Blain’s Morning Porridge – Nov 7th: US Mid-Terms the big issue this week – and they don’t bode well for a bounce in stocks or bonds.
“Activist groups pressuring advertisers are trying to destroy free speech in America!”
This morning: US Mid-Terms will dominate the news this week. Gridlocked US politics might be good in terms of zero legislative surprises, but polarisation will punish stocks and diminish the US over the long-term.
It’s going to be an interesting week. We’ve got everything! Italians wanting to surrender to Putin even before the shooting starts (demos in Rome demanding Ukraine accepts a Moscow peace). We’ve got the farce that is Twitter, where Musk is now trying to rehire staff he sacked in the middle of the night, while threatening advertisers who pulled ads (because of the uncertainty around what the platform will become) with promises of revenge for compromising free-speech! And, the big question for global growth: is China really about to reopen and unwind strict Covid controls, potentially mitigating the coming global recession?
But, the big, big issue will be the US Midterms, which will undoubtedly pour petrol onto the conflagration of polarisation consuming America.
While the mid-terms are being bitterly fought on political issues like Crime vs Abortion, the real issues are economic. Rising rates, a slowing housing market, galloping inflation and the threat of a global slowdown provide a depressing backdrop. However, the reality is US economy could ride out of the coming recession strongly. It is growing and performing well from its internal energy and oil, financial and commercial strength.
In any normal world we’d be saying: “in God, the Dollar, and Treasuries, we Trust.” Today? Not so much.
Around the globe faith in the Pax-American Negotium Dominatum is breaking down. Support for the US is weakening as the whole regions like the Gulf position themselves in opposition – feeling enabled go do so by the perceived instability of US government. These were once US client states – when these start to fall away, look for empires to fall. Meanwhile, dollar strength is causing untold economic misery around EM nations.
Far from the US leading the world in growth and commerce – as it undoubtedly still does – the perspective the world now holds of the domestic US “dream” has turned dystopian, a nation where the underlying threat of political violence goes denied, dysfunctional parties, internal division, and debate reduced to furious “whataboutism” – including the broad acceptance of the Big Lie by the right, who explode in righteous indignation when asked by citing how the left apparently hijacked polls in the past.
The broad expectation is a strong showing by the Republicans will trigger Trump to announce he is running for the Presidency in 2024. It might, or might not, crystalise an outbreak of common sense in both parties, as a realisation the international cost of another Trump presidency could unravel the USA’s significant currency and trade advantages and global position, while also unravelling the NATO alliance. In order to avoid an internal Ron DeSantis vs Trump Republican civil war – the Reds might just let Trump stand. What’s the odds on DeSantis as his running mate?
As I’ve learnt many times – don’t date criticise ‘Merica by taking a stance on their politics, lest you are happy to face a string of foul abuse.
From the other side of the pond, we are stunned by the deflection and delusion that now passes for politics in the US – and that’s from a nation that did it all within a single party in 3 years: May, Boris, Truss, Sunak. There are lessons from the UK’s current travails. When political stability collapses – it can be utter and complete…
A sudden collapse in the US’ Virtuous Sovereign Trinity; whereby the weakness in central government and the risk of further credibility outages causes the dollar to crash as bond yields soar, triggering market mayhem, seems terribly unlikely… but when markets turn chaotic, they can turn chaotic suddenly.
For many global investors, it’s increasingly difficult to perceive how the US, and thus the markets, move forward. But, they inevitably will… perhaps in surprising ways. What is the likely outlook for the US economy.
US political gridlock between the Democrat Presidency and Republican Congress looks nailed on. Perversely, the market apparently likes that. 2 years of nothing to worry about in terms of fixing the economy. That’s a good thing – according to US investors interviewed by Bloomberg. Big Business will be happy on the basis there won’t be any tax or investment legislation that might shake up their money-making opportunities.
Meanwhile, the electorate will remain increasingly divided, while the economic reality of a disempowered government pulling back spending as long-term inflation continues is likely to impact corporate revenues across the whole economy. The US govt. sort of works on the basis of pork-barrelling agreement on budgets in returns for spending favours – that looks increasingly unlikely under a new pack of MAGA wielding Republican congressmen and senators. Even “reconciliation” – the arcane process where the President can force through spending by getting votes against to count as votes for (it’s complex) won’t work.
In effect, the US is going to pursue Austerity economics by default – which is never going to boost jobs and earnings in a stressed economy. And, expect the Republicans to spice it up with a series of manufactured crises.
I will never forget being in San Francisco during one of the period debt ceiling/government shutdowns in the late 20-Teens. I’d hopped aboard the trolley bus, and was stuck by well dressed folk sitting there with apparently all their possessions. I got chatting – the guy was a government employee. He hadn’t got his salary cheque that month, couldn’t pay his rent, and had been slung out by the landlord. He was looking for somewhere to stay. I raised it in a Porridge back then – and was told by US readers it was the guys’ own fault… why was he working for Government when he could do more to help himself get a proper job.. At Twitter perhaps?
In a gridlocked US we can look forward to the US consuming itself with Republican show-trials of Dr Anthony Fauci, Hunter Biden, et al, while defunding the FBI, CIA and IRS for their heinous crimes of attacking the rightful President Trump. We can expect more games and brinkmanship over the Debt Ceiling and attempts to unravel Biden’s Climate Action subsidies.
Big deal. Let the American’s have their internal bickering.
The real issue is the value of US companies. With inflation looking to remain high, the Fed still raising interest rates, ineffective government and spending cuts, plus the likelihood of a global recession – on what possible grounds would anyone expect US corporate earnings to increase?
More likely is rising wage demands fuelling inflation further, the US being negatively impacted by global recession, and rising tension on energy prices, and rising corporate defaults as “Debt-Zombies” collapse on higher debt-service costs. In such an environment its difficult to see why one would expect stocks to rally from here..
Five Things to make a bad day worse…
Thunderer Donald Trump pours scorn on his rival for Republican crown
FT US Midterms: Republicans double down on Trumpist candidates
BBerg Wall Street Hopes History Repeats With a Post-Election Comeback
WSJ After Quarter Billion Dollars, Walker-Warnock Georgia Senate Race Is a Toss-Up
The Atlantic The Climate Economy Is About to Explode
Out of time and back to the day job.
Strategist – Shard Capital
“In such an environment its difficult to see why one would expect stocks to rally from here …”
It’s only one possible outcome, however one analyst has suggested –
“A cautionary observation is that when the P/E10 has fallen from the top to the second quintile, it has eventually declined to the lowest quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 PRICE DECLINE BELOW 1050.” (Capitals added for emphasis). https://www.advisorperspectives.com/dshort/updates/2022/11/03/p-e10-october-2022-update
Good Day Bill,
You are spot on as to the atmosphere in the good old USofA. It is foul, fetid and filled with furious ferals.
One aspect of the situation that was omitted is the fixation of the Democrats on minutia such as personal pronouns, trigger warnings and the myriad options for one’s gender identity. The insanity has spread to the White House where President Joe Biden invited Dylan Mulvaney, a man who recently started identifying as a little girl, to sit with him for an interview at the last Thursday afternoon.
When asked by Mulvaney if “conservative” states should have the right to pass laws limiting access to gender reassignment treatments, Mr Biden said: “I don’t think any state or anybody should have the right to do that. As a moral question and as a legal question, I just think it’s wrong.”
It is an open secret that Biden is in his dotage, what is unfathomable is why his staff cannot prevent him from embarrassing himself, his party and the country. Whist the voters are worried about crime, inflation and border security, the Democrats are blathering about the demise of democracy. Democracy has already died on university campuses and in the mass media where any dissent is met with vitriol and “cancellation”.
Tomorrow will see a tsunami of Republican votes turfing out Democrats in once safe venues. The returns in Big Blue New York will be an early indication, with the Democratic Governor and several congressmen being defenestrated.
As for the reaction of the markets…God only knows.
The US is going to kill the goose that laid the golden egg, political stability (and fairness and justice). People will soon find out how little their political policies (right or left) affected the economy but how much a lack of political compromise affects an economy (since the political process loses its self-regulating features when there is no compromise).
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