Things have been pretty calm in terms of overall market activity despite some occasional bouts of volatility. Despite hundreds of forecasts across the spectrum of economic views that we are about to see a huge new major crisis, that has yet to emerge. The 2018 elections are over now and will results in predictable gridlock which markets don't normally find too bothersome.
Lately though, a few indications that we might be about to see some kind of rollover in the economy have begun to show up. The stock market is now struggling and more and more view as overpriced. The housing market is showing some signs of a slow down with mortgage rates creeping higher. Same with auto sales. So we continue to monitor things to see if these are just minor pullbacks or the start of something more significant.
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Unfortunately, it is impossible to try and analyze the potential for future economic conditions without taking into account the political ramifications. So what follows below is an attempt to try and project what we might see in 2019/2020 given the current political landscape.
From 2016-2018, the Republican Party controlled The White House, the Senate, and the House of Representatives. While its true that the slim majority held in the Senate did place some limits on what Republicans could get passed into legislation, for political perception purposes, the public would view whatever happened economically during 2016-2018 as being owned by Republicans. I think this view is not entirely proper because there are many longer term factors that impact the economy (good and bad) unrelated to whatever the political party in power does. But in general, the public probably does not view things that way which is what matters in terms of political fallout.
For the most part, the general perception is that the economy did well during 2016-2018 which probably allowed the Republican Party to limit its losses in Congress in the recent mid term election. It is also probably true that if we had seen the new major financial crisis many are still expecting to arrive during 2016-2018, President Trump would have taken most of the blame for it just as he claimed most of the credit for what most viewed as a good economy. With total control of The White House and Congress, it would have been pretty hard to shift blame elsewhere in the public perception.
So what happens now in 2019-2020?
Now the political perception situation has been altered. The Democrats will now control the House of Representatives. We can be pretty sure they will use this new found power both to impose gridlock on any new legislation President Trump would want and to harass him with various investigations for the next two years. Without control of the Senate, this will mostly be just noise, but will certainly insure that no further major agenda items for President Trump will go anywhere (the possible exception being some kind of infrastructure bill).
How will this impact markets and the economy?
It is too early to say right now. We will consider two alternatives in this analysis:
1) Gridlock along with continuing rising interest rates slows down the economy and cause some correction in the stock market, but not a severe decline.
We will call this the minor impact alternative. If this is what happens, we can expect that not all that much is going to change in the next two years and that nothing terrible will happen requiring someone to be "blamed for causing the problem". In politics, perception is pretty much everything. With a divided government where nothing major happens good or bad, it is pretty hard for either side to successfully blame the other side. Further stalemate seems the most likely outcome.
2) The economy rolls on over from here into a severe decline and the stock market takes a severe drop. The possible signs of a topping out and rollover we see now pick up momentum and turn into the major crisis so many have expected now for years. The entire financial system comes under risk once again (worse than the 2008 crisis).
Here is where it gets interesting. If we really do get into a major economic decline of the kind people like Jim Rickards have been predicting for a long time, someone is going to have to be blamed in an effort to push the political fallout their way.
We don't even have to guess what President Trump will do under this scenario. He has made it clear. He has already tagged the Fed for blame due to tighter money policies. And he has already made it crystal clear he will blame Democrats for a falling stock market.
So the President already has two convenient scapegoats lined up in case things really do go south significantly the next two years.
We can expect that Democrats along with all others opposed to President Trump will do everything they can to lay the blame on President Trump. Perhaps they will argue that the last two years were just a carry over effect from years of low interest rates and easy money policies that President Trump rode to its crest. Whatever they feel will resonate best with voters is probably what they will go with. But we can be pretty sure they will blame President Trump.
In the second scenario, the Blame Game likely ramps way up in 2019-2020. An already divided nation will probably see even more intensity on both sides as the political stakes for who the public blames for the crisis would be enormous. That may be hard to imagine given what we have already seen, but in any crisis things become even more intense. Also, under severe crisis conditions, the door tends to open wider for what are normally considered more extreme views to gain momentum. This could range from the socialist agenda coming from the left to the "end the Fed" agenda on the right. If a majority of the public views the present system as failing, they tend to be more interested in listening ideas for radical change.
It is this second scenario we should watch for and monitor carefully the next two years. If we get the first scenario. nothing major is likely to change in terms of our financial system or monetary system. But under the second scenario, the potential for some kind of major change increases and what that change looked like probably would depend on who the majority of the public blamed for the crisis (an unknown in a complex system).
I offer no predictions here. I just attempt to monitor events and offer the best analysis I can based on what actually happens. If I had to guess right now, I would guess scenario #1 above is more likely than scenario #2. But who really knows? The conventional wisdom has been wrong as often as it has been right in recent years.
Added note: Unless some significant news event arises to cover, this may be the last article on the blog for the next month or so.
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