Not all is good, far from it. Yet even pessimists have to admit that November brought some rays of hope. The US midterm elections, which replace – in the middle of a presidency – scores of representatives and senators, turned out less dystopian than feared. The Democrats lost the House, but they managed to hold on to the Senate by sheer luck.
This means that as from January 3, 2023, President Joe Biden will have a hard time getting any of his policies approved by law makers. Look closer, and it becomes apparent that democracy in the US is alive and kicking.
Confounding the predictions, voters by and large refrained from partisan party box ticking. They chose candidates according to their perceived merits, for the local policies they stood for, and not because they were Trump-endorsed, or ‘Make America Great Again’ cheerleaders.
Quite to the contrary: voters did not fall for contenders who based their campaign on bigotry and incitement, nor did they put Democrats on the stake for the hardship of inflation. Many female voters rallied against anti-abortion policies.
The electorate pleaded for normalcy. Who would have guessed? A telling example was the Pennsylvania senatorial election, where preference was given to a Democratic candidate who had suffered a debilitating stroke during his campaign over a radical Republican contender endorsed by Trump. Democratic conventions have been revived. Republicans, even those who have a passion for election meddling, were quick to acknowledge defeat. Decent behaviour became the new normal.
For us observing the US from afar, yet suffering its dysfunctions, the loss of the House to the Conservatives means that the Biden administration has to compromise with Republican legislators, who will oppose the 15 per cent minimum tax rate for corporations, already agreed internationally.
They will disallow any ideas about increased taxation, more market regulation, harsher anti-competition policies or anything that sounds too green. Sad, yet as stock investors we may rejoice.
Habitually, market observers welcome political gridlock as a boon for shares: nothing unexpected will happen, nothing painful will happen, as nothing can happen.
This is only partly true. If the civility shown during the November mid-terms does not prevail in Congress, expect another round of debt-ceiling-blackmail to re-emerge. This is the sad spectacle that wilfully brings the US to the brink of default.
Habitually, market observers welcome political gridlock as a boon for shares- Andreas Weitzer
US government debt is fixed by law and currently stands at $31.4 trillion. This debt ceiling is always quickly exhausted, leaving no space for budgetary flexibility. It is fixed in absolute terms, not as a percentage of GDP. Whenever the administration has to raise new debt, which inflation, higher interest payments, or say, student loan forgiveness may necessitate, they have to go to the House cap in hand and will be told by Republicans what expenditure to cut in exchange: public health, support for the war in Ukraine, EV subsidies.
It will be a stand-off, not just gridlock. President Biden is good at horse trading. He has the patience, the age and the experience. Yet the Republican demands might be too onerous even for him. If he blinks, we are fine. If not, the US will be technically in default and market mayhem will ensue.
On November 11, FTX, one of the most respected crypto exchanges globally, filed for bankruptcy. Within days, its market value had fallen from $US 32 billion to nil. The story of how its customers, who have to fear now for the recovery of $10 billion of their deposited assets ‒ which had been used to prop up the proprietor’s own risqué investment ventures ‒ will engage the courts and public opinion for a long time.
My positive take on this is how this costly bust, which has put the credibility of the whole crypto world suddenly into question, happened without real world contagion.
It was chiefly the US consumer price inflation report for October that boosted the bond and stock markets and lifted long lingering gloom. Headline consumer price inflation (CPI) was at 7.7 per cent: still alarmingly high, yet much better than expected.
Inflation, whether measured in aggregate, or excluding food and energy, averaged as the ‘trimmed’ mean, or focusing on hard-to-tame ‘sticky’ price rises, have stalled or even reversed. Markets took this as the long awaited signal that inflation has peaked and that future rate hikes will be less pronounced, halted, or will soon even be going into reverse. Inflation readings are still scary, and far from the Fed’s declared aim of bringing it down to two per cent.
Yet undeniably, as consumers have shifted from buying stuff to doing things goods inflation is falling, transport costs are coming down, inventories are exceeding demand, supply bottlenecks are easing, and hasty investments in warehousing and means of delivery might prove miscalculated.
Higher mortgage rates have cooled the housing market too. With rents and fictitious ‘homeowners’ rents’ being the most prominent part of the CPI (40 per cent) deflationary impulses can be expected, albeit with considerable delay. If everyone, including the Fed, can see that inflation is coming down, interest rates may not be raised as much as was still feared at the beginning of the month, and the wealth and income destruction engineered by the Federal Reserve to dampen demand will moderate.
This is why ‘growth’ stocks – companies promising growing fortunes in the future, which look less worthy in a higher interest rate environment – have rallied with the CPI news lately. (Albeit looking at Facebook, or Twitter, the concept of ‘growth’ is hard to decipher.)
For us in Europe, the inflation saga, less a question of skewed demand than unaffordable energy prices, is far from over. Yet as the US dollar weakens, the euro has gained strength, softening the impact of imported inflation. We cannot tell if this is going to last, but the downward trend has been reversed for now.
If everything goes well, the ECB might not be forced by the dollar to raise interest rates so punitively that its peripheral countries like Italy cannot afford them. The euro looks safer for now.
On another positive note, gas storage facilities are full, while consumers got the message that it would be better to turn down the thermostat. Temperatures are moderate and gas prices have retreated considerably. Households and industries may avoid the worst.
The war in Ukraine is still far from a peaceful solution. Nobody can tell how long and with what intensity the bloodletting will continue. Yet the withdrawal of the Russian army from the important city of Kherson to the other side of the Dnieper shows that Putin and his generals have not completely lost their grounding in reality.
As a retail investor, I certainly feel relief that most of my shares have reversed their downward path for now. I am still nursing losses, but feel less panicky about it. I feel confirmed in my decision to not having sold out in a rush. I have generally changed tack though.
For more than a decade I invested the proceeds of expiring bonds into shares. Now all redemptions go back into corporate, investment-grade bonds. And I started to think by myself if I shouldn’t sell some shares for more of these bonds.
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com