Wednesday, August 26, 2015

The Market Dropped 3%, So What's For Dinner?

On Monday, Oct. 19, 1987, the U.S. stock market nose-dived, with the Dow Jones Industrial Average falling 22.61% in a single day.  That was volatility.

Recently, the market has been bouncing around, losing as much as a few percent a day, and edging into correction territory (a loss of over 10% from the latest high).  This turbulence isn't surprising, given the six year age of the longstanding bull market.  Indeed, in the summer of 2011, the market dropped around 17% on account of various investor jitters.  Then, it recovered.  Markets regularly have downturns, even bull markets.

So what does the future hold?  Nothing that anyone can reliably foretell.  The direction of the financial markets today is determined first and foremost by central bank policies.  The key players are the U.S. Federal Reserve, the European Central Bank and the Bank of China.  Predicting central bank policies is difficult in the best of times.  These days, with the data unusually uncertain, central bank policy is harder to predict than one's luck at the  roulette wheel.  This is especially so since politics appears to infiltrate central bank policy, making prediction even harder.  But one thing you can expect is they'll be cautious about doing anything that isn't accommodative.  If the Fed raises rates in 2015, it will probably do so once, and be done with rate raising for quite a long while.

The Chinese stock markets have a bubbly aura, making further volatility in Shanghai and Shenzen likely.  But China's economy is not heavily dependent on rising Chinese stock prices--and neither are Europe's economy or North America's.  Many individual savers in China are getting hosed, but the Chinese economy doesn't rely on domestic consumption. If Chinese investors lose their savings, Chinese manufacturers will still keep exporting to the rest of the world.  So the acid reflux in the Chinese stock markets may, ultimately, have only so much impact and not more.

Keep an eye on the market, but don't miss any meals over it.  If you're nervous, stay the course and don't invest more right now.  On the other hand, if you're feeling lucky, think about adding a bit to your stock holdings as the averages move down.  You know what they say about not letting a good crisis go to waste.

Is there a black swan lurking?  Maybe.  Since China has been the major source of world economic growth in recent years, any major upheaval in China could be the black swan.  What could happen there?  Well, President Xi Jinping has been aggressively consolidating power.  He may be the most powerful leader China has had since Mao Zedong.  But the market turmoil in China, and the recent slowdown in its economic growth, may be causing some to question his leadership.  The secretive nature of China's Communist Party makes it impossible to know for sure how strong Xi's grip on power may be.  While there are no overt signs of change, if Xi is forced out of power and there is a struggle for control in China, then all bets are off and you might want to do some hard thinking about how much risk you care to hold in your portfolio.

Tuesday, August 11, 2015

How The Donald Could Beat Hillary

The stolid burgermeisters who run the Republican Party shrink with horror at the thought of nominating Donald Trump as their presidential candidate.  His verbal atrocities are reaching the level where they might offend Attila the Hun, and the conventional Republican wisdom is that there is no way Trump could beat Hillary Clinton, the likely Democratic nominee.

However, the latest polls that follow Trump's bloody comments directed at Fox News moderator Megyn Kelly show that Trump's support among the electorate remains essentially unchanged.  If this persists, The Donald will be a force to be reckoned with in the Republican primaries.  Democratic strategists are probably delighted, because they, too, are likely to believe that Clinton can easily beat Trump.

However, Clinton's 2008 campaign also thought she could beat Obama, and there was a problem with that line of thinking.  How could Trump beat Clinton in 2016?  By doing pretty much what he is doing now.

Within living memory, Trump has been a political centrist, and has even expressed support for liberal positions on some issues.  He's made donations to Democratic candidates.  He even made donations to the Clinton Foundation and invited the Clintons to his 2005 wedding.  As a candidate for the Republican nomination, Trump has slid dramatically to the right, proposing a wall at the U.S.-Mexico border that Mexico would have to pay for and the defunding Planned Parenthood, and generally foaming out of the right side of his mouth.  Plain talk pays off in this election cycle (see and Trump is presumably saying what he thinks will help him win the primaries.  Plain talk is certainly paying off for Bernie Sanders.

In the general election, however, if Trump is the Republican nominee, he could easily slide leftward, shifting his views to draw enough support from the political middle to win.  It wouldn't be hard for him to adopt centrist positions, since he's been a centrist for much of his life.  There is plenty of precedent for candidates from both parties to shift toward the middle in the general election.  The advantage that Trump has over Clinton is that he appears sincere, unscripted and bold.  Clinton seems unable to emerge from her cautious, calculated, too well-burnished image.  We can't see the real Hillary; and her destruction of e-mails only compounds the sense that we'll never get to truly know her. 

Both Trump and Clinton have tarnished images.  But Trump appears to have a way to overcome the tarnishes in his image.  Clinton seems bedeviled by the tarnishes in her image, and apparently can't prevent them from dominating the news coverage of her candidacy.  If this state of play continues, The Donald just might beat Hillary if they were to meet in the general election.