Election uncertainty – Confirmation that one lives inside an alternative universe may have occurred when a US Presidential candidate woke up in the middle of a night’s sleep last Friday morning to engage in a damaging Tweeter storm. It wasn’t just that the odd hour, but his actions did not appear to further his cause, whatever that may be.
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Forget about the insensitivities and vulgarity, and try and forget about an 3 AM nuclear explosion potential. From an investment standpoint, more jaw-dropping was the lack of strategic insight and disregard for winning typically observed in a successful businessperson. This is all creating election uncertainty.
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Bank of America Merrill Lynch’s global economic team is equally having trouble sleeping, just for different but correlated reasons. In a September 29 research note, the day the Trump tweets were widely discussed, the bank says “the US presidential elections have become one of the most significant near-term risks to the economy.”
What worries BAML more is not just who is elected. Regardless of the victor, the bank might not like the outcome.
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“Even before new policies are enacted – which differ under each candidate – we are concerned that the economy may hit a soft patch due to heightened uncertainty,” the bank’s US and global economics stated in a research piece titled “Elections: what keeps us up at night.”
Just don’t tell that to the stock market, which ended higher by 17.14 points on the S&P 500 Friday, closing near all-time highs.
Election uncertainty – BAML concerned over trade and the fate of the bank’s regulator
When the bank report from Michelle Meyer and a global team of economic thinkers outlined their concerns, they lean in one direction – and these two issues are historic in nature.
“On the downside, we are concerned about rhetoric over trade and the Fed,” the report stated, pointing to two key issues driving the Presidential aspirations of Donald Trump.
Never before in an election has the US central bank been brought up in public. But with unprecedented central bank monetary policies clearly violating free market rules – CNBC’s Rick Santelli on Friday raised a common concern over market price discovery being dismantled — why are these critical economic issues not being discussed in public?
The BAML report didn’t go down this important but politically sensitive minefield, rather safely outlining the sometimes nuanced strategic benchmarks.
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“The Fed is an area where the two candidates differ sharply,” the bank report said of the bank’s regulator. “While Clinton has not commented on the Fed, as is typical of presidential candidates, Trump has said that he would not reappoint Chair Yellen, and he has criticized the Fed for keeping rates low for political reasons.” Trump has more specifically charged the Fed with market manipulation, an issue raised by respected hedge fund manager Paul Singer and more recently JPMorgan’s highly regarded quantitative derivatives analyst Marko Kolanovic.
BAML is looking at a Trump presidency from the standpoint of control of the Fed when they express concern over who might lead the bank regulator.
Fed Chair Yellen, who was helped into office by a lobbying push among progressives to keep Larry Summers from the office, has faced unprecedented challenges, including the removal of a stimulus program started by her predecessors. She has recently confirmed numerous whispers that the Fed sees purchasing assets such as stocks as “helpful during an economic downturn.”
Yellen’s term is set to expire February 3, 2018, while the generally respected Vice Chair Stanley Fischer’s term expires June 12, 2018. If either Fed official decides to step down or is not re-nominated, speculation could turn to current Minneapolis Fed president Neel Kashkari as a potential replacement, but the large banks are expected to oppose such a move.
Election uncertainty – Congress is expected to play a more integral role in approving Presidential appointments
BAML, for its part, thinks a Clinton election will keep in place current central bank orthodoxy and drive “continuity at the central bank as presidents have historically done.” Trump, on the other hand, could upset the apple cart. “Trump’s rhetoric suggests that he would try to change the composition of the Fed.”
The bank then raises a key issue: Trump’s appointments, if they are not in line with orthodoxy, could be blocked in Congress. “Presidential appointments are subject to Senate approval,” the report noted, saying that “the biggest risk for change comes under a Republican sweep” of Congress, which the bank is predicting.
Congress increasingly imposing its will on presidential appointments is not only occurring on the right, but the Wall Street Journal is reporting that Sens. Elizabeth Warren and Bernie Sanders will closely scrutinize Clinton’s regulatory and – most important – Department of Justice and FBI appointments. The message is clear: regardless of who wins the Presidency, the US Senate could mitigate any radical appointments.
Election uncertainty – Markets and business cycles are susceptible to election uncertainty shocks
When the 2016 dust settles, it is both Federal Reserve appointments and economically questionable rejection of trade policies that are creating uncertainty. Markets and “uncertainty shocks” are a feature of the business cycle, BAML opines.
“We expect increased uncertainty ahead of the election as the candidates continue to debate, and, if the race narrows, it could become increasingly difficult for consumers and businesses to know which set of policies to expect,” they wrote. “But we also expect increased uncertainty when the candidates do not clarify their positions fully or change their positions.”
Predicting volatility around election uncertainty has become a parlor game of sorts, with BAML on several occasions going long election volatility while JPMorgan’s Kolanovic says otherwise. With the election nearly one month away, one prediction is clear. Remember what Robert F. Kennedy said in 1966, quoting a Chinese curse: “May (you) live in interesting times.” The outcome and its aftermath is likely to be more than interesting.
On the upside, there is always fiscal stimulus to hope for, the report noted, a position they have advocated in the past.
By Mark Melin
