Every year, investors ask the dreaded question: Will this autumn be like 1929, 1987, or 2008?
Our Set for Life fund sees such a significant risk that we are going into 100% cash from September 14, 2022, until the midterm elections. We feel an opportunity to step aside and then return to recently liquidated positions at a lower cost and with larger holdings.
Over the next seven weeks, we are long cash due to the following uncertainties that might burst the bubble:
Current Inflation. When inflation began to rise last year, the thinking was it would be temporary. The initial supply bottlenecks would abate as COVID-19 finally left the stage. By the autumn of 2022, year-on-year price rises would return to the norm.
However, even as energy prices have plunged, food, home, and health prices increased faster to keep inflation rising.
All the pundits that told us inflation was temporary said it would be gone by now. Instead, it’s gaining momentum.
Inflation over the next 12 months. The war in Ukraine pushed up energy prices as Europe’s largest oil and gas exporter fell under sanctions. In retaliation, Russian President Vladimir Putin started to cut off the energy supply to Europe.
He claimed it was due to “technical difficulties” in the Nord Stream Pipeline connecting Russian oil to Germany, but it was actually to take a swipe at the west where it would be most felt: Their wallets.
These “technical” difficulties prevented Germany from stockpiling enough heating oil for the coming winter. As supplies continue to weaken, the prospect of higher heating prices this winter grows.
As Ukraine takes back more territory, Russia seethes at Europe and America for arming them to the teeth.
Some analysts fear Putin might retaliate with a nuclear bomb as his final act. He’s way too clever for that.
Why guarantee neverending sanctions with a nuclear bomb when you can keep stockpiling oil and gas to bleed the West slowly? He can sell at a higher price once the war ends and sanctions are lifted.
This keeps energy prices and inflation hot.
But that’s just half the story.
America is in a recession, and Joe Biden’s policy is to inject trillions into the American economy. Even as Fed Chair Jerome Powell raises rates, Biden keeps the money spigot flowing.
His student loan forgiveness injects over $700 billion into the economy. Couple that with his, ahem, Inflation Reduction Act, and more money will continue to flood the system during the worst inflation in a half-century.
This exacts a debilitating tax on the lower and middle classes, creating another unprecedented problem:
American Instability. People become violent and unpredictable when they have nothing left to lose, and there is no hope things will get better. If political reality doesn’t assert itself this November, January 6 might look like a cocktail party before it’s all over.
In 1993, Bill Clinton took office. His campaign was simple: It’s the economy, stupid.
Once elected, he raised taxes and attempted a health care overhaul that was soundly rejected. The American economy grew less in 1993 than it did under Clinton’s predecessor in 1992.
The 1994 midterms were a disaster. His party lost control of both chambers of congress for the first time in half a century.
In 2009, Barrack Obama took office to fix the economy broken by the Great Crash of 2008.
Things only got worse. During his first two years in office, the great crash became the Great Recession.
His midterms were even worse than Clinton’s. Again, the party in power ceded both chambers of congress to the opposition.
Joe Biden’s mandate was to repair an American economy ravaged by multiple lockdowns from the COVID-19 pandemic.
Neither Clinton nor Obama brought on inflation. Neither created a recession. Neither set in place massive crime waves. Neither saw an invasion by over 3 million non-citizens.
Every political calculus points to a drubbing of the democratic incumbent. The Republicans will take back both chambers.
Since the democrats took control of Congress four years ago, they impeached the Republican President twice and are about to indict him.
If you are the Republicans, what do you do when you have a majority in Congress? You do to Biden the same thing. That could lead to his impeachment, even his removal.
Do the democrats want to risk this? Can they prevent it by any means possible?
At least a third of the country believes so. If the democrats somehow “hold on” to either chamber of Congress, those 100 million people already suffocating by inflation will lose all hope of anything getting better.
The mere hint that the 2020 elections weren’t free and fair led to riots in the American Capitol. Imagine what could happen if people feared that the midterms were rigged too?
It doesn’t matter if they were actually rigged. If enough desperate people feel like there is no hope, we will see instability the likes America has never experienced.
The markets will react. They will anticipate late October and early November.
However . . . if the Republicans take Congress things go very bullish. Stocks respond positively to one party in congress and the other party in the white house.
The media is our barometer.
If mainstream media polls show a more than a 60% chance of the democrats retaining congress, we see this as their way of preparing the country for the inevitable outcome.
If they put a 50% chance or less for such a scenario, we might take some positions just before elections on the assumption they don’t want to be seen as clueless once reality sets in.
“Fundamentally,” stock markets are overvalued. They can drop 50% and still trade above historical valuation. The question is — will it happen now?
It is our view that such a crater can happen sometime in the coming weeks. The risk is high enough for us to batten down the hatches and seek safety until the dark clouds pass.