November 6, 2018
I’ve been the MC, panel moderator, and/or speaker at the New Orleans Investment Conference for each of the past 35 years, ever since I worked for its founder, James U. Blanchard III, in the 1980s. This year, the bears were out in force, as usual. They’re right one year in 10! There’s no sense in repeating the views of some of the perma-bears, whose views never change, but I was particularly concerned that one of the frequent bulls, Dennis Gartman, turned “bearish on stock prices,” saying we were “well into a global bear market,” citing the submerging “emerging” markets and the sub-par European and Asian markets.
Bond vigilante Jim Grant believes we are in a bond bear market, too. The “great bond bull market that began in 1981 with the absurdity of 15% Treasury yields ended in 2016 with the reciprocal absurdity of $11.9 trillion of marketable debt worldwide priced to yield less than zero. We think a new bond bear market is underway.” He cited Hoisington Investment Management data back to 1870 which says average nominal Treasury long-term yields have averaged 4.66%, or 152 basis points above the current 3.14%.
Grant created the most memorable imagery of the conference, in my mind, saying that the investment landscape today is like the busy investor flying all day, rejecting airline food, waiting for a hotel meal only to find that all restaurants are closed, room service is not available, and the only food at hand is the mini-bar with a $7 tin of Pringle potato chips. In other words, stocks, bonds, and currencies are of little value but are expensive, so what are you going to buy? At times like this, I am glad I edit Louis Navellier!
Mainstream analysts like Guy Adami of CNBC’s “Fast Money” and Peter Boockvar of the Bleakley Advisory Group and editor of the Boock Report were equally dismal. Adami’s talk, “Forewarned is Forearmed,” warned of the Fed’s unwinding of its bloated balance sheet. Boockvar’s talk, titled “Buckle Up,” added that the Fed is unwinding QT at the same time the European Central Bank (ECB) is ending its quantitative easing (QE) and the Bank of Japan (BOJ) is cutting its QE in half. A decade after the 2008 crisis, when the Fed quintupled its balance sheet and the BOJ bloated its balance sheet to nearly 100% of Japan’s GDP, they are just now beginning to unwind their “cure” to a decade-old crisis. After each of three rounds of QE at the Fed ended, Boockvar showed, there was a 10% or greater correction, and we’ve seen such a correction again in October. (Yes, I wanted to add, but the market recovered every time!)
With all this background, we entered the Sunday political panels, of which I was the moderator.
The Yin and Yang of Gold and Stocks in the Elections of 2016 & 2018
Since I cover both stocks and gold for Navellier & Associates, I was able to notice something that may have escaped many analysts at this conference, so I brought it up on my political panel. Back in October 2016, the S&P 500 fell 4.2% in the five weeks leading up to the election, on the presumption that Hillary Clinton would win. In a mirror image, gold rose in October 2016 from $1,254 to $1,303 on November 4, but when Trump won, gold fell sharply to $1,125 in mid-December and stocks took off like a rocket.
The same thing happened this year. Gold rose 3.4% since September 30 and the S&P fell 6.6% for a 10% gold/stock spread, based on the assumption that the Democrats will take over the House after Tuesday’s election. But what if the unexpected happens once again – the Republicans retain the House? Then we could see a stock market rally and a decline in gold, just like what happened in November 2016.
However, in the greater likelihood that the Democrats win control of the House, gold should continue to rise and stocks could test their recent lows before rising again, before it sinks in that “gridlock” can also be a winning formula for stocks, as shown in recent decades – when Republican Ronald Reagan worked with a Democratic Congress and Democratic president Bill Clinton worked with a Republican Congress.
The odds calculated by “538.com” predict an 85% likelihood of the Democrats taking over the House. Since World War II, the first mid-term elections after a new President has been elected have found the Party opposing the new President gaining an average 26 seats in the House of Representatives. If the President had a popularity rating under 50% (as Trump has) the average since 1945 is a gain of 37 seats.
Back in 1994, there was a “Republican Revolution” in the first mid-term election of the Clinton era, after Hillary Clinton’s flirtation with “socialized healthcare” had angered many voters. Republicans, led by Newt Gingrich and his “Contract with America,” stormed to victory with a 54-seat swing, taking control of the House for the first time in 40 years (since 1954), by a healthy margin of 230 seats to 204, thereby throttling the Clintons’ most aggressive liberal programs and leading toward greater prosperity, capital gains tax cuts, “the end of welfare as we know it,” and balanced federal budgets by the end of the decade.
This pattern has also occurred in the President’s second term. In 2006, after the Republicans had control of the House, Senate, and White House for six years, the Democrats took back 31 seats of the House in the 2006 mid-term elections to gain a 233-202 advantage to make George W. Bush a “lame-duck” President in his last two years, during a time leading into the deepest financial crisis since the 1930s, in 2008-2009.
After Barack Obama won in 2008, his record trillion-dollar deficits, Obamacare, huge stimulus spending packages, including “cash for clunkers” and “shovel ready” pork-barrel spending, led to what Charles Krauthammer called a “restraining order” at the voting booth in 2010, as Republican voters, led by a Tea Party movement, created a record 63-seat swing in the House to give the Republicans a 242-193 majority. (In the 2014 mid-term elections, Republicans gained 13 more seats to throttle Obama’s final two years.)
Something like that may happen this year, according to the pundits at “538.com,” the Website that takes its name from the number of electors in the Electoral College. They follow each of the 435 House districts and 100 Senate races in granular detail and add up the details in real time. Their latest totals show an 85% chance that the House will go Democrat, with a median 40-seat gain for the Democrats. More comforting to Republicans, “538.com” sees an 82% chance for the Republicans maintaining control of the Senate.
Most polls see about an 80% chance of the Democrats winning the House. Here’s what Crosstabs says:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But it’s encouraging to Republicans that in their last poll on November 8, 2016, “538.com” predicted a 71.4% chance that Hillary Clinton would defeat Donald Trump for President, so the polls can be flawed.