Aug 14

Presidential election cycle

By MultiplyWealth's Team

Instead, the main risk here is deflation. Deflation would eliminate the negative real rate condition. In a deflationary environment, a 2-year T-Bill yielding 0.25% looks really, really attractive. This is why the Japanese keep gobbling up JGBs. Something to think about while we complain or marvel at these peculiarly low interest rates. Policy could also "resolve" that second condition. Despite our macroeconomic problems, the stock market is still a pretty great place to be if corporations are knocking it out of the park. But large corporations probably won't keep posting record earnings margins forever. In fact, they certainly won't. Profit margins don't keep expanding endlessly. By definition, they can't. They move in big, unavoidable cycles. It's a side effect of capitalism. (Or the quasi-capitalism the U.S. employs.) Since the thought of raising taxes on the middle class is abject heresy and raising taxes on the wealthy won't move the needle enough, perhaps increased corporate taxation could be on the agenda for the 2014 election? Not that special interest would permit our Bought Congress to let that happen. But who knows. Never forget that in a Democracy, citizens are the ones with the vote. I know it seems unfathomable for the current system to change for special interest groups to relax their grip on Congress. But the path of history is cyclical, not linear. Maybe the populist revolution we all thought was going to happen back in 2008 doesn't take place until the 2014 midterm elections? Maybe that's when all the tea partiers are kicked out and replaced with a new breed of radical populist Democrat? Maybe that's when Occupy (Wherever) finally evolves into something with real focus and meaning with clever, manipulative individuals at the helm instead of aimless pseudo-revolutionaries? Don't forget about the psycho-social sub-strata in the U.S. right now. There's plenty of fear and anger just beneath the surface. In any case, none of these things will be the catalyst for the next bear cycle. The catalyst will be an unforeseen acute crisis or a recession. Once the feedback loop gets going, it'll be ugly for a while. And all the pieces are in place for that feedback loop to happen. During crises, people start throwing around the term "perfect storm" with reckless abandon. After the analysis we've gone through today, you should be able to see how all of these factors -- factors that would indeed generate a "perfect storm" -- are linked. Honestly, I'd be very surprised if we didn't see a "perfect storm" materialize sometime in the next 3-4 years. There's a good chance it'll be worse than the last "perfect storm," too. Consider: at some point in the next couple of years we are highly likely to have an environment where the economy is slow, the long-term structural challenges appear too great to overcome, investors are increasingly more afraid, policy gets unfavorable towards corporations and their margins, deflation becomes a distinctly tangible threat, cyclical election patterns start working against us, and earning a risk-free 0.15% on your money looks pretty darn attractive. It's funny, when you step back, the one thing that's clear about the market is that it moves in big cycles. Perhaps this is the reason why. While the market is moving in one direction, all the dominos are slowly being lined up in another. And then at some inevitable point, all the new dominos are in place and all that's needed is a simple flick of the finger.

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