The Uncivil Civil War: Economic And Market Implications Of Political Transformation

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Come senators, congressmen
Please heed the call
Don’t stand in the doorway
Don’t block up the hall
For he that gets hurt
Will be he who has stalled
There’s a battle outside
And it is ragin’.
It’ll soon shake your windows
And rattle your walls
For the times they are a-changin’

The Times They Are A-Changin’ – Bob Dylan

America’s populace is politically divided in a way that has not been seen in decades. The growing rift is rapidly changing the landscape in Washington D.C. and has major implications for the nation. Amazingly, as voters from different parties espouse views that are worlds apart, they share a strikingly similar message.

This article considers the juxtaposition of colliding worldviews and the unified message that voters across the political spectrum are sending. While many investors are aware of the political change afoot, it seems that very few have considered how said changes might affect the economy and financial markets. In this article, we share some of our thoughts and encourage you to give the topic more consideration going forward.

Given the importance of the subject, this article will likely be the first of several discussing the intersection of politics and markets.

The Changing Faces in Congress

Speaker of the House Paul Ryan and Congressmen Bob Corker and Jeff Flake are a few of the well-established Republicans not seeking reelection. While each has their reasons, it appears the prospect of losing re-election played a significant role in their decision making. Is this a case of “playing not to lose” as opposed to “playing to win”? Political capital can be delicately converted to monetary capital only if a politician, in or out of office, plays his or her cards wisely.

This is not just a story about Republican discontent. In New York’s Democratic 14th Congressional District primary, Alexandria Ocasio-Cortez, a totally unknown candidate months ago, recently upset incumbent Joseph Crowley, the fourth-ranking Democrat in Congress and possible successor to Nancy Pelosi as the Democratic House leader. Crowley has represented New York since 1999, most recently as a representative of the Bronx and Queens.

Ocasio-Cortez is a 28-year old Latino woman who was tending bar only a year ago. She ran on campaign promises that were decidedly left of the mainstream Democratic agenda represented by Crowley. Her political stance was not surprising given her support for Bernie Sanders during the last Presidential primary and her membership in the Democratic Socialists of America.

While there are many messages 14th District voters are sending us; we believe there are two that are representative of voters of both parties throughout the country.

  1. Voters appear to prefer political views that are less centrist and offer a change from the status quo of the existing parties.

  2. Voters are looking to buck established party leaders in favor of someone different.

The Washington Post, in an article about Ocasio-Cortez’s victory, summed up these messages well – “Many of the key Democratic House primaries this year have been competitions over biography, with a premium given to those who break new ground or remove old barriers.”

Economic and Market Implications

Assuming this trend continues, the implications for the economy and the financial markets will become increasingly important to follow. While the topic for another article, simply consider the massive social changes that occurred in the late 1960’s and early 1970’s. Those changes had profound and lasting effects on culture and society as well as the economy, monetary policy, fiscal policy and the financial markets.

The following provides a summary of factors worth considering as this new era of politics takes hold:

Deficit – Despite a Republican-controlled Congress and President, the size of the fiscal deficit is surging. Current forecasts by the Congressional Budget Office (CBO) estimate that Treasury debt will increase by over $1 trillion a year for the next four years. While it seems that the Democrats and Republicans cannot agree on much, they currently seem to agree on increased government spending. Given a President that is not averse to debt financing and deficit spending and a slew of politicians concerned about future elections, collectively they may opt for more spending to please their constituents. Given the importance of retaining (or not losing) power, the tendency towards higher fiscal deficits will continue regardless of which party controls the House and Senate. Discipline of any form appears outdated in the halls of Congress and certainly not a popular political platform.

Recession and stock market crash response – During the great financial crisis of 2008/09, extreme fiscal and monetary stimulus were employed to right the economy and stabilize the markets. In just three years from 2009-2011, a timeframe spanning the recession and immediate recovery, the aggregate fiscal deficit was $4.006 trillion. In those three years, the government accumulated a deficit that equaled that of the 22 years immediately prior.  The Fed’s monetary policy response was even more brazen. They lowered the Fed Funds rate to zero which helped push longer-term bond yields to historically low levels. Further, they introduced QE and purchased over $4 trillion of U.S. Treasury, Agency and Mortgage-Backed Securities.

Our concerns for the next recession and stock market drawdown are twofold. First, will the Fed acquiesce with unprecedented monetary policy as they did repeatedly during and well after the financial crisis and recession?   Second, will the vastly different political views of Congress and the likely infighting make negotiations on fiscal bailouts harder than those that occurred in 2008 and 2009?

Under Jerome Powell’s leadership, the Fed appears less concerned with financial asset prices than did the leadership of his immediate predecessors. Further, inflationary aspects of fiscal deficits may make them more apprehensive about easy policies that can have inflationary impulses. One of the key signals for a change in monetary policy came when outgoing New York Fed President William Dudley gave a speech on January 11 characterizing three to four rate hikes in 2018 as “gradual.” Although there was no immediate market response, within two weeks the stock market convulsed. The market has yet to regain those losses and the Fed thus far has not walked back Dudley’s comments.

The fiscal situation could also become problematic if the political parties continue down the path of discordance.  Either party might be willing to push or block emergency fiscal stimulus to affect the President’s reelection chances heading into the 2020 presidential campaign.

Geopolitical – The changes occurring in our political system are closely monitored by other nations. While some nations are experiencing similar changes, especially in Europe and the United Kingdom, we have little doubt that our allies, our enemies, and everyone in between will try to capitalize on the situation. Trade and the dollar’s status as the world’s reserve currency are the foremost concern. We believe many nations want to unseat the U.S. dollar as the world’s reserve currency. Trade tariffs and fair trade negotiations are likely fueling the desire even more so. Will political change and the possibility of a stalemate in Congress provide these nations an opportunity to reduce their reliance on the dollar? The implications, as discussed in Triffin Warned Us, are massive.

Public/Corporate confidence and spending habits – Consumers tend to spend when they are most confident about their own financial situation and that of their nation. As the political issues collide and political rhetoric from both sides increase, will consumers’ confidence waver?

Alternatively, what if current consumer spending has less to do with confidence and is largely based not on what they want to spend but what they need to spend? Food, gas, healthcare, housing, and education are all making unreasonable demands on consumer spending habits. These expenditures are being funded by dis-savings and credit as opposed to rising salaries and wages. The evidence for this lies in the concurrent rise in consumer credit data and decline in household savings. The demand for political change is not coming from the elite that profited from corporatism and speculation, but in large part from the majority being left behind. These are the marginal consumers and play a large role in determining the pace and quality of economic activity.

Similarly, what of the confidence of corporate executives? We suspect that as political differences become acuter and the future less predictable, executives will hold back on investments in new projects, plants, equipment or employees.

Summary

Currently, the market seems indifferent to the recent wave of political upheaval. The relative stability in the economy and strong performance of stocks over the last few years is likely mesmerizing many investors.  We believe investors should consider that the changes in the political landscape may only be in its infancy. Whether the recent move towards political divergence is a fad or the start of something much larger is anyone’s guess. However, we believe the increasing influence of millennials at the expense of baby boomers will have impacts which we are just starting to see.

Given that equity markets are perched at extreme valuations, implying that the risks are significant and future returns well below normal, we believe the political unknowns and the associated risks they carry are among the reasons to maintain a conservative investment stance.

The following video provides a historical perspective of how Congress has become increasingly divided over the last 80 years.

While it stops in the year 2013, the differences have only widened since then.

Comments

MonsterSchmuck Mon, 07/09/2018 - 10:59 Permalink

Finally.

A grownup arrived at the ZH office.

 

No wonder LordWillingly didn’t like it. Too many big words, boring facts, reasonable povs, and humility in admitting uncertainties. Too adult a diet for the hot headed partisan hack babies in the comment sections these days. 

Quantify hongdo Mon, 07/09/2018 - 12:07 Permalink

I for one, welcome the coming civil war. Its more about understanding reality than anything else. Reality is humans have never gotten along even with a shared culture, race and ideology. Intermix them and things get very dicey.

In reply to by hongdo

caconhma Quantify Mon, 07/09/2018 - 14:57 Permalink

Humans are just another species of Nature animal kingdom. Furthermore, Humans are animals and nobody so-far cancel/changed the Nature basic Law: the fight for existence. Therefore, regardless of whoever says or does, this fundamental Law of Nature doesn't change.

There are always lots of people unsatisfied and unhappy with status-quo. Consequently, it is just a matter of time before these "unhappy people" make alliances, unite, and start an upheaval.

In reply to by Quantify

ReturnOfDaMac Got The Wrong No Mon, 07/09/2018 - 11:31 Permalink

You hit the nail right on the head.  Some think freedom is the right of the state to seize your assets if they catch you carrying too much legal tender, others think the opposite.  Some think freedom is the right have naturally growing plants and use them to treat yourself if needed, others think the opposite.  Some think freedom is the right of the state to force you to pray to jeebus and not buy hooch on Sundays, others think the opposite.  The list goes on and on and that's just for the one word of freedom. Yep, folks are miles apart.

In reply to by Got The Wrong No

ReturnOfDaMac Consuelo Mon, 07/09/2018 - 13:52 Permalink

I'm an old dog, ever heard of the pledge of allegiance, you know that last sentence?  BTW, when I was a knee high young'un, the principle in my elementary school got on the PA and began every morning with a prayer.  I like you Consuelo, you been around a while but please know what the hell you are talking about when you post on ZH, a whole LOT of people on this site actually do...

In reply to by Consuelo

just the tip Mon, 07/09/2018 - 11:09 Permalink

bullshit is right.

while the US is divided, the congress is just exactly that.  they are more unified than ever.  their sole goal is to stay in office.  they care little for country and less for a nationalist president.  they have their feathered nest, their feifdom, and don't want to lose it.

it has been said the third "B" in the boston phone book would be a better president than any we've had in damn near 50 years.  as much as i loathe the coasts, i pretty much think that sentiment could be right.

MonsterSchmuck Mon, 07/09/2018 - 11:18 Permalink

This reminds me of the old days, when ZH posted adult content useful to investors. Then stirred comments from intelligent and experienced people who could expand upon or counter the articles points in ways that further informed readers.

Now it’s like the Yahoo comment section. Amateurs and trolls arrived, likely humanity majors schleping for a Soros sponsored front in DUMBO. 

 

Jo A-S Mon, 07/09/2018 - 11:22 Permalink

Apart from the initial paragraph about Alexandria Ocasio-Cortez, the article totally ignored the voters.  And, theoretically, it is the voters who put these politicians in power....  If "power" is the correct terminology.

adr Mon, 07/09/2018 - 11:23 Permalink

What you have is the core block that hasn't changed, and provides nearly 100% of the true value of the American economy, that has been completely shit on for the past 20 years.

An entire way of life that represents half of America is being labelled as fascist by the whack job lefties who are given full support by the media.

If you are conservative you are supposedly a hate filled bigot who wants to roast queer people over a spit. Being told not that you are wrong, but that your viewpoint should be illegal and that you should be put in jail for it. Or if Antifa had its way, killed because of it.

 

THE COMPLICIT MEDIA AND THE NEW LEFT IS CLAIMING THAT THE FOUNDING VIEWPOINTS OF AMERICA SHOULD BE ILLEGAL AND ANYONE WHO BELIEVES IN THEM SHOULD BE ARRESTED OR KILLED.

This happened 100 years ago in Russia and millions died because of it.

Ocasio-Cortez doesn't represent hope. She represents a new tyrannical dictatorship that will lead to the destruction of nations and the deaths of billions. People ask, "What would have happened if someone killed Hitler before he was able to gain so much power?"

Well, let's kill Ocasio-Cortez before she can lead us down the same path. If she and others like her gain control of the American political system, the country is over. Obama was the spark that lit the fire made from the kindling the Jews spread all over America. The fundamental change to lead a new Bolshevik revolution in America that was planned by Lord Rothschild 130 years ago.

Omen IV adr Mon, 07/09/2018 - 11:38 Permalink

The Cortez district voters in the primary were almost exclusively Black & Brown - as this trend of tremendous expansion of black and brown continues their preferences of - No Jails / No Cops / No ICE / No Profits / Free Everything    ---- will become the law of the land

someone has to remain to pay for it in these big cities

In NYC the Pubic Housing Authority is facing $38 Billion in repair or replacement cost for the housing stock of 400,000 people who cant afford a market based product - even for NYC that is a Huge Number - for Principal alone that is more than $1,400 per apartment / per mo. amortization --increase over today or $17,000 per year plus interest of at least $700 - these people produce next to nothing - so how do they afford $20k year increase?

why would companies remain in the City to have their people's assets and cash flow  raped by Politicians like DeBlasio to pay for the welfare payments of the Free Shit Army?

 

what is Cortez's limit to Free Shit?

How big should the Free Shit Army be?

In reply to by adr

gaoptimize Mon, 07/09/2018 - 11:49 Permalink

We should, and I did, expect this as real conservatives and freedom lovers refused to let the Deep State in Washington and their leftist allies get away with it like they have since at latest 1913.  If they don't like the heat we are bringing, they best get out of the kitchen.

earleflorida gaoptimize Mon, 07/09/2018 - 12:01 Permalink

imagine you go to work turning on a printing press that produces 'Fiat Federal Reserve Notes' worth trillions today, and you collect the interest of 2.5%-5.0% annually/forever and the American people are responsible for the 'Promises-to-Pay

this is how fucking dumb`down the country has become as a borderline idiotcracy

This is a Republican & Democrat rape!!!

all were complicit. PERIOD!!!

In reply to by gaoptimize

Consuelo Mon, 07/09/2018 - 12:03 Permalink

Biggest danger is haters not knowing (nor caring) what they hate.   Not open to reasoned debate and no knowledge deeper than a parroted soundbite to even engage a semi-reasoned debate.

 

 

deja Mon, 07/09/2018 - 12:30 Permalink

When less than 12% of registered democrats in NY-14 actually voted in the primary and the tally was Ocasio-Cortes 15,897 (57.5%) vs. Crowley 11,761 (42.5%), there is no message here other than if you snooze, you lose.  Crowley snoozed because he didn't bother to make any effort for the primary.  Ocasio-Cortes knew all she needed to beat was voter apathy and not Crowley himself, and it was not that hard to get out the leftist democratic socialists to turn out.  Promises of more free shit, etc.

BandGap Mon, 07/09/2018 - 12:32 Permalink

This is indicative of supposedly synchronized systems that grow too complex. 

The dismantling of our system will actually lead to a simpler, more effective approach - after what will most likely be a painful reset. Large systems cannot account for all variables, these will be culled.  

Efficiencies will spring from the reset.

 

Ms No Mon, 07/09/2018 - 13:03 Permalink

Millenials not saving anything, probably because they can't, might help the economy look better for now.  These bastards seem to hate savers.  It's hard to imagine the logic that places complete chaos and insecurity as a goal.  It could easily backfire on them as well.

I haven't been around liberals for about ten years.  Now that I am I cant believe how bad they are.  They won't allow you to observe them from a distance as the free roaming disabled zoo creatures that they are.  They have to instigate and tell you what they think.  They can't help but approach you and accost you with their ignorance and mental-emotional instability.

Its appalling.  There is no peace anywhere they reside in large numbers.  What compels them to approach people as if we give a shit?  They're gawd damn energy vampires and peace thieves.  

naos Mon, 07/09/2018 - 13:25 Permalink

Demographics of the voting regarding Ocasio-Cortez  would be interesting.  Did any whites vote?  The results show how pathetic our nation has become...no wonder we're circling the drain.

thetrumpet.com

 

snblitz Mon, 07/09/2018 - 14:47 Permalink

America is divided between those who vote themselves other peoples' money (OPM) and the rest.

The OPM voters outnumber the rest.

If you are able to vote yourself other people's money why would you stop?

The question is what happens when the "other people's money" runs out?

 

 

 

ATTILA THE WIMP Mon, 07/09/2018 - 14:51 Permalink

My book, Civil War Two the Coming Breakup of America, is back in print and available on Amazon in kindle format. It contains my opinions about why the united States of America will erupt in a civil war in our lifetime that will depopulate North-America and shatter the USA into several new, ethnically-based nations.

https://www.amazon.com/dp/B07FCWD7C4

It was first published in 1993 and I will have an update available by 2019. America is so far gone that this book won't do you much good. It will do me some good if I can raise enough cash to buy a beat up old ship and name it The Deserting Rat and sail it around the Caribbean.

 

I also have another book available on Amazon:

 

I was in a real-life teenage Dirty Dozen in Vietnam. We were potheads, bar brawlers, dope peddlers, murderers, stockade bums, malingerers, murderers, deserters, drunks, thieves, pill poppers, junkies, fraggers, village burners and worse. We even had a cannibal.

 

We were in the 2nd bat of the 173d Airborne Brigade.

 

You want action and adventure? Here’s a video preview on Youtube.

https://www.youtube.com/playlist?list=PL8Nxd_UEw7a_LJBZUOMUWZ0sTaGu9LeGS

 

And here’s an Amazon link :

https://www.amazon.com/dp/B01N43BCZI

 

Be aware that this book is not for those wussies forever getting their panties in a twist

About shenanigans like decapitations and summary execution of so-called POWs.