Because the end of year tax selling; repositioning; profit taking et cetera, et cetera still has to prove itself out. That happens at any time from now till end of year. And the issue here is the Fed is already “All in” as they say. What happens if that has to now go to “11!” or higher? Hint: November 2018 could become the front and center representation for Christmas past.
Does this mean the above is a certainty? Of course not, no one knows. However, with that said…
The Louisiana outcome changed two very critical calculations going forward. The first:
How does the markets react to the newly revealed political calculus?
Yet the other may have even far greater impending ramifications for the immediate future. And that is:
How does China see it?
Because if they (China) now calculate the winning edge is to no longer negotiate and a more winning position is to just sit back and wait it out for the possibility of a more friendly administration. The implications for a global upheaval of supply lines are not only huge, but quite possibly, immediately so.
Both of these scenarios have to calculated and positioned for now and going forward. The idea that money and markets will wait and see until Nov. of 2020 if wishful thinking at best.
Louisiana just solidified that imperative. And that has implications for all of us. Like them or not.
© 2019 Mark St.Cyr