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Playing Politics | Seeking Alpha

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If you’re an investor, you’re playing politics.

You may not know it, but you are. As regular readers know, part of the Heisenberg raison d’être (if you will) involves explaining the intersection of geopolitics and finance.

The fact is, public policy shapes markets and markets shape public policy in a reflexive relationship that ebbs and flows over time.

There is perhaps no better example of this dynamic than the financial crisis and Dodd-Frank.

Over the weekend, I warned that the events in Charlottesville would end up having implications for markets depending on how the administration handled what was an exceedingly delicate situation.

Well, corporate America – rightly or wrongly, and it doesn’t make one shred of difference which in terms of the implications for your portfolio – wasn’t enamored with the President’s response. That’s not debatable. Everyone from Jamie Dimon to the CEO of Campbell Soup piled on Wednesday and ultimately, Trump himself acknowledged that his council on American manufacturing was no longer viable. He disbanded it officially in a tweet at 1:14 in the afternoon.

Again, it doesn’t matter what your opinion about all of that is. That is just what happened today. There isn’t a partisan statement in that paragraph – it’s just a recap of events.

Markets reacted immediately. Here’s a snapshot of the knee-jerk in stocks (SPY), the dollar (UUP), yields (TLT), gold (GLD), and the VIX (in descending order):

Now I’m going to assume I don’t need to say this, but you never know with readers: there is zero question as to whether what you see in those charts was the direct result of Trump disbanding his initiatives. You can go and recreate them yourself and zoom in on a 30-second interval and see the moves the second the tweet crossed.

Ok, so fast forward exactly 46 minutes and we got the July Fed minutes. Well guess what? They contained this rather telling passage:

Several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms’ spending and hiring plans.

See the problem here? The worry for the Fed is that the controversy surrounding the President is impeding his ability to implement tax reform and fiscal stimulus. In other words: the Fed is worried that fiscal policy isn’t ready to take the baton from monetary policy.

Can you guess what happened to the dollar once human beings (as opposed to algos, which only scanned for “inflation” and hints about the balance sheet) got around to reading that excerpted passage from the minutes? This:

And here’s the S&P, the Nasdaq, and the VIX (again, in descending order):

Over the weekend, I got several e-mails from HR readers about what the implications of the turmoil in Virginia might be for markets.

Pretty clearly, they were looking for some kind of straightforward, dire prediction from me about renewed risk-off sentiment come Monday morning.

But the situation wasn’t that simple.

The read-through for markets was more about how corporate America and lawmakers would receive whatever the White House’s response ended up being. If it was well-received, then the President’s growth-friendly agenda wouldn’t suffer further setbacks at a time when the very last thing we need ahead of the debt ceiling debate is more setbacks.

If the President’s response was not well-received, then the potential existed for corporations to pull their support and for lawmakers to become even more recalcitrant than they already were.

One more time: there’s nothing partisan in that assessment. That’s just a rehash of my simple, straightforward, “it can either go this way, or it can go that way” thought process as I conveyed it to three readers on Sunday afternoon.

Well, it went “that way” – so to speak.

And that created further uncertainty around tax reform and other parts of the agenda, an agenda which, to the extent it would be good for the economy, all of us would be excited about as investors (again, leaving partisanship aside and just thinking about it from the perspective of asset prices).

But wait, there’s more.

As you might have heard, Gary Cohn is said to be displeased about the situation. And see this is another one of those times when politics undoubtedly has implications for markets. Because Gary Cohn is a key piece of the puzzle for tax reform and not only that, he is by many accounts first in line for Janet Yellen’s job.

Here’s Compass Point’s take:

The Street is focused intently on how U.S. National Economic Council Director Gary Cohn will react to President Donald Trump’s recent statements after the events in Charlottesville, because of tax reform in the near-term and the Fed chairmanship in the medium-term.

For a bit more color on why you should care about this, we go to KBW’s Brian Gardner:

The impact to President Donald Trump’s economic agenda, particularly tax reform, from controversy surrounding comments about protests in Charlottesville can’t be ignored. Items requiring congressional action such as blocking CFPB’s arbitration rule or raising Dodd-Frank thresholds now face higher hurdles. Tax reform was always going to be “heavy lift”; may be even harder now.

It’s kind of hard to argue with that assessment. Think about it this way: if you and I have a car accident at an intersection, we might vehemently disagree about whose fault it was, but we’ll both agree that we had an accident.

And look, don’t pretend like people aren’t trading on all of the things mentioned above, because they are and they have been all year. There’s a reason why this chart of speculative positioning in the dollar looks like it does:

(Bloomberg)

Relatedly, there’s a reason why the Russell 2000’s entire post-election outperformance against the S&P has been erased (note the massive outperformance in the week following the election):

Finally, there’s a reason why financials underperformed on Wednesday:

I don’t think I have to tell you that all of the above was Wednesday’s biggest story. You need only turn on the news to know that.

But what I always try to do is help people think about markets holistically, because at the end of the day, the more you understand about how all of the pieces fit together, the better off you’ll be.

And perhaps now more than ever, politics is one big puzzle piece.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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