Inequality Will Define Markets and Geopolitics in 2019
Nous Sommes Tous En France
As we discussed last week, power and wealth continue to be concentrated in fewer individuals and institutions. As the protests in France evidence, voters in Western nations have had enough. While those in historically democratic nations have gone to the ballot box to enact change, there is growing concern that countries in Eastern Europe (ground zero for nearly a century of Soviet imperialism) are embracing the 21st-century version of this familiar alternative.
It’s hard to not be envious of the Chinese miracle, where many credit the Communist Party with bringing 700 million out of poverty. In return, the population seems to have accepted a dystopian police state; It is amazing what people will do to improve their lot in life. When is the bargain a bad one?
Just after the 2016 US presidential election, politicians and commentators (especially on the left) acknowledged the plight of America’s working class and talked of reaching out. That lasted about a minute and then US politics devolved into a particularly vitriolic partisan circus. It’s hard to take politicians seriously when they express concern for the working class. Maybe it’s because there are so few working-class politicians, as laid out in Nicholas Carne’s book, The Cash Ceiling.
The same frustrations are playing out globally. In case it wasn’t clear, the protests in France are not insignificant, they are not happening in some far-away corner of the country, they do not involve some fringe element of society. They are the working class of France rising up in Paris and other major cities to reject their inequality. Imagine these scenes on Pennsylvania Avenue, Fifth Avenue in NY, and outside the futuristic headquarters of Silicon Valley.
In 2019, the world will require a clear definition of where the United States stands on rising authoritarian elements across the world. The actions of the Trump administration will be critical. A mere 10 percent drop in stock markets has shifted focus back to “protecting” our wealthy investor class, with renewed calls to halt the Federal Reserve’s interest rates hikes and walk back any attempt to bring fairness to the US-Chinese trading relationship. These actions would primarily benefit our investor class, a group that has never been richer and is sitting on ~300% stock market gains since early 2009. Without addressing inequality at home or across the world, the US administration will not be able to take a credible stand against the rise in authoritarianism. 72 years prior, in 1947, a series of major actions by the United State drew a line in the sand against communism. These actions included
- Outlining of the Truman Doctrine
- Formation of the International Monetary Fund
- Announcement of the Marshall Plan
- Passing of the National Security Act of 1947
- Establishment of the CIA
President Harry Truman is consistently rated as one of our Top 10 Presidents against heavy competition. Your move, President Trump.
Tech stocks and Crude Oil continue their Q4 role as leading indicators of market performance. Entering December, I was looking for a Santa Claus rally in the S&P while remaining short the NASDAQ. It didn’t take long in December for markets to turn back down in unison. At important price levels, markets have been perfectly rhythmic. Since the initial October drop, three upward price movements have been rejected, each time on significant volume. Each swing high has been lower than the last one, suggesting continued downward pressure.
A definitive break of 2620 on the S&P and 6920 on the NASDAQ seems very possible. In that event, further downside is quite likely. The Russell has already broken down below its recent swing lows. Looking ahead, were this to materialize, the S&P has price memory around 2500 and 2370, approximately 5% and 10% below current levels. Investors would do well to realize that were those levels to be hit, the S&P would still be +11% and 17.5% since the 2016 Presidential Election. Crude Oil price action continues to imply further downside, possibly with much lower prices. The recent rallies on news from OPEC have not produced a meaningful upward movement in prices. A break of 50 in WTI Crude seems quite likely as well. Price has memory at around $42–43 in WTI Crude.
Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.