Below we address a topic on everyone’s mind: The next U.S. President.
Markets vs. The Economy
In particular, we address what the election means for the markets and your portfolios, not the real economy—as they are not the same thing.
Certainly, the choice of the next U.S. President matters to each person for different reasons, and certainly the next U.S. President will impact the real economy, as policies regarding trade, taxes, health care, energy, wages etc. do matter, and each party, red and blue, have different approaches.
This means voters will decide for themselves which policies, personalities and parties they favor, as yes, the office of the President does matter—it does impact the economy.
The less obvious question we address below, however, is do the markets ultimately care about the next U.S. President, or does the Fed have more say over such issues than an Oval Office, be it red or blue?
I think you already know what I think…
Red and Blue—The Big Night Looms for the Next U.S. President
As an openly-divided America approaches an emotionally-charged Presidential election in the backdrop of a headline-dominating COVID crisis and the highly contentious policy reactions thereto, the last thing readers want or need from two Wall Streeter’s is a political opinion.
We agree. And so, we’ll stick to the market’s potential response to the next U.S. President, not our own.
Despite the Fed’s majority powers, politics do impact markets, and we know many of you have very passionate views on who you wish to see as the next U.S. President.
Law school taught me to see two sides to just about anything, including political views. Thus, I’ll support cases for both choices for the purposes of this report. 😉
For Republicans looking for some comfort and last-minute inspiration, the following projections and opinions from Phillip Stutts will offer some solid optimism for a Trump victory.
And for Democrats equally thirsty for some election-night hope and confirmation, the following projections from Matt Grossman will offer equally solid optimism for a Biden victory.
So, there you go, a little 11th-hour inspiration for both sides of the red and blue divide.
OK. Now let’s turn to a topic upon which Tom and I feel a bit more qualified to address and/or speculate—not red and blue, but bulls and bears…
Bulls & Bears—What Happens After Election Night?
As for market reactions to a Trump or Biden victory, this is a dangerous game of guesswork…
We all remember the ubiquitous 2016 projections of a market collapse in the event of a Trump upset over Clinton.
Despite one night of panic on the future’s market, the pundits got it wrong, and a massive Trump rally, rather than correction, followed.
In short, so much for pundit market predictions—including ours…
Given that central banks now determine market direction more than actual supply and demand or free-market price discovery, we feel the long-term melt-up and melt-down dynamics of which we have been warning for years will be the same even if Papa Smurf were the next U.S. President…
In short: these are Fed Markets, not stock markets, and their fate is tied to a central bank, not the next U.S. President.
In the nearer-term, however, the market reaction to a Biden or Trump victory has been the topic of heated bull and bear discussions for months.
The consensus view is that a Biden victory would be negative for equities, as blue leaders are deemed less “accommodative” to favorable corporate tax measures on which stocks rely.
The Fed Is the Market
A recent report from JP Morgan, however, takes a different view, and this is because:
“Central bank liquidity has helped enable a record $1.3 trillion in capital market activity year-to-date ($1.2 trillion debt issuance and $96 billion equity issuance), which has significantly lowered credit risk and allowed equity risk premia to compress in the midst of a recession.”
Translated to simple-speak, JP Morgan is basically just looking to the Fed to keep markets going, not red or blue leadership in the White House.
Ironically, I agree with JPM—in part. That is, I do believe the Fed will continue to determine market direction regardless of who wins on November 3.
What’s misleading, however, is JPM’s word choice, namely the idea that the Fed has “significantly lowered credit risk” by adding another trillion in debt issuance.
Folks, as we discussed here, adding more debt to an historically unprecedented debt bubble doesn’t reduce risk, it merely postpones and fattens it.
Anyway, kudo’s to JPM for their cinematic efforts in at least making the Fed look like a benevolent savior rather than just a desperate experimenter.
After all, bull markets run on a perception of calm, and JPM manages perception extremely well.
At Signals Matter, however, we prefer facts and reality over pundit perception and fantasy pushing.
But that doesn’t mean fantasy (i.e. more debt and more Fed printed dollars—aka “liquidity support”) won’t continue to push dangerous markets dangerously higher after some initial volatility post-election, regardless of who wins.
Toward this end, JPM believes the S&P will hit 3600 by year-end.
This is indeed possible, for all the reasons discussed above (i.e. Fed support), and we are not here to fight the Fed nor the primary-dealer banks (like JPM) it serves in the rigged game between the Eccles Building and Wall Street.
Reality Still Matters
But not fighting the Fed is not the same thing as fully trusting the Fed. As discussed elsewhere, we won’t fight the Fed, but that doesn’t mean we’ll trust it.
We build portfolios around an open premise that the central bank has taken over securities markets, and that central bank-driven markets work wonderfully until they fail historically.
The trillion-dollar question, of course, is: When will they fail?
Sadly, our answer is more honest than any politician of any political color: We don’t know.
In the interim, and when it comes to market-timing, which no one can do, we must embrace some honest measure of uncertainty.
Risk vs. Uncertainty
Uncertainty is real, and we have to accept it. But uncertainty and risk, as we reported long ago, are not the same thing.
That is, uncertainty can’t be measured, but risk can.
That is why we invest with an eye toward risk management rather than speculative uncertainty bets—which are little better than a coin toss of blind hope or blind fear, neither of which are good drivers for long-term investing.
Given that facts can be measured, including the tailwinds of central bank support and the risks of quantifiable asset bubble implosions, we have to objectively measure the tailwinds against the headwinds and then build truly diversified portfolios which anticipate both market sun and market storms.
The sun is easy to see and measure: It’s the Fed.
The storm is equally easy to see and measure: over-bought bond markets (with negative real yields) and over-bought stock markets (with 30+ PE ratios) and a real economy rotting from the bottom up as the Fed sends risk assets to the sky.
But as Icarus reminds, those who fly too close to the sun get burned. The same is true for those who fall too in love with the Fed: They eventually get burned as well.
Using a similar analogy, Bloomberg reporter, Liz Capo McCormick, recently described the Fed as both the “arsonist and fireman.”
That is, the Fed (as “fireman”) has “rescued” markets from many market infernos otherwise caused by the same Fed (as “arsonist”) playing with matches of dangerous rate suppression and an equally dangerous gasoline can of unlimited money creation.
I recently used a different analogy to drive home the same point, namely the Fed has lived and died by the same sword of debt.
In the end, of course, the result is the same: the markets bleed out—or burn down.
Until then, it’s our job to prepare your portfolios for the fire and/or sword without getting burned or cut, while also enjoying the market’s sun while it’s still shining.
Again, we explain in detail how our portfolios achieve this balancing act here.
Risks We Are Tracking with Certainty
Despite the uncertainty as to the expiration date of current Fed fantasy (and hence surreal market inflation), we can track obvious, objective and quantifiable risks that are right before us, just take your pick:
Tons and Tons of Risk vs. One Waning Super Hero
And folks, pushing against all those known and empirically valid risks is one super-hero with a red cape, a blue suit and yellow CB on its chest—i.e. a Central Bank near you.
Printing unlimited fiat dollars to pay for unwanted and unpayable sovereign and corporate debt is an amazing super-power.
We don’t deny this. Not for one second.
Free or artificially low-rate debt is a powerful market force when paid back with counterfeit dollars in a monetary policy environment that boils down to a government loan to itself.
But each of those risks listed above eventually form into a co-centric force with kryptonite-like effect on even the strongest (or most fraudulent) super-hero.
The question for now, of course, is how many of you believe in Super Heroes?
Getting Back to the Presidential Election
Faith in Super Heroes is comforting, as is faith in all fantasies, from MMT to Santa Clause.
Powell is no super hero, nor are Presidential incumbents or Presidential wanna-be’s.
Instead, like economies and markets, Presidents are all mortal and all subject to the natural laws of physics, biology and markets—from George Washington onward.
It’s fine to have preferences, it’s fine to admire one Presidential candidate more than another, or despise one more than the other.
That’s the beauty of Democracy as well as the Enlightenment ideals from whence Democracy was born: The self-evident and inalienable right to make and express your own choices. The right to be passionately involved. And the right to freely voice your opinions and, alas: Vote.
After all, Voltaire, Evelyn Beatrice Hall, Thomas Payne, and Edmund Burke all agreed that, “I may not agree with a word you say, but I’ll defend to my death your right to say it.”
(Lucky for censorship centers like Facebook, Google, Netflix and YouTube that Voltaire, Hall, Payne and Burke are already dead…)
As far as November 3rd, we know that half of you are going to be very upset on November 4th, and we truly understand why, and truly respect your frustrations, be they red or blue.
My view, outside of politics and looking only at markets, is nevertheless partly political, in that it effectively dismisses politics, but for the fact that the Fed (an independent, private bank) is now quite political.
The Fed—A Fourth Branch of the Government?
Unfortunately, the Fed is slowly becoming a fourth and dangerous branch of our Federal government, which our founding fathers never intended it to become.
Thomas Jefferson and Andrew Jackson, whatever you think of them, are both rolling in their graves.
They passionately argued against a Central Bank as an unofficial but all-too-real branch of government and policy.
“The bold efforts the present Central Bank had made to control the government…are but premonitions of the fate that await the American people should they be deluded into the perpetuation of this institution or the establishment of another one like it.”
“The Central Bank is an institution of the most deadly hostility existing against the principles and form of our Constitution.”
My view is thus no secret, nor is it red or blue, and when it comes specifically and only to our markets, boils down to this: Central banks, now more than ever, determine markets, not the next U.S. President.
This bodes very, very badly for our long-term markets and economy—regardless of who is the next U.S. President.
Of course, this is a bit simplistic. Presidents can and do impact perception, confidence, policy and hence markets. But compared to the Fed, I believe the latter is the real force to reckon with.
Right now, the post-COVID outbreak economy, like the pre-COVID the economy, is rotting from within.
Almost all of this rot is due to excessive debt levels encouraged by Fed policy, as our Four-Part Market History series evidences.
So does the near entirety of our book, Rigged to Fail. Read em, and see for yourselves. We aren’t making this stuff up. The Fed is leading us to an historical and dangerous cliff.
The Fed is not a savior, it’s a toxin, and its policies have a direct correlation to the disgraceful disconnect between a broke economy and rising securities market.
In fact, every risk listed above can be attributed to Fed policy.
No leader, including the next U.S. President, red or blue, can solve in one or two presidential terms what decades of poisonous, central bank debt-binging since Greenspan has done to slowly destroy the US economy at the expense of a now completely artificial securities market.
Thus, whomever emerges as the next U.S. President, let’s all accept defeat or victory with the grace of citizens who value our form of government and its three branches.
But let’s also and do our best to keep the Fed from becoming a fourth branch—which is more dangerous to the markets than any candidate, red or blue, whom you favor or disfavor today.
Now, get out there and vote. Your choice matters.
Sincerely, Matt & Tom