Don’t Ignore the Signs of a Financial Crisis, There’s Trouble in These United States
Investors are worried about the outcome of the U.S. midterm elections on November 6. And they have every reason to worry about a financial crisis, because the elections will highlight and sharpen the conflicts between political, social, and economic classes in the United States.
I say “financial crisis” rather than “stock market crash” because the situation has chronic overtones. A crash implies the possibility of a prompt recovery, while a financial crisis needs significant changes (or attempts at changes), and months if not years to resolve.
Many have tried to blame America’s problems, social and economic, on President Donald Trump. The truth, of course, is sadly different.
The signs of trouble go back a long way. But in the 2000s, with the return of a consolidation of wealth (within a small elite, the “one percent”) and perpetual war, a permanent crisis has emerged.
The mainstream media ignored these signs; it just happened to remember to look around when Trump was elected.
The current president, however, is merely the scapegoat and symbol of American decline.
The Stock Market’s Records Are Deceiving
The stock market highs, fueled by tax cuts and stock buybacks, were never meant to be permanent. And they were never meant to boost the fortunes of the lower and middle classes.
Therefore, the next major stock market crash, which could be triggered by the instability that the midterm elections are going to produce, can only end in financial crisis. Trump is merely the messenger.
While few trust polls any longer, Goldman Sachs Group Inc (NYSE:GS) and others expect that the Democrats will retake the House of Representatives while the Republicans will keep control of the Senate.
It Does Not Matter Who Wins and How
Whatever the midterm vote will bring, Americans are so far apart and locked into quasi-tribal disunity that politics offers few answers, only more division.
Still, whether the Democrats win the House or both the House and the Senate, they will have enough clout to obstruct President Trump.
They will also have the clout to pursue impeachment and other procedures to stall the White House, Mueller investigation or not.
If there’s one thing that has served as a social glue since Trump swore allegiance to serve and protect the United States, it was the stock market.
Trump has pursued aggressive economic policies that have encouraged investing in the stock market. From corporate tax cuts to easing investment banking regulations, the past two years have been a financial party.
Turn the Market Euphoria Into a Financial Crisis?
After failing to stop Trump with “Russiagate,” nothing more than a poor poker strategy, the last thing Trump’s opponents (Democrat and Republican) can do is to grind the Wall Street “fest” into a financial crisis.
How can Trump’s opponents stimulate a financial crisis? For starters, they will have more control over blocking unusual spending requests. For example, Trump was able to easily increase and pass the defense budget.
However, with the U.S. national debt approaching the next psychological barrier of $22.0 trillion, Democrats can stall requests to increase the debt limit.
Meanwhile, investors have started to show fear. They are worried about the growing risk, if not the probability, of the global economy slowing down.
Trump took the first misstep when he criticized Federal Reserve Chair Jerome Powell’s plans to raise interest rates. He fell just short of firing Powell, which would have triggered a major crash.
But even the fact that I’m writing about Trump’s uneasy relationship with higher interest rates betrays the unprecedented significance that stock valuations have on politics and vice-versa.
Uncertainty has Spread Worldwide
And note that whatever the uncertainties of U.S. stocks, Europe risks a financial crisis that could drag Wall Street down with it.
The Italian government, no friend of the pro-euro “liberal” establishment in the European Union (EU), wants to shake off the EU’s yoke of austerity.
That has caused the kind of friction last seen in 2014 with the Greek financial crisis.
The new Italian budget, which sends a clear sovereigntist and anti-austerity challenge to the EU, could trigger a eurozone crisis.
Analysts are left to discuss whether this will lead to a long-awaited correction or the trigger for the next major financial crisis in the West.
And Trump will need to increase the debt limit if he wants to fulfill any of the promises he made to his base about spending to improve U.S. infrastructure.
A mixed or outright Democratic win will do more to raise the specter of a civil war than encourage the typical post mid-term stock rally. That’s an eerily potent combination of fiscal hostility and political acrimony, which could trigger a long and deep correction or even a financial crisis. (Source: “What the Stock Market Says About the Midterm Elections,” Barron’s, October 23, 2018.)
An Existential Conflict
Ultimately, the problem goes back to the fact that Trump voters and liberals don’t simply disagree; they hate each other.
America is experiencing an existential conflict, and this is fueling a civil war-like mood.
Consider the series of mail bombs sent to noted stalwarts of the liberal establishment, including former President Bill Clinton, former Secretary of State (and presidential candidate) Hillary Clinton, businessman/philanthropist George Soros, and Senator Maxine Waters. Those incidents represent just a taste of the clouds heading toward Washington.
Regardless of outcome of the elections, the post-midterm climate will remove any doubt and further entrench the two sides amid distrust.
The fact that this distrust has reached a peak is no surprise to longstanding observers of the general climate of decay.
No amount of technological innovation (the economic benefits of which concern a miniscule sector of the population) can mask the chronic disease of the system.
Growing debt and the wide economic disparity, which also explain the divide, have alerted us regarding the collapse.
U.S. public debt has risen well above $21.0 trillion. Barack Obama doubled it since 2009, yet he had little choice, given the legacy he inherited. That legacy goes back all the way to Bill Clinton’s repeal of the Glass-Steagall Act in 1999.
The “reform” went by the name of the Financial Modernization Act. Rather than being progress, it was a step backward to the time before the 1929 financial crisis that led to the Great Depression.
National debt represents the sum that a government owes to other countries or even individuals, typically contracted through the sale of securities or bonds.
With the debt being so high and interest rates already being so low, the Federal Reserve will have no room to maneuver (as it did after the 2008 sub-prime crash) to avert a long financial crisis.
Therefore, the next stock market crash could be fatal for the entire U.S. economic system.
The Foundations Are Shaking
Looking at the situation without the rose-colored glasses of a Wall Street insider, there’s a sense that everything has fallen apart.
At the risk of boring you, given the number of times I’ve said this, some stocks will survive the next financial crisis better than others.
No matter how deep the financial crisis might be, the military industrial complex will survive. And the Federal Reserve’s plan to raise interest rates should be seen as an attempt to cause a market correction now in order to avert a bigger crash later.
The worst that the defense contractors face is the prospect of consolidation. It happened in the 1990s when the end of the Cold War prompted a rethinking of military budgets. Thus, Lockheed became Lockheed Martin Corporation (NYSE:LMT) and Boeing Co (NYSE:BA) absorbed McDonnell Douglas.
Yet, another season of mergers and acquisitions in the defense and aerospace sector remains distant. President Trump has repealed the nuclear missile treaty with Russia signed in 1987 that effectively terminated the Cold War.
And then there’s a resurgent and unstoppable China to worry about. It wants to lead the world in 25 years. Washington will not let that ambition rest unchallenged.