Risk & Opportunity

A quarterly political and economic newsletter published by Michael Cuddehe

Q2 '16

2016 Election Issue—The Politics of Destruction

As the 2016 presidential election mercifully draws to a close, the polls indicate that Hillary Clinton will handily defeat Donald Trump. There is great uncertainty, however, regarding control of Congress. The House is expected to remain in Republican hands, but the Senate is up for grabs. At the eleventh hour, an announcement by FBI Director Richard Comey that the Clinton emails are under review again has created turmoil, raising the specter of a Brexit-like shocker at the end.

Regardless of the final result, it will take quite some time for the American people to recover from the year-long outpouring of campaign venom and sleaze dumped on us daily by our corporate media. If you are not feeling slimed, you just haven’t been paying attention. Dean Baquet, Executive Editor of the New York Times, recently called out CNN and Fox News for their egregious coverage of the campaign.

Internationally, the U.S. brand has been badly tarnished. How can any developing nation be convinced that American style democracy is the best path for them, when our system has put on a campaign more suited to Honduras or The Democratic Republic of the Congo than to a country whose president is considered the leader of the free world?

The Republican Party has stood by Donald Trump even as he has taken the campaign into the sewer, with a shameful display of non-stop lies, nonsense and bigotry, while claiming the system is “rigged” against him, and threatening violence against opponents.

As President Obama recently noted, “This didn’t start with Trump.” Republicans have been cultivating the lunatic fringe for decades, with their anti-science, fact-free conspiracy theories and scorched earth politics—all spin all the time—undermining our (Democrat) presidents, our government, and our democratic traditions, by sowing division, mistrust and hatred.

The Trump phenomenon is like a malignant tumor that has burst open and is now devouring its host.

As a result, the polarization of the country has reached levels not seen since the Civil War. We now have two Americas; they don’t talk to each other and don’t trust each other. They don’t understand each other’s core values and desires, and don’t care to learn. David Brooks recently posted an excellent summary of the damage done to our civic institutions and public morality in this piece entitled, “How to Repair Moral Capital.

As the embarrassing spectacle draws to an end, it’s useful to take a perspective from outside our borders. The Economist says it all in “Debasing American Democracy.”

The Silver Lining

The meltdown in the Republican Party may well be the best thing to happen for America in decades. Republicans have been practicing the politics of division and destruction since Ronald Reagan succeeded in selling “voodoo economics” to America.

This could be the opportunity for honorable Republicans, people like Michael Bloomberg and Mitt Romney, to take control of the party, or start a new one, and re-dedicate themselves to traditional Republican values. We need the balance provided by those values.

Democrats also need to pay heed. The struggle by down-ballot Democrats to capitalize on the disaster at the top of the Republican ticket tells us that the American people are just as weary of the Democrats as they are of the Republicans, if not more so.

Economy

Economic recovery following the 2008 financial panic has been anemic, but it has been steady. The structural headwinds of debt and technology-driven unemployment have been substantial, and they are not going to go away.

Taxes are also likely to increase, no matter who wins the election or what they promise in the campaign. The question is who will pay, the general public or the upper tier? Under normal circumstances, rising taxes would produce a drag on growth, and might even produce capital flight.

As far as rising taxes creating a drag on growth, universal overcapacity, low yields, and global instability have made investors so risk-averse that they already don’t want to invest in much of anything other than non-productive rent-seeking opportunities. A modest loss of private sector capital to taxes might actually produce more growth than would leaving it where it is. If that money were invested in education and infrastructure, it would yield growth and long term returns for everyone.

Regarding capital flight—where would capital go? Capital is flowing into the U.S. from around the world. Financial and geopolitical instability elsewhere make it likely that the U.S. will continue to be the safe haven for years to come.

Markets

Markets across the board are in limbo at least until after the election, and maybe even until the 1st or 2nd quarter of 2017. The stock market has been in a broad trading range for two years, creeping ever so gradually higher on continued Fed support, with traders aggressively buying the occasional correction. The refusal of the market to go down for so long, despite persistent pessimism among traders, raises the possibility of a melt up rather than a crash.

Deflation has been the dominant macro force since 2008, but inflation has been picking up a bit lately, giving some buoyancy to commodities, but threatening big losses in bonds. Given the massive pile of kindling the Fed has created, inflation could erupt into a conflagration at any time. Hard assets should be on everyone’s menu. Gold has entered into a buy zone, and an important cycle low.

Big volatility will be coming at some point, but when? No-one knows. The biggest risk is in bonds of any kind, especially sovereign and high yield, and the most upside potential is in physical assets and stocks, although the ride could be “gut wrenching” as they say in the business. One should be cautious with the banks. When the day of reckoning comes, the banks will probably be pressured into a Cyprus style bail-in. Depositors will get the grain elevator treatment—x percent of their deposits converted to 40 year Government Reconstruction Bonds or some such fancy name for confiscation.

Geopolitics

The global temperature keeps rising. Syria keeps going from bad to worse. North Korea is threatening nuclear holocaust against South Korea, and Russia is menacing Eastern Europe. The whole of Europe is in turmoil over immigrant disruption, the meltdown of Deutsche Bank, the rise of right wing parties, Brexit and the prospect of upcoming votes on EU in Greece, Italy, Spain, and probably France.

War cycles point to continued conflicts until at least 2020. Tensions with Russia in Syria and Eastern Europe, and China in the South China Sea could escalate into outright hostilities at any time. The Philippines President, Rodrigo Duterte, has been unleashing profanity laden tirades against the U.S, and has recently announced alliance with China, declaring “The U.S. has lost,” and demanding that U.S. troops get out of the Philippines in 2 years. The balance of global power is shifting rapidly. It is a dangerous time.

Summary

Our next president is going to have her/his hands full from day one. On every front, financial and political, domestic and global, instability is the status quo. Donald Trump is not going to go quietly into the night, and Republicans are promising to block any nominations to the Supreme Court If Hillary wins the White House and they retain the Senate. Relief from the stress of the election could be brief, even nonexistent.

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