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Investors Must Have an Escape Plan in This Volatile Election Season

Investors Must Have an Escape Plan in This Volatile Election Season
(Dollar Photo Club)

Wednesday, 04 May 2016 07:45 AM Current | Bio | Archive

Politics loom once again as the departure of Ted Cruz from the U.S. Republican race allows traders to start preparing themselves for pricing in the prospect of candidate Donald Trump.

The problem, as ever, is just what can be priced in.

Markets are never good at dealing with non-binary situations.

What many investors don't take into account is that in November we will have, beside the presidential election, also the elections for all 435 voting-member seats in the House of Representatives, as well as all 6 non-voting delegate seats, and 34 of the 100 seats in the Senate. There will also be 12 state gubernatorial contests, two territorial gubernatorial races, and numerous other state and local elections that will be contested.

The November elections is not all about just the presidential election, but there are literally thousands of elections. For example, what happens in Congress could make as much difference to the markets as who becomes president.

At present, the uncertainty over possible outcomes is also compounded by a certain vagueness, which is normal at this stage, over what candidate Trump’s policies might be.

More immediately, the focus will be on who is likely to be the victor in any Clinton versus Trump race, because the announced or presumed policies of both two candidates are sufficiently far apart as to make pricing in probabilities of the two candidates’ “platforms” extremely difficult to achieve.

The complex U.S. political system and the EU politics are good examples that it is far more desirable for not saying necessary having economists presiding impartially over independent central banks.

Fiscal policy, as a redistributive policy, should sit in the political domain.

Monetary policy, although it can be redistributive, is more properly under the guidance of economists.

However, even here things are fraying.

The Fed has a concerning number of non-economists on the FOMC.

In the euro area there are rising concerns that the national central bank governors at the ECB are becoming more political, and of course, quantitative policy flirts with fiscal implications and negative interest rates are best considered as an outright fiscal policy.

That said, in the United States, we just heard two economists at the Fed suggesting the plausibility of a June rate hike, but we have to remember, unfortunately, sound economics may not always hold sway at the FOMC in the way that it should.

Atlanta Fed President Dennis Lockhart said in a prepared speech: “In spite of the first-quarter estimate … I'm sticking with my forecast that growth will be stronger over the rest of the year. The fundamentals look solid for consumer activity … there are indications that broad-based inflation is firming. This gives me some confidence that the run rate of inflation will rise to 2 percent over the medium term … for the time being, I'm favoring the encouraging employment data over the growth data … the downside risks from abroad appear to have subsided since January and February … the economy is nearing full employment, at some point we should begin to see mounting pressure in the labor market. One sign of mounting pressure would be accelerated wage growth…”

San Francisco Fed President John Williams, who is at present non-FOMC, speaking at a panel on "systemic risk" at the Milken Institute Global Conference said: “It makes sense for us to be moving interest rates gradually back to more a normal level.”

Williams also said the biggest systemic financial risk currently is the possibility that “broad sets of assets are going to see big movements downward” as interest rates rise. “That’s an area that I think is a potential risk.”

Williams is, in my opinion, completely right and that’s an extremely serious point he makes that all investors should better keep in mind and be prepared for.

When rates start rising, albeit moderately, there will be serious bumps in the roads, yes "roads" in plural!

Make absolutely sure you can get out quickly from whatever investment vehicle you're involved in when you will want to do so.

Believe me, it won’t be easy!

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Make absolutely sure you can get out quickly from whatever investment vehicle you're involved in when you will want to do so.
election, president, markets, investors
Wednesday, 04 May 2016 07:45 AM
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