In January, I was bullish on the U.S. economy and the state of the markets.
I hadn’t worried much about the base of valuations – but I’d remained concerned as always about the fact that the Federal Reserve has been the primary driver of the market for the better part of the decade. Every time the market sneezed, the Fed would offer a bevy of bond purchases and stimulus. The Fed has cried wolf over and over again.
But in February, my momentum models went negative. Wall Street ignored COVID-19 all January, while my Twitter Feed was full of prominent warnings from nurses in Wuhan. It was in January that I started advising readers to sell stocks that had ripped higher in the previous months. Still, markets continued to rally – until the selling pressure started around the third week of February.
We then witnessed the sharpest downturn in the history of the markets. Volatility hedge funds imploded. Forced selling pounded pension funds. And 401Ks became 201Ks again.
Then came the inevitable in March. Hedge fund managers and insiders – well aware of a pending bailout from Congress – swooped in and picked up shares on the cheap. The result is likely the single largest transfer of wealth from the government to the mega-rich in the history of the markets.
Markets ripped higher again from March to June. A lot of people were too fearful to reenter the market. In May, when I was being prepped for hernia surgery, my doctor was more concerned about the state of the markets (Did he miss the rally? Would the market fall again?) than he was about the intestine breaching my abdomen muscles.
There are many scenarios and risks traveling at warp speed through the hallways of my mind between 11PM and 7AM when I’m trying to sleep. But I want to be clear about something before we dive into the intersection between finance, politics, and other events of the day.
I don’t have much of a dog in the fight. I’ve spent too many years taking lip from politicians and mobs of all political stripes. I am not much for allegiance, as history is rife with betrayal. I’ve long operated under the banner of James Joyce’s famous quote in A Portrait of the Artist as a Young Man:
“I will tell you what I will do and what I will not do. I will not serve that in which I no longer believe, whether it calls itself my home, my fatherland, or my church: and I will try to express myself in some mode of life or art as freely as I can and as wholly as I can, using for my defense the only arms I allow myself to use — silence, exile, and cunning.”
For now, I only mean to point the camera and assess the risks.
Negative Momentum Kicks In
Last week, the models went negative again for the first time since March.
And now, with the Fed pushing into the unprecedented arena of individual corporate bonds to offer any available buying pressure – the question is: So… now what?
First, the American Bolsheviks are burning the cities and threatening the revolution. In Seattle, they took over a few blocks and tried to set up their own government.
As an older Millennial, I’ve lived through three financial crises in 20 years, but I’m still very adamant about free market trade. Yes, there is a dramatic problem with just 1% of the nation owning as much as the middle class. I don’t blame capitalism. I’m blaming corporatism, the Federal Reserve’s socialism for the capital class, and the rising charge of digital feudalism.
Eliminating free market economics with whatever blend of socialism has been pitched isn’t going to provide an environment ripe for investments or stability. It will only lead to greater picking and choosing by government officials on who gets what slice of the bread and who receives the crumbs.
Second, the market has not priced in the likelihood that Joe Biden is going to become the 46th President of the United States.
With Donald Trump’s support collapsing, it’s clear that this race is now Biden’s to lose. His selection of a Vice Presidential candidate is likely the most important political decision of the last 50 years. And while Biden has largely committed to the race and gender of his pick, the economic leaning of that candidate could potentially derail support at either the far left or the center for the ticket.
A Biden victory is less important than control of the Senate, which now looks more likely to fall in Liberal hands as well. This would likely ensure the roll back of the Trump tax cuts, a likely series of economic and social justice reforms, and the expansion of Federal powers across society after left-leaning lawyers spent four years on the sidelines seething.
This morning Ross Douthat at the New York Times wrote that we are likely going to see the liberal shift anticipated by 2030 hit us by as soon as 2022. I agree. This country is going to move quickly to the left over the next two years, and I expect that the House of Representatives will become incredibly progressive with a staunch roster of self-righteous Millennials who believe they have all of the solutions to all of the problems.
We can use history and common sense to determine if they are right or not, but my first expectation is that the ongoing use of centralized planning and top-down solutions will become a breeding ground for incompetence, corruption, and moral posturing on a level this nation has never seen.
Third, COVID-19 has pushed this nation back to the brink. The Trump administration is not completely to blame for the outbreak and second wave, but they didn’t help the situation. You can’t have your Vice President speaking at Mega-churches where no one is wearing a mask. It’s simply not going to work. My home state of Florida is now engulfed in this disease, and there are people still not wearing masks in public because they mistake public health orders for decrees issued by the German government in 1943.
Everything will be Trump’s fault this year, according to the media narrative. And like the Obama Administration, the next President will enjoy the media’s coverage for four to eight years that anything wrong will still be the fault of the previous President. This sort of narrative makes everything in society look like a nail according to the people holding the hammer.
Four, with or without Trump, the United States is facing a significant slide in esteem and economic power in the global sphere. Right now, the relationship between the United States and China is strained. The question is how tough a Biden administration would be on the Chinese Communist Party. Don’t expect too much criticism.
China right now is engaged in dramatic exploitation of foreign nations in Africa and the Middle East with its debt-financing programs. It is engaged in a form of 21st century economic colonialism that will drain resources from Africa over the next few decades, and few people are paying attention. The United States will likely turn another blind eye to China, which could benefit trade, but it will leave its power waning as Xi Jinping looks to fill the vacuum created by America’s fleeting power.
Opportunity from the Chaos
Now, all of this sounds very pessimistic…
It’s going to be a bumpy ride, and there will be times that we just want to get off and vanish into the Caribbean Islands.
The question moving forward really centers around what the United States does economically in the months ahead. The U.S. dollar continues to lose its prominence around the globe. This could potentially benefit domestic manufacturing. We could also see the U.S. start shifting its economic and military focus away from other pockets of the world and spin back to enhancing and rebuilding the economy.
There are calls to rebuild the U.S. economy from the ground up, a sharp push to build the products that America stopped building in the 1960s and 1970s.
An America 2.0 has been pressed as a way to ensure we become self-sufficient and no longer rely on foreign countries for vital products. This represents a multi-trillion-dollar opportunity that will benefit investors who take a more pragmatic, conservative approach to investing in places where the government can’t stifle innovation.
That’s why we’re going to talk a lot about real estate, private equity investment, and other ways to make money off this emerging trend.