Rattled

“The breath of an aristocrat is the death rattle of freedom.”

-Goerg Buchner

While the 2016 Presidential election is still over a year away, it's fair to say the Republican and Democratic establishments are rattled right now. Completely rattled.   The candidates responsible for the rattling are none other than Donald Trump and Senator Bernie Sanders.  While we have misgivings about both candidates, frankly, shaking up the disfunctional two party system with its embedded interests is a very good thing for America.

On the left, we have Vermont's self-avowed socialist Senator Bernie Sanders. Technically speaking, he is an independent who caucuses with Democrats.  He is also probably the poorest candidate in the race.  In fact, last year Hillary Clinton made more than the Sanders’ entire household net worth.

So, how is Sanders actually doing?  Overall, he has gained massive ground on Hillary, but according to poll aggregates he still trails her by almost 28 points for the Democratic nomination.   Interestingly, though, in New Hampshire primary polls Sanders is up more than 9 points on Hillary.  So, while he remains a true long shot, Sanders is narrowing the gap every day.

On the right, of course, is the omni-present Donald Trump.  At times, Trump has identified himself as a Democrat, but recently pledged that he would support the Republican nominee. For all practical purposes he represents the "Party of Trump."  Or, as David Brooks accurately wrote in the New York Times this morning, “He is a lone individual whose main cause and argument is Himself.”

Regardless of his intentions, so far The Donald is polling very well in the race for the Republican nomination.   This is highlighted in the attached graphic.  Since early July he has been the clear leader and is now more than 14 points ahead of second place Ben Carson.   Trump’s poll chart looks eerily similar to a chart of the Chinese stock market from earlier this year.

 Rattled - z middle chart

If the history of recent elections is any guide, it's unlikely that Trump or Sanders will prevail.  But the current state of affairs is certainly a valuable lesson for both parties. The electorate is signaling they are tired of Washington insiders and petty partisan politics.   As a result, non-traditional candidates with limited party alignment are receiving serious consideration (even those with combovers!)

French historian Alexis de Tocqueville summed up the challenges with the two party system more than 180 years ago when he wrote:

“There are many men of principle in both parties in America, but there is no party of principle.”

Indeed.

Back to the Global Macro Grind...

On a related market and political note, our housing research team is currently doing work analyzing housing stock returns in and around an election year.  They’ve found that the general cycle, not surprisingly, goes something like this:

  • Year 4 (Election year) -> candidates promise the world / stocks price in great expectations
  • Year 1 (New President) -> honeymoon / talk of big ideas / do no harm
  • Year 2 -> Unleash hell
  • Year 3 -> Comping the comp
  • Rinse and repeat

Our team looked at housing stock returns going back to 1991. Their overwhelming conclusion was that election years are the most favorable for housing stock returns. In fact, the median return for housing stocks in an election year was an incredible 30% (with the average just a hair behind at 29%.)  If you’d like to view their research in its entirety or discuss the results of the analysis, please ping our sales team at .

Supporting this idea that housing stocks have the potential to outperform in the coming year is the reality that the Fed is likely to push out raising rates longer than most expect.   We penned a piece for Fortune recently highlighting five key reasons why the Fed might push the date for interest rate increases.  Not the least of which is inflation expectations, which have become downright deflationary.

Speaking of "rattled," the short-duration Treasury market is completely rattled as it relates to digesting the Fed's intentions.  In the Chart of the Day below, we show a chart of the 2-year Treasury yield, which emphasizes the inability of the 2-year to break through the 0.74% yield level.  Certainly, it has made attempts to breakout, but alas, it continues to fail as the likelihood of the Fed increasing rates gets pushed out further and further.

As you may have heard, The World Bank has offically joined the chorus of global prognosticators urging the Fed to delay a hike.  According to the World Bank’s Chief Economist:

“I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence. It is the compounding effect of the last two weeks of bad news with that China devaluation. The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly.”

Less than a week ago, the IMF also urged the Fed to delay any rate hike.  So to the extent the Fed does decide to raise rates during its Sept. 16th and Sept 17th policy meetings, it would do so against the advice of both the IMF and World Bank . . . the two institutions that were created at Bretton Woods to manage global financial stability.

Bottom line? If Chair Yellen and her Fed colleagues ultimately decide to raise rates in mid-September, we will all be rattled.  As will equity markets across the globe.

Our immediate-term Global Macro Risk Ranges (with our intermediate-term TREND call in brackets) are now:

UST 10yr Yield 2.10-2.24% (bearish)

RUT 1120-1176 (bearish)

VIX 21.60-32.63 (bullish)
Oil (WTI) 39.66-49.45 (bearish)

Gold 1115-1145 (bullish)

Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research

 Rattled - z chart of day 09.09.15 chart