The US is right in the middle of a presidential election season, which we affectionately refer to as "silly season"—a time when our politicians are kissing babies, handing out lollipops and promising better times ahead.
At Financial Sense, we view the markets through a three-legged stool consisting of fundamentals, technicals, and the "politicals". Given the polarity of the front-runners, their widely diverging viewpoints on economic policy, and a new vacancy in the Supreme Court, we believe the political leg will likely have more importance for investor sentiment this year.
It is important to note that the election outcome will have clear long-term implications for the US economy, however, markets (composed of businesses and investors) don't like uncertainty and this alone may have a significant impact prior to the actual outcome.
Without getting into the weeds of the various economic policies proposed by each candidate, the greater issues in our mind are the steady increase in US government debt, the associated interest expense of that debt, and the constraints this will impose on future policymakers, both fiscal and monetary.
If we take a look at the government's fiscal budget for 2016, 25% will go to social security and pensions, 28% will go to healthcare, 21% for defense spending, 6% to interest on the debt, and 10% to welfare. Altogether, this accounts for 90% of the government's budget, leaving very little wiggle room for fiscal policy measures unless financed by future debt increases.
In the wake of the financial crisis, interest rates were lowered to zero in an attempt to cheapen the cost of capital and jumpstart consumption. However, with a high debt burden and economic growth bounded at a lower level, a sizeable increase in interest rates will not only lead to interest costs consuming a larger portion of the US budget but will likely tip the US economy back into recession.
In summary, a very strong argument can be made that the US will be following the footsteps of Europe and Japan by moving towards negative interest rates during the next economic downturn, which, according to data we follow could happen as early as next year.
As Russell Napier recently remarked on our show, the bigger issue to investors may not be the next crisis, but understanding how to navigate the political response to it.
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