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Batten Down the Hatches

Political Risk Comes to the Fore

By: Francis Cianfrocca (Diary)  |  October 24th, 2008 at 05:15 AM  | 

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This is a brief note to warn you all candidly that the news background for financial markets is very unfavorable this morning.

European and Asian stock markets are in free fall, down around 10% as I write. That’s not a typo. Trading in S&P index futures is limit-down, and has been halted in Europe. Unless conditions change in the next few hours, expect to see perhaps an 800-point loss in US stock markets.

The US dollar has strengthened to $1.25 against the euro (it was almost $1.60 earlier this year). The Japanese yen is at a six-year high against the euro. For different reasons, both the dollar and the yen benefit from the exceptional turmoil in all global markets, both financial and commodity.

As I predicted earlier this week, crude oil prices have fallen sharply on the news that OPEC has announced a larger-than-expected cut in production this morning in Vienna. They’ll be taking 1.5 million barrels a day of production offline. But demand is falling faster than they can cut supply.

For the first time in a lifetime of watching markets, I have to say that political risk plays a big part in this market turmoil. Generally, markets don’t care who runs Washington.

This time, everyone is staring at the possibility of a Democratic landslide, with not only the White House, but also 57 or more seats in the US Senate, which amounts to a practically filibuster-proof majority.

And both the Democratic Presidential candidate and the Congressional leadership have started floating outlandish proposals to remake America’s public finances.

They’re talking about enormous new fiscal spending, as well as tax cuts for 95% of the people. And they’re not shy about the fact that they consider business income (aka, “windfall profits”) to be their piggy bank.

It’s probably not a good time to be investing in anything that reflects the value of corporate earnings.

-Francis Cianfrocca

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COMMENTS

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  • bags64

    Have any economists abroad publicly stated that the proposed Democratic fiscal/tax policies are a reason for Europe’s market behavior?

  • Martin_A_Knight

    Republicans need to hit the reset switch.

    • blackhedd

      Economists, here and abroad, are among the people who are observing the behavior of real markets, and saying “Wait a minute, none of that is supposed to be even possible.”

      And plus, economists are not necessarily disinterested politically.

  • Marcus_Traianus

    This is going to be a bumpy ride. Yields are up and all the warning bells are going off. Why? The proposals coming out of a potentially Democratic Congress and President are scaring the pants off folks in global markets.

    A colleague from the UK just told me he never thought he would live to see the US become a “socialist country intent on killing the free market and capitalist system”. That’s a European folks; is this really what you want?

    We have proposals to redistribute wealth, covertly raise taxes on businesses, eliminate 401k’s, nationalize the banks, limit free trade, empower unions to further destroy the US workforce, confiscate money from global corporations and God only knows what else. No wonder the US Chamber of Commerce is putting its weight behind Republicans.

    What is the Democrat’s reaction? Chuck Schumer calls up and says they will make it hell on earth for US business if the USCC keeps supporting Republicans. Is this the Soviet Union or United States? Well, you get to decide that in a few short days.

    Bye, I am going to go see if I can lend a hand with the Democrat meltdown.

  • kowalski

    If anyone had said a year ago that the fallout from the mortgage and housing crisis was going to be a 50% drop in the DJIA, people would have thought they were insane.

    It looks like we’re on track for that.

    • Marcus_Traianus

      And I would add a small real-time market ticker with Barack Obama and Chuck Schumers face next to it.

      But that is above my pay grade and beyond my simplistic technical skills.

  • Old_Crow

    Deflation looms, money flow has slowed to a crawl. Stay away from this market if you can.

    We are starting to see the effects of ‘pricing in’ a liberal democrat regime. And my emphasis is on the word starting.

    A 7000 Dow (or lower) by the new year is entirely possible. Anyone who says we are near a bottom is a fool. Many option plays are also too expensive due to the insane volatility. Short term CD’s and cash for now.

    • kowalski

      How bad could it be? After all:

      Ron Howard, Opie, Richie Cunningham, Sheriff Andy Griffith and the Fonz all want us to vote for “…the kind of change that will allow us to trust our government again.”

      See more Ron Howard videos at Funny or Die

  • izoneguy

    that the Dow would slump to about 5000 by election day.
    I may not be far off. Obama would be bad for business.
    Biden has already warned us that Obama would be facing a crisis. How much more warning do the American people need?
    One of the guys I have worked with is for Obama and he was smugly saying “I don’t have money in the stock market”, I asked him if he had a 401K plan. He said yes a small one and I told him he was in the stock market. And I said he should look at the proposals Obama has for 401K plans.

  • RestonCon

    Thanks BH. I always enjoy reading your insightful posts. Bravo.

    Earlier this morning, I had to school a government worker on the basics of the stock market. I work for an investment bank in Arlington, VA and have an MBA. The building also has a Fderal Government agency (Mine Safety) as a tenant. As this woman was boarding the elevator, she was talking to a colleague about the big drop in the overseas markets last night. She actually thought that this was a good thing! She even used the word ?good? to her colleague and hoped it would spill over to US markets. At first I thought she was going to say for Obama because was clear to me (based on other things) as to whom she supports, but instead it was empathy. She was glad about the situation because she wanted the fat cat rich folks ?to suffer a little? so they would ?under stand what we are going through? She added that the market meltdown ?wouldn?t impact me anyway.?

    Normally I don?t intrude on other people?s conversations, but I couldn?t let this go unchallenged. I first chastised her for rooting for the markets to worsen and that people do get hurt and she should not be actively rooting for people to get hurt. I also told her that ?fat cats? aren?t the only ones who own stocks. I informed her that half of all US households are in the stock market and that most people have retirement funds and 529 education savings accounts tied up in the market. I didn?t have time to tell her that when employers do well, that?s good for employees, even if they don?t own stock or that IPOs=business expansion, etc.

    The lack of basic economic understanding is frightening…and worse…they?ll vote.

    • jenest2001

      I heard this week at work is that a co-worker is going to vote for Obama because she will get money from him.

      Needless to say I just walked away. No point in arguing with someone who has their hand out.

      • Tim_Schieferecke

        n/t

        • kowalski

          The lack of economic understanding is deliberate: it’s the result of the way people have been trained to think for the past 30 years. In this country, the Fonz and Opie carry more weight with more voters than anyone with “an education” — particularly when all anyone with an education can say is:

          “Well, we ran all of this through powerful econometric models on supercomputers for several years now and, gosh, we just never figured things could ever be this bad. We had no clue.”

          In an environment like that, Opie and the Fonz seem like Pillars of Wisdom to an awful lot of people.

          • kowalski

            I have a member of my family who does exactly that: runs big econometric models on supercomputers at a great, great, great big University. I didn’t hear a peep from them in the past year about any of the models predicting anything like what we’re seeing now, and they have a Ph.D. Yesterday Alan Greenspan flatly admitted that he had “made a mistake” in assuming that these institutions had developed intelligent ways to evaluate counterparty risk. He said that the entire “intellectual edifice” undergirding much of the financial sector collapsed in the summer of last year. It’s taken more than 12 months for everything to come crashing down.

          • izoneguy

            ..stock up and be prepared.

          • Marcus_Traianus

            Since you don’t really know who the real MT is I can personally advise Opie is an uninformed, contra intellectual, uneducated jerk (but you did not need me to tell you that) and his wife is even worse.

          • kowalski

            I don’t doubt for an instant that you’re absolutely right about that.

          • kowalski

            It makes me sick to realize that the best indication I had that we were in for a long, hard 2009 came in November of 2007 on the basis of something like a mailing job.

          • kowalski

            Direct mail is a good bellweather industry if people are looking for indications of what companies large and small are doing to attract customers, because most direct mail campaigns take several months to conceive, plan, and conduct from end to end, particularly in larger organizations: they’re good indications of how companies are looking forward and planning for the economic climate they see coming six months to a year down the road.

            You have to try to correct for your own biases and also understand the relative health of the companies concerned, of course, but if you have enough experience and a wide enough cross-section, you can do that to a “good enough” degree of accuracy.

            One reason is that large direct-mail campaigns are expensive propositions, and companies are very careful with their money and their data.

  • deltar

    You are blaming market losses on a possible future president and congress, who haven’t even won the election yet. I thought most folks had not given up on McCain yet… But it looks like not only have you given up, you’re already preemptively blaming Obama (et al) for current events. Well I give you credit for planning ahead, but the argument is totally transparent.

    You want so bad for Obama to lose that you search for anything, whether it makes sense or not, to counter his momentum.

    Will you “blame” Obama in 2011 for the market recovery from the dark days of ’08?

    • kowalski

      One of the other, more subtle indications that I got in the early part of 2008 was that the Xerox corporation shifted several members of its regional sales force that I had been talking with here in the Northeast away from corporate sales and into government contract sales. These are the seasoned people who sell the heavy-iron, production-class Xerox machines, and three of the people I had been dealing with were repurposed into government sales and replaced with one guy who was relatively new.

      To me, that was a clear signal that at least in this area, Xerox was betting that more of its business in the next 12-24 months was going to come from government sales.

      • blackhedd

        But I won’t apologize for telling you something you probably already know, because you don’t act like you know it.

        Markets discount future expectations, and turn them into prices.

        I talk to very senior Wall Streeters daily. For the first time in my life, they’re talking about a Presidential election as if it actually mattered.

        And none of them, not a single one, expects the President to be anyone but Obama, and that has been true for months now.

        As far as markets are concerned, the election is past history.

        • cwilson

          the 290-seat Republican House Majority and 52-seat Senate Republican Majority elected in reaction to the socialist meltdown driven by the Obama/Pelosi/Reid “nationalize all 401(k)s” agenda.

          • Cowboy

            For his long term remedies.

          • Old_Crow

            that’s why even after a great quarter, if a company forecasts weak earnings, the stock usually drops.

            The market is currently pricing in the roughly 50% probability of an Obama victory. If he wins, it will probably drop at least another 10-20% off the current lows.

            Obama’s anti-business and tax increase proposals have ramifications. Prudent companies plan for the future. I know several large firms that are planning layoffs and moving operations to countries that impose less tax burdens – if Obama is elected. These companies are merely making sober and proper business decisions. The general problem with ignorant folks like Obama, Shumer, Dodd et al, is that they have never held jobs in the private sector and do not know how business works.

          • izoneguy

            …and are talking layoffs if Obama slimes his way in…
            America will hand the biggest crap sandwich EVER to any new president. *hit rolls downhill and this will be the biggest *hitslide we have seen in a lifetime. All the Obama supporters holding out their hands for the promised change will start clenching them into fists shouting where is the change we hoped for. And of course they & Obama will blame it all on Bush.

  • IndependentfrMI

    Powers have turned the stock market into a gambling racket.

    We need Americans that live within our means….to say don’t buy it if you can’t afford it. Save for the future and don’t be inclined to mortgage you future.

    This crisis started years ago with the buying and selling (packaged securities) from bank to bank from credit co to credit co and financial institution to financial institution. When you buy someones debt and turn around and call it assets it is going to bite you in the asset.

    How will the democrats control(inflate) the prices of homes the government now owns?

    • IJB

      I’ve thought over the last few weeks that the bottom will be around Dow 5,000.

      We’ll see if I’m right or not in the next few weeks and months.

  • Alberta

    Probably still will if the Dow gets to around 8000

    You one of those who think 7880 was the bottom or we still got room to fall?

  • The_Gadfly

    I switched my 401(k) to mostly bonds yesterday. McCain’s antics in the current crisis, while better than Pelosi, Reed, and The One himself, haven’t really inspired much confidence. A bit more than Bush, but not much more. Both of them have grabbed for the “a little bit of socialism to save capitalism” emergency call button, which is the true voodoo of voodoo economics. After looking at the current rankings on Real Clear Politics, I decided it is going to be a long 2 or 4 years, and even though I’m down 40% already, waiting for it to go back up is a fools errand for the foreseeable future. Not that I feel good about moving to bonds, because the inflation guaranteed to come from his plans will eat away at that, but at least I won’t be losing principle. Even if I miss the initial upswing if we elect people who understand economics in one of the next two elections, I figure I’ll still be in better position for the upswing if I’ve got more money left to switch back to stocks. If the 401(k) would have let me move to gold, I would have, at least for the next year and a half.

    Of course, from the sounds of it, I might not have any 401(k) money anyway after Obama raids them to pay for his spending, nor will I be able to protest by calling into talk radio after they kill that with the fairness doctrine. And don’t get me started on judges. The real killer is, with all the focus on the Presidential race, even if McCain wins, he’ll probably be working with such a socialist congress, he won’t be able to get the right programs in even if he knows what they are.

    • enrique

      The Nikkei average before their crash in 1990 was 38,000. Today it is trading at 7,600. 18 years later!

      That’s not to say that the DOW will plunge that far but it is important to realize that markets don’t always rebound even given lots of time.

      Advice contained within this message is not meant to be used for investment purposes.

  • enrique

    They’re talking about enormous new fiscal spending, as well as tax cuts for 95% of the people. And they’re not shy about the fact that they consider business income (aka, “windfall profits”) to be their piggy bank.

    You mean endless financial market bailouts, forced bank equity seizures by the Treasury department, economic stimulus packages, regulating CEO pay, and buying up large swaths of the financial markets like AIG/Bear-Stearns/Fannie/Freddie at taxpayer expense?

    It makes me sick to think that not only did Republicans support these moves but they were done by a Republican administration. Oh well, Obama will try to fix things with more government which will fail even worse and we will have Obamavilles much like the Hoover Towns during the 30s.

    I only hope Republicans wake up and begin to support the free market, cutting regulations, and offering a real difference of policies with the Democrats. I know I’m doing my part locally to get the right candidates elected.

  • Pentagon16

    I complained about this tactic on Lucianne.com this morning as well.

    When you post panic filled news flashes- it serves to scare the electorate, causes McCain political damage and gets the focus off the election 9 days from now.

    And guess what? The Dow finished negative ONLY TWO PERCENT TODAY. There have been about 25 worse days just this year. Was the panic really warranted?!

    the more panic there is about something that DID NOT HAPPEN, the less chance McCain has to win- for numerous reasons. Something to think about.

    • enrique

      Instead of offering a free market approach to the banking crisis with deregulation, investigations of Freddie/Fannie, and increased oversight of the Federal Reserve and their ludicrous interest rates – he instead chose to support a huge bailout at taxpayer expense. Americans were overwhelmingly opposed to it and it would have put Obama on the defensive.

      Instead, he chose to screw the taxpayer and work across the aisle to ‘get something, anything’ done. I’m not sure what would make me more upset: he doesn’t believe in free markets or he doesn’t understand them.

      • Alberta

        enrique, ive put everything in the matress.

        • enrique

          like the safest place for money nowadays. Curious what will happen to banks over the next few years now that the feds have taken some ownership. Forced policies on lending or not allowing full withdrawls of funds, etc?

          • deltar

            that overreaching by the Dem congress will be pretty likely. The backlash will be swift if BO can’t keep them within some limits. Lord knows a democratic congress can’t control itself. That will be a tough job for Obama, we’ll see if he’s up to it… I think the public has grown increasingly unforgiving and I’m glad to see it frankly.

            I don’t smoke from the Obama bong but I do think he’s pretty smart — smart enough to want to keep a Dem congress and then get reelected, and cognizant of the public policy needed to deliver that. People here beat him up pretty good, but he’s proven to be formidable.