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FRONT PAGE CONTRIBUTOR

Batten Down the Hatches

Political Risk Comes to the Fore

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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