Eyeballs Deep in Political Risk

Dear Reader,

Political risk isn’t a term you hear a lot in English speaking countries like Australia and the US. That is, it’s not used about those countries. When economists and analysts talk about political risk, they’re usually talking about Venezuela, or some country where the Rule of Law, property rights and contracts aren’t fully respected by whomever runs the government.

Investors in emerging markets know all about political risk. If the mining company you invest in owns an asset that gets nationalised by the government (nationalised is a fancy way of staying stolen), that’s political risk.

If the transition of power after an election is no longer peaceful — if the result of the election itself is disputed and the institutions used to resolve that dispute no longer function (or malfunction), that’s also political risk.

I’ve begun today’s Rebellion with this little discourse because the US is about to be eyeballs deep in political risk. And for investors, the big question to start the week is whether this kind of risk will sink the stock market rally…and the bond market…and the US dollar. As you can see, there’s a lot at stake.

I’ll get back to the Supreme Court, Congress and the president in just a second. But first, we have to talk about political risk this fall because of what the Federal Reserve said last week.

Fed Chairman Jerome Powell said the US central bank would not be raising interest rates until 2023. In other words, it won’t do anything to jeopardise sky-high stock valuations OR whatever chance of recovery there is in a US economy that was shut down in the second quarter.

Let’s get one thing straight. If the Fed has proven anything, it’s that monetary policy exists to keep rich people rich. Low interest rates, quantitative easing — the whole Fed toolbox is pretty good at keeping financial asset prices high. But it’s not doing much to stimulate demand in the private sector (consumption, bank lending, business investment).

Powell essentially said that’s the job of the Congress and the president, or fiscal policy. Congress can pass a bill that orders the Treasury Department to mail out cheques directly to the American people.

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Congress can fund a project to build a bridge to the moon. Congress can spend as much money as the Treasury can borrow at historically low rates.

All THAT adds up to more political risk in the US. The US government set records for spending and deficits this fiscal year. It will spend over $6 trillion, which is about $3 trillion more than it takes in via tax receipts. Hence the $3 trillion deficit.

The risk isn’t that the US government will default on its debt. It doesn’t have to. It can print money to pay creditors back.

The risk is that it does exactly that and ushers in the kind of inflation that utterly destroys civil society, the middle class, and the retirement savings of millions. All that risk got more real last week because of the Fed’s announcement.

Which brings me back to the other big piece of news from the US. I’m not telling you this because you should care. Or because you might have any interest in US politics. But it COULD affect stock markets worldwide. So, it’s worth a look…

What I mean is the possibility that there’s a contested election result on 3 November. In a normal world, we’d know the winner of the election around midnight on the US’ East Coast. But this year both major political parties have cast doubts on the legitimacy of the result. Both have complained of ballot fraud and threatened lawsuits across the land.

If you remember in 2000, the race between Al ‘I invented the Internet’ Gore and George W Bush came down to the hand counting of ballots in the state of Florida. Ultimately, in a 5–4 decision, the US Supreme Court ordered the halting of the recount. Florida’s electoral votes were awarded to George Bush and the rest, as they say, is history.

A full analysis of the three branches of the US’ Federal government is beyond the scope of today’s Rebellion. But I would like to at least make the point that the death of Associate Justice Ruth Bader Ginsburg on Friday increases the level of political risk in the US. Why?

Justice Ginsburg was a solid vote for the Court’s left wing (in the US, we call them liberals, but I’ll avoid using that term because it means the opposite in Australia).

Her death leaves a vacancy on the Court, which normally has nine members. A court with eight members might be unable to reach a majority decision should the presidential election again end up in front of the Supreme Court.

But I’m getting ahead of myself. Supreme Court vacancies are filled when a president nominates a person to fill the seat and the US Senate confirms that nomination. By the way, you don’t have to be a lawyer to be on the court. But almost all nominees have been (and most of them have graduated from either Harvard or Yale Law School…not very diverse).

Here’s the catch: The Senate, as the Upper Body in a coequal branch of the government, doesn’t have to consider the president’s nomination. This happened when then-President Barack Obama nominated a man to fill the seat of deceased Justice Antonin Scalia. Obama was not up for re-election (the US Constitution limits presidents to serving two terms). But the new president, who turned out to be Donald Trump, wouldn’t take office for 11 months.

The political risk in Australia…

That seemed like a long time to leave the court seat vacant. Democrats howled with indignation. But because Republicans controlled the Senate, there was nothing they could do.

Similarly, even though the election is just months away, and even though Trump could lose, it’s entirely possible that he nominates a candidate and the Senate (with a very narrow Republican majority) confirms the candidate, even after Trump has theoretically lost the presidency (a President Biden wouldn’t begin his term until late January, as specified by the Constitution).

Already a maelstrom is brewing. There’s no telling what Democrats, ‘progressives’ and ‘activists’ would do if Trump nominates a candidate and the Senate confirms him or her.

By the way, the Senate holds confirmation hearings by tradition, during which Senators try to sound intelligent and learning by asking questions written by their staff.

But the Senate could confirm a Supreme Court nominee with no confirmation hearings at all. It would drive some people insane. But there’s no legal reason they can’t do it.

What WOULD happen then? You’d have a large part of the American political establishment, backed up by lackeys in the press, calling the president and the Senate and the Supreme Court illegitimate. The peaceful transition of power through free and fair elections would suddenly be in doubt. And political risk in the US would rock the stock market.

What about Australia? The political risk in Australia is that State Premiers — especially Dan Andrews — lose legitimacy in the eyes of the public due to constantly moving the goal posts on how to end COVID lockdown. Politicians govern with the consent of the governed. When that consent is lost, usually you get an election and the bums get thrown out.

Will Victorians wait for an election to throw their bum out? Or will it happen sooner? Let’s hope sooner. So the economy and the Australian people can live and breathe free again. More on that next week.


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Dan Denning,
Editor, The Rum Rebellion

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

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