The presidential election is less than one week away. Will Trump be the victor or will Harris?
The mainstream media is calling it a tossup. But from what we can tell, Trump appears to have the edge. At least, that’s what Wall Street is signaling.
Of course, apart from death and taxes, there are no guarantees in life. This is especially true when it comes to presidential elections. Anything can happen on election night. Ballot stuffing, fraud, hanging chads. You name it.
What will it be this time that throws the election results into question? Moreover, will voters accept the determined outcome? Or will discontented supporters of the losing side take to the streets and inflict total chaos?
What about stocks? Has Wall Street already priced in a Trump win? If so, and if Trump wins, will share prices run up further in celebration or will they drop in a “buy the rumor, sell the news” shakeout?
What will happen if Harris pulls out the victory? Will stocks crash? If so, is this a strategic buying opportunity?
These are just a partial array of the questions. We’ll have to wait until Tuesday – or possibly longer – to start getting some answers. Regardless of who wins there are certain things we do know that won’t change.
We know that deficit spending will still run close to $2 trillion per year. We know that rising interest rates are stressing the financial system, as bond and real estate assets held by banks decline. We know that wars in the Ukraine and Middle East are escalating.
Thus, inflation and chaos are practically certain. That’s what bond investors are anticipating…
Politically Motivated Decisions
The yield on the 10-Year Treasury Note is now at about 4.30 percent. That’s up from 3.70 percent on September 18, when the Federal Reserve cut the federal funds rates by 50 basis points (bps). Clearly, bond investors do not think bonds, at current prices, are worth the risk. They see an abundance of inflation and chaos coming down the turnpike to steamroll their capital.
What’s more, on November 6 and 7, immediately after election day, the Federal Open Market Committee (FOMC) meets to hash out how it will further its actions of extreme credit market intervention. With Treasury yields running higher since the last FOMC meeting, will the Fed take a pause in its rate cutting cycle?
The answer to this question comes down to whether the Fed is willing to admit it screwed up. The Treasury market has shown that the Fed’s initial 50 bps rate cut was a mistake. That it was politically motivated all along.
If you recall, just prior to the last FOMC meeting, Senator Elizabeth Warren wrote a letter to Fed Chair Powell and told him he was terrible at his job and “behind the curve.” She demanded a 75-bps rate cut. After the meeting Warren called for even more rate cuts.
Politically motivated decisions are rarely the right decisions. With respect to monetary policy, politically motivated decisions are always wrong. They serve to boost the ruling class while harming those who earn wages and live off their savings.
Warren, for her part, influenced policy with her benefit in mind. She wants cheaper credit so Washington can continue its borrowing and spending madness. She loves big government. And wants more of it.
Justifying Rate Cuts
Powell is a politically motivated animal himself. Rate cuts are in his self-interest too. A Harris victory preserves the status quo, including his job. Perhaps, in his mind, boosting stocks with rate cuts just prior to the election was a means for keeping his job.
If Trump wins, Powell knows he will be given a pink slip. He will have to find a job pretending to do work for one of the big banks his policies have supported.
In the meantime, Powell has several data points he can use to justify additional rate cuts at the FOMC meeting next week. For example, on Thursday the personal consumption expenditures (PCE) price index was reported for September. Like, the CPI, the PCE price index reports changes in consumer price inflation.
The PCE price index is the Fed’s preferred inflation gauge. The Fed likes it more than the CPI because it generally reports a lower number. The latest CPI report, for example, showed consumer prices in September were inflating at an annual rate of 2.4 percent. The PCE price index report for September showed consumer prices inflated at an annual rate of 2.1 percent.
Indeed, 2.1 percent is a smaller number than 2.4 percent. Moreover, 2.1 percent is closer to the Fed’s arbitrary 2 percent inflation target. Thus, according to the data, rate cuts are justified. Or are they?
Supposedly, the Fed’s real focus is core PCE – which strips out food and energy. But this is only true some of the time, like when it helps tell the story the Fed wants. Core PCE is up 2.7 percent over the last 12 months. So, at the moment, the Fed will direct attention to the overall PCE price index.
Still, the PCE price index report isn’t the only additional data point Powell can use. About the time you read this article (or soon after), the Labor Department will publish its jobs report for October.
It is anticipated the number of new jobs added in October will be down from September. This is partly because of the two major hurricanes in the southeast, which caused people to be out of work. The Boeing strike will also pull the jobs number down. Hence, the jobs data will be soft, and further rate cuts will be justified.
Inflation and Chaos
Data can be contrived to tell whatever story the author desires. Data contrived by government agencies is particularly susceptible to the imposed will of the overseeing administration. Policy makers want the data to make them look good and to justify their decisions.
Yet just because data tells a certain story doesn’t mean it is so. Some stories can be fantasies. Stories told with government data often come from fantasyland.
For example, the story that consumer price inflation is subsiding is generally bogus. Prices are still going up. They may not be going up as fast as they were two years ago. But they are still going up.
What’s more, rising prices year after year are cumulative and compounding. Over the last four and a half years consumer prices are up over 22 percent – from 258.115 in March 2020 to 315.301 in September 2024.
So, when you add an additional 2.4 percent on top of that, it has a greater compounding effect than 2.4 percent had just several years ago. And this is according to the government data – we all know price inflation has been much greater than what’s been reported over this duration.
Here’s the point…
More Fed rate cuts are coming. Powell calls it “policy gradualism”. In addition, as noted last week, if the Treasury market doesn’t cooperate and follow the federal funds rate down, the Fed will be forced to unleash more QE to contrive yields to its liking.
Gold, for its part, is sitting at about $2,750 per ounce. No doubt, providing an elevated barometer reading of the inflation and chaos we’re living through.
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Sincerely,
MN Gordon
for Economic Prism
