We’ve received some interesting questions about the election, and about TradeSmith Decoder as a service. We’ll answer a few of those today.
As a quick note regarding questions, the mailbag is always open: You can reach us via [email protected]. We always enjoy hearing from readers — and if your question is a common one, we may answer it directly in a future TradeSmith Daily.
Q. Some think “gridlock” is bullish for markets, as it has been in the past. Why do you disagree?
Gridlock — a scenario where Washington can’t make policy and can’t pass bills — has historically been seen as positive. In the past, Wall Street has preferred a gridlocked Washington to an engaged one.
But the key difference is the macro backdrop.
When the economy is functioning on normal terms, Wall Street prefers that Washington stay out of the way. To the extent that new legislation stifles commerce, no news is good news.
In past years it has been the central bank, not Congress, that has done the heavy lifting in terms of helping markets with monetary policy.
If the Chairman of the Federal Reserve can lift the stock market by cutting interest rates, or introducing a new QE program, then Wall Street won’t much care what Republicans and Democrats are doing.
But the logic of gridlock changes when a crisis hits. Think about natural disasters, like hurricanes and floods. If FEMA, the Federal Emergency Management Agency, did not exist, the country would want to create it.
Then, too, when monetary policy maxes itself out, fiscal policy — action from Congress — is what’s left.
The Federal Reserve is set up to help Wall Street, not Main Street. The Fed can’t send checks to people or keep mom-and-pop stores and small-time landlords from going bankrupt.
If the country is faced with a tidal wave of evictions and bankruptcies, coupled with millions of business closures, it is fiscal response that can make a difference.
Remember the horrible advice that U.S. Treasury Secretary Andrew Mellon reportedly gave to Herbert Hoover early in the Great Depression: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system.”
We now know that Mellon’s instinct — “liquidate” everything — was a recipe for economic collapse, because a lot of the severe financial distress in a macro-driven crisis is not “rottenness” at all, but rather hard-working people caught out by forces beyond their control.
The mechanism for alleviating these crises is no longer the central bank, but Congress, which holds the power of the purse. Wall Street understands this. Investors on the whole believe it, and CEOs do, too.
To put it another way, gridlock in a time of crisis is bearish because the threat of deflationary collapse is bearish, and gridlock means a lack of fiscal safety net.
Consumers trust banks because of FDIC insurance. If not for FDIC insurance, we would see fewer banks and a lot more bank runs.
If the availability of emergency fiscal policy is FDIC insurance for the economy on the whole, then gridlock is like suspension or cancellation of that policy. That makes Wall Street nervous.
Q. Won’t we mostly have gridlock anyway, if Democrats control the House of Representatives?
It’s true the House of Representatives is not in play in this election. There is a theoretical chance it could flip from Democrat to Republican, but the odds are very low.
Still, though, we don’t include the House in various gridlock scenarios because, in many cases, the House is willing to do business, even with Republican leadership.
It’s important to define the basic terms. Functional government does not mean legislation passes smoothly or easily. It means a better-than-even chance of passing anything at all.
Consensus is still a hard slog, and even with party unity you don’t always get it. Republicans tried to dismantle the Affordable Care Act in 2018 — while controlling the White House, the Senate, and the House of Representatives before it flipped — and still failed.
So consensus doesn’t mean instant passage. It just means passage is feasible. Gridlock, on the other hand, means that passage is virtually impossible. It puts the odds at slim-to-none.
A Democrat-led House of Representatives is not a gridlock factor by this measure because there are a significant number of moderate Democrats in the House. These moderates hail from districts that are more purple than blue, meaning they are incentivized to act in a non-partisan fashion. That, in turn, means a consensus can be wrangled out, at least in theory.
The Senate, meanwhile, is much more combative. It is the place where bills go to die — as declared by its own leadership.
In 2019, majority leader Mitch McConnell said “Let me be clear: I will be the Grim Reaper in the Senate” with respect to anti-free-market legislation. If Dems retake the Senate, and have to face a Trump White House, they will feel the same about anti-labor or anti-environment legislation and will launch dozens of investigations alongside. That is where you see gridlock.
Q. What happens if state or local governments are denied access to credit?
This is a fascinating question. We honestly don’t know, because it has never happened in modern times.
In 2019, we wrote about pension-related crisis scenarios where various states could become insolvent. California, Illinois, and others have long had the financial equivalent of a ticking time bomb in their pension portfolios.
Now, thanks to COVID-19, the threat of state-level crisis has accelerated and expanded. The pandemic has been catastrophic for state budgets, in terms of ratcheting up costs and reducing all manner of tax revenues at the same time (property tax, sales tax, state income tax).
Our general conclusion in 2019 was that, due to the ticking time bomb in pension fund obligations, a multi-trillion bailout was inevitable. And we came to that conclusion, mind you, multiple months prior to COVID-19.
So, this is one more trend that the pandemic has accelerated. Multi-trillion bailouts for the various states are impossible to avoid at this point.
But what if the federal government just says no, or gridlock prevents a state bailout from happening?
Then the situation might be comparable to Greece. If you recall the European debt crisis that peaked in 2012 or so, Greece was the focal point.
The Greek economy was in shambles — crushed by a gigantic debt load — and deep-pocketed EU members, led by Germany, did not want to help with Greek debts, and it was touch-and-go as to whether Greece would stay in the EU.
If the federal government decided to, say, treat California the way the EU treated Greece in 2012, you could see a genuine secession movement take hold.
There could also be a banding together of states with broken budgets due to convergent long-term interests, and some kind of ultimatum to the tune of: “If you don’t want to help us now, we see no obligation to keep sending you transfer payments.”
So, ultimately, if the United States is to stay the United States, the states will get a multi-trillion-dollar bail-out. They are going to need one, perhaps sooner rather than later, and the nation will support it rather than vote against it, because otherwise we are talking about a dissolution of the union.
The really hairy question is how long a resolution would take. The European debt crisis, which dragged on for about two years, from 2010-2012, was relentlessly grinding and horrible. It was like pulling teeth or getting a cavity drilled without Novocaine, for what felt like an interminable period of time.
How will municipal bond markets respond to all this? It depends entirely on local specifics. But in states going through a COVID-accelerated budget crisis, one can forecast an elevated period of volatility that could last for years, as the specifics of state level bailouts get worked out.
Q. How will gold and silver respond to the various scenarios?
The ultimate outlook for precious metals is wildly bullish. The question is what happens between here and there. This, too, is a factor that depends on the path of fiscal policy, and what happens to the federal government.
The United States has a mountain of debt. So, too, does the world. This mountain of debt threatens to topple over and crush all that lies beneath it. If the U.S. economy experiences a deflationary collapse, a debt mountain, built up over decades, will be the culprit.
For a sovereign government, there are only two ways out of a situation like this. You either inflate the debt away — which ultimately means printing currency to pay off obligations — or you find some kind of growth miracle, a way to grow the economy at such a rapid rate that productive income expands at a fast enough rate to comfortably service the existing debt.
The rapid-growth angle is a pipe dream. It isn’t a realistic hope. That means the powers that be will have to inflate the debt away, which means resorting to the printing press, and the United States, thanks to the size of its obligations, will have to print more than anyone else.
As mentioned, this is wildly bullish for precious metals, Bitcoin, and all manner of inflation assets that can benefit from a decline of faith in the U.S. dollar and the general erosion of fiat currency.
But as with the inevitability of government-funded state bailouts, it isn’t just the destination, but the path from here to there that matters.
In terms of currency printing, the Federal Reserve can’t do enough by itself. The real spender, the mega-spender, has to be Congress, which still holds the power of the purse. When Congress decides to spend trillions, and keep spending trillions, that is when you will see things really take off.
This is why a timing component still exists for precious metals investments. We are extremely long-term bullish on the precious metals space. But we are also aware that, sometimes, the government can take its sweet time in reaching a conclusion, even when delay is foolhardy or dangerous.
Q. It sounds like things could get crazy. Should I go to cash, or what?
If you’re not prepared for turbulence, going to cash is certainly an option. Keith Kaplan, our CEO, has said that cash is a better alternative than going into this election unprepared. (That’s one of the reasons we created the election webinar.)
But cash isn’t necessarily the best option, if you are willing to prepare and take action. The post-election scenario will generate major upside opportunities — not just major risks — and staying in cash is a form of risk all by itself.
If inflation picks up, even as money market funds yield close to zero, staying in cash could mean a steady loss of purchasing power. And if various paper assets continue their uptrends, or go further into “melt-up” mode, the cash-bound investor may not know when to get back in, or how to get back in.
Being stuck on the sidelines as historic opportunities are generated, and various areas of the market rise sharply while your cash feels worthless can be a painful proposition indeed.
It’s totally understandable to fear volatility, because most investors are not ready for it. And frankly, in our view most research services aren’t ready for it either.
The typical long-only, stock-based research service is built for bull markets and calm environments, where the only real question is which stock to buy.
TradeSmith Decoder, the research service we run, is completely different. We have long been prepared for this moment.
When markets get volatile, that is when real traders thrive. And when extreme “macro” factors start to dominate the landscape — stuff like inflation, debt crises, geopolitics, and societal unrest — that is when a deep knowledge of financial history, and a deep versatility in terms of trading instruments, both long and short, starts to really matter.
So in terms of what you should do: If you don’t want to sit in cash, you should consider subscribing to TradeSmith Decoder. We’ve been anticipating this market sea change for a very long time (which is why we called many aspects in advance, prior to the pandemic, in our Deadly Decade Survival Guide in 2019).
TradeSmith Decoder provides daily commentary to subscribers. It provides real-time trading signals via daily broadcasts. And it provides position sizing in a closely tracked model portfolio.
If you don’t want to sit in cash and watch your purchasing power erode, you need trading capability, and guidance from someone who is deeply seasoned and deeply familiar with the type of market environment we are heading into now. That is what TradeSmith Decoder was built for. It is the culmination of 20 years of skill and experience, distilled into a product that will keep you informed, every single trading day.
Q. Are readers told WHEN to buy and sell with TradeSmith Decoder?
Yes, they are. And this is one of the most important aspects.
Analyzing markets is one thing. Keeping track of markets on a day-in and day-out basis is another.
Knowing when to buy or sell — when to add to a position, when to take partial profits, when to move quickly — is crucial for success. There can be weeks or months at a time when no action is required on a position. And then, within the space of a day or two, action can be vital.
We track hundreds of instruments, every single day, including a watchlist of potential trades we are prepared to enter. We also track all of our positions, every single day, monitoring the price action not just for new positions, but for opportunities to add to existing positions, or to take profits on a position, or to exit a position entirely.
Due to the sheer number of information streams involved, it is impossible to track that amount of data without a streamlined system for managing all that information complexity.
Fortunately, TradeSmith Decoder has such a system — which was built and perfected over the course of 20 years — and we use it not just to give general guidelines, but to tell subscribers EXACTLY what we are buying and selling, with real-time instructions down to the day.
Q. Do you need a cryptocurrency account to use TradeSmith Decoder?
You don’t need cryptocurrency access to benefit from TradeSmith Decoder. It certainly doesn’t hurt, as we are active in cryptocurrencies.
But there are various stock- and ETF-based alternatives to direct cryptocurrency exposure — we have told subscribers about them — and more will be on the way.
We have so many opportunities in Decoder that cryptocurrency is only one aspect. At the moment, the majority of positions in the Decoder portfolio are equities and ETFs (and that will normally be the case).
Q. What are the benefits of Decoder’s “go anywhere” approach? Why not just stick with stocks?
Look, stocks are great in a multi-year bull market.
There are long stretches of time where stocks seem to rise and rise, and all the major indexes drift gently upward, and investors don’t have to worry about “macro” factors like interest rates, inflation, geopolitical conflicts, or currency volatility.
In periods like those, stocks are all you need. But the periods don’t last.
At certain points in the cycle, the market is like a calm ocean — small waves, plenty of sunshine, and a gentle breeze that is perfect for sailing. In those times, long-only investing is the way to go.
But at other points in the cycle, the market is like a storm-wracked ocean. In those periods you have giant waves, – the kind that can easily swamp or drown an unprepared vessel – with thunder and lightning and full-force gales.
We are headed into the second type of market environment — the one with high volatility, big waves, and stormy skies. This is partly just a natural aspect of cycles.
Markets generally were quiet and calm for about a decade, from 2009-2019. That period will be looked back on as a golden age for stocks.
But moving forward, we will see the opposite conditions, for years — because that is how cycles go. For whatever reason, a new decade seems to reverse the trends of the previous decade.
Then, too, we are now at the tail end of a bigger cycle, a long-term debt cycle, that began in 1980 and is coming to a climax in 2020. For roughly 40 years, leverage and debt in the system was built up from a low base. Now we are set to see that 40 years of leverage and debt build-up go into reverse.
In terms of “go anywhere” capability, this means that some of the very best opportunities of the next few years will not be in stocks at all.
The best opportunities of the new decade could be in currencies, which are about to explode in volatility; or cryptocurrencies, which are seeing a historic rise to prominence; or in commodities, which will see 1970s-style price appreciation as the U.S. dollar declines.
To be sure, we expect TradeSmith Decoder to do very well in equities, ETFs, and options, in the coming years. (We also have the ability to go short as well as long, which is crucial.) But our “go anywhere” capability, and the chance to exploit major opportunities not just in stocks, but in currencies, commodities, and cryptocurrencies, will be more valuable than ever in the macro-dominant world that lies ahead.
We’ll have the ability to make explosive gains in years where the stock market was flat or even down. How many traditional investors will be able to look forward to that? Not many.