Recently, financial and economic events have taken a back seat to politics. Whistleblowers, United Nations speeches, White House tweets, and the on-going trade wars seem to be moving markets far more than unemployment or earnings reports. Is this simply a short-term phenomenon, or is something else happening that is becoming a longer-term trend?

 

As readers are aware, over the last three years, financial markets have been increasingly governed by what is happening in Washington. At first, markets keyed off big developments like the tax cuts and what they would or would not accomplish from an economic point of view. From time to time, markets would also focus on the possibility of infrastructure spending, or a new health care plan for the country.

 

However, as the months wore on, more and more of the market's ups and downs were dictated by the trade war, the Russian investigation, and recently, the mid-term elections. The time horizon for investors, given the uncertainties of politics, has become shorter and shorter. That happens to work out well for the high-speed, computer-driven trading platforms of Wall Street. Those "Algos" now represent upwards of 80 percent of all equity trading on any given day.

 

As an example, if you were to track the markets' moves last week, based on political developments, as CNBC and other financial news outlets did, you would see an extremely high correlation between politics and market moves. The president's comments and tweets on Chinas, his speech at the United Nations Assembly, and House Majority leader Nancy Pelosi's news conference on the launch of an impeachment inquiry against President Trump by the Democratic-controlled House, impacted all sorts of financial instruments.

 

Trading in currencies, bonds, stocks, commodities, even commercial credits gained, and lost value based on political events. It is almost as if the tried and true market determinants — the strength of our economy, prospects for inflation, earnings data, and the unemployment rate — are secondary, at best, to the drama in Washington. 

 

Last Friday, the president and his cabinet seriously considered forcing the U.S. financial exchanges to de-list Chinese companies on their stock exchanges. In addition, Trump is considering placing controls on U.S. citizen's ability to invest in Chinese markets. This week, he is slapping tariffs on European goods ranging from single malt scotch to French wine.

 

Is the new normal? Are we entering an era where financial markets are no longer governed by fundamentals, but instead by governments and the whim of politicians?

 

A lot of people would like to blame the present government interference in the economy on Donald Trump, but the transition from free markets to what I believe is a nascent form of corporate socialism predates the Mad King. The truth is that government in this country has taken a larger and larger stake in what we still like to think of as our free market economy. It has been happening for years right under our noses, but we can't see the forest through the trees.

 

The fortunes of the health-care sector, for example, are an area where politics and government are in the front seat, while earnings and growth are almost an afterthought. The banking sector, as a result of the Great Financial Crisis of 2008, is another sector that has felt the heavy hand of government. And then there is the myth of the American farmer and rancher, stalwart symbols of free-markets and capitalism, whose homesteads and businesses have been subsidized by massive government doles for decades.

 

Today, we are focused on the trade war and the severe impact it is beginning to have on global growth worldwide. What we fail to see is that these tariffs are also moving more and more of the country's economic control of the markets and its pricing mechanisms from the private sector to the Federal government.

 

"Big Brother" is now deciding on an almost a daily basis, what products will be exempted from tariff controls, and which will not. How are these decisions being made and by whom? These decisions have an enormous impact on the cost of goods sold and even more on the companies that produce them.

 

This week, we placed tariffs on some European products, such as single malt-scotch whiskey and French wines. Do you really think a Scotch or fine wine drinker will switch to an American whiskey just because of a tariff? And why are Italian wines and olive oil exempt?

 

And like a socialist (or communist for that matter) economy, the government is now dictating which companies will be protected (compensated) because of the impact of tariffs. Why are the nation's farmers, who are largely U.S. mega-cap corporations, given taxpayer money, but the manufacturing sector is not?

 

The manufacturing sector is suffering deeply from the trade war where business has dropped back to a 10-year low. Who is deciding that farmers deserve more help than manufacturers? How is controlling prices, deciding who benefits (and who does not) any different from what a communist or socialist state would do?

 

The point is that while Wall Street rants and raves about an Elizabeth Warren or Bernie Sanders socialist presidency, much of what they fear is already happening right before our eyes. As it is, we have already become a society where nearly every Orwellian prediction in the book "1984" has come to be. We have passively allowed our government to monitor our every movement, conversation, or phone call — all in the name of protecting us from another "9/11." On the economic front, it's the trade war and Trump. When are we all going to wake up?

 

As we close this quarter, investors are having a hard time deciding what the stock market’s next move will be. Since the future appears murky right now, equities are trapped in a tight trading range. Will we break out? And, if so, in which direction?

 

For the bulls, we are tantalizingly close to breaking out to all-time highs, but every time we do, something happens to spoil the parade. The bears, on the other hand, believe the markets are fraught with risk and should be sold. Both sides have a good case, but that decision is going to be made elsewhere, specifically, in Washington, D.C.

 

You would have to be marooned on a desert island not to know the events that have transpired this week in the political arena. From the speeches and meetings early in the week, to the bombshell announcement by the Democrats of a presidential impeachment inquiry, one could accurately describe the week’s events as tumultuous.

 

However, in this debate, I am going to side with the bulls simply because of how well the markets held up under the news. Make no mistake, the threat of impeachment is real and here to stay and, in my opinion, will be with us through the 2020 election. Like the Mueller report, it will take on a life of its own, spreading out and around looking for dirt. And in Washington, it is not difficult to find dirt, especially in a swamp.

 

Look for the controversy to impact the trade talks. Why would the Chinese want to cut a deal with a president under the cloud of an impeachment inquiry? Why not wait and let the Democrats do the work of undermining Trump’s standing and authority? Of course, they could get a deal on their terms, if Trump feels exceptionally vulnerable.

 

Impeachment is yet another blow to expectations that a trade deal will happen anytime soon. As a result, despite economic data to the contrary, the bears will be expecting our economy to falter further. Talk of "Recession 2020" will once again gather momentum. That will lead to rising expectations that the Federal Reserve Bank will need to save our faltering economy and the stock market with more interest rates cuts. You see where this is going?

 

I wonder sometimes, if we couldn’t actually talk ourselves into a recession. It seems that on all fronts, there is indecision. Investors are divided on the prospect of recession, on a trade deal, on whether the Fed will cut rates again in October or maybe December. Is it any wonder that the markets are locked in this trading range with so many unanswered questions?

 

If we now throw in the circus of impeachment, is there any chance that we can carry on and push stocks higher?

 

Well, yes, actually, there is. Have I not just described one humongous “Wall of Worry”? And what happens to stocks in that kind of environment — against all odds, equities usually climb higher. 

 

We could get a trade deal, simply not the deal Trump wants, but one that is good enough for government work. The Fed could back-stop the economy again with one more rate cut, which, in my opinion, would be more than enough to satisfy everyone, at least into next year.

 

As for impeachment, I have enough faith (may be a poor choice of words) that Trump is adept at covering his bupkis in just about any circumstance from paying off prostitutes to obstructing justice. Why should something as nebulous as an impeachment inquiry slow Donny down? 

 

Now that we are heading into October, be prepared for some volatility. It is a notoriously bad month for stocks, although not always. If the markets get tripped up on any of the above concerns, look through them. This too shall pass. Stay positive and stay invested.

 

India's Prime Minister Narendra Modi is aggressively pushing for a greater share of global trade now that its neighbor to the north (China) is squabbling with the United States. In doing so, India is hoping to regain some economic momentum, kick-start employment, and reverse its slowing economy.

 

For those readers whose knowledge of India is limited to the next Bollywood musical, India's economy has been in the doldrums. It is still growing at a 5 percent clip, which may sound high to some, but it is at the lowest level in six years. The country's unemployment rate is presently at 8.19 percent, versus 6.27 percent last year.

 

Despite the poor performance of the economy, Modi was re-elected last year with an even larger majority. He is the leader of the largest political party on the planet, the Indian People's Party (BJP), with 180 million members strong.  Modi is considered by most to be a populist and in the same camp as President Trump when it comes to the economy and in his anti-Muslim "Islamophobia." 

 

But India, which was one of the largest and fastest growing economies in the world, has been hit by the global downturn in manufacturing, as well as depressed agriculture and basic materials prices. As a result, consumer spending has slowed, and given the country's population (1.36 billion), that downturn is a big problem. The U.S-China trade war, however, has opened up a new opportunity for India.

 

Vietnam, as my readers are aware, has been the biggest winner so far from the fallout of between the U.S. and China. As international companies abandon China to escape U.S. tariffs threats, they have looked to Vietnam as an alternative center of operations. It is business friendly, offers low tax rates, and has a fairly efficient labor force.

 

This trend has not escaped other countries in the region. Since most observers in Southeast Asia believe that there is no end in sight to the trade wars, several countries are doing what they can to entice some of that business their way. India is one of them.

 

Last week, Prime Minister Modi surprised the financial markets by announcing a $20 billion tax cut for domestic corporate taxes from 30 percent to 22 percent. In one fell swoop, India has gone from having one of the highest business tax rates in Asia to one of the lowest. In addition, he promised that companies formed after Oct. 1, 2019, will only pay a 15 percent corporate tax rate.

 

In addition, most economists in India expect India's central bank to cut interest rates again next month in what appears to be a coordinated fiscal and monetary effort to spur the economy. But Modi is leaving nothing to chance. It is therefore no accident, in my opinion, that he appeared alongside Donald Trump in Houston last Sunday.

 

As 50,000 voters of Indian descent filled a sports stadium, the two leaders heaped praise on one another. For Modi (who also had a private meeting with Trump at the United Nations), he is hoping for help in wooing more American companies to move from China to his country. For Trump, Indian voters in the U.S. are a growing political force. They have historically voted for Democrats, but generally, many Indian voters are business-minded and have  benefited from Trump's business tax cuts, and just might be ripe to switch sides, especially with an endorsement from a popular politician from back home.

 

Indian investors have so far approved of Modi's latest moves, sending their stock markets up almost 7 percent since the tax cut announcements last week. It is too early to say whether Modi's tax cuts will work any better than those of Donald Trump in growing India's economy.  In the case of the U.S., corporations used the tax cuts to buy back stocks, pay extra dividends, and generally enrich those who had investments in the stock market, which went to record highs. If Modi's tax cuts produce the same result, you might want to look at the Indian stock market.

 

Last weekend's surprise drone attack on Saudi Arabia's major oil fields was a disaster, but it could have been worse. Fifty years ago, an attack like that would have sent the world's financial markets into a tailspin and rocked global economies. None of that happened — thanks to the U. S. energy production.

 

Granted, there was an initial decline in the markets until the damage was assessed and experts concluded that the 5.7 million barrels per day (bpd) of crude production could be put back online within three weeks. The short-fall represented about half of the Saudi's daily production. Yet, the markets rebounded quickly, and for the most part, it is business as usual again in the global markets. An initial $10 per barrel spike in oil subsided quickly. Oil has now given back more than half the price rise.

 

While Saudi production of 10 million barrels a day is, and will continue to be, an important source of energy supply, U.S. energy production has already surpassed not only Saudi output, but that also of any other energy producer worldwide. This is an enormous stabilizing factor in energy markets today and possibly into the future.

 

The Department of Energy indicates that U.S. oil production in 2019 will average 12.1 million barrels in 2019, and an additional 12.9 million barrels next year. The shale fields of the Permian region of Texas and New Mexico are largely responsible for that increased production. Those fracking wells should continue to goose production, breaking record after record over the next two years.

 

The saga of how we became the world leader in energy production is a long story, full of ups and downs, beginning way back in the time of John D. Rockefeller. He formed the Standard Oil Company and by 1879, controlled 90 percent of America's refining capacity. The key drivers in the use of oil at the time were the electric light bulb and the automobile. By the end of World War I, oil-powered ships, trucks, tanks and airplanes impressed on the world how oil had become a strategic energy source and also a critical military asset.

 

The developed nations of the world used any excuse to capture the global oil output, which was largely centered in the Middle East.  During my lifetime, the Organization of the Petroleum Exporting Countries (OPEC) was founded in response to the efforts of Western oil companies (and the governments that backed them) to first control, and then drive down, the price of oil. Over time, the control and ownership of production and pricing shifted from the West to Middle Eastern-producing countries and their national oil companies.

 

From the beginning, the U.S. has historically viewed OPEC as a threat to its supply of cheap oil. The cartel could (and did) set the world market price of oil wherever and whenever it wanted. This impacted the economies of developed countries causing undue strain and dislocations.

 

As supplies of energy tightened, world demand for oil continued to grow, and energy prices for both oil and natural gas rose higher and higher. In the 19702, oil became a political football during the first and second world oil embargos. Those events spurred a response from both the private and public sector of the U.S.

 

It was a combination of luck and cooperation between the Department of Energy (DOE) and Texas wildcatters that launched the United States onto its path to oil independence in the form of fracking technology. The idea dates back to 1947 (in this country) when the first commercial fracking job was accomplished. The real breakthroughs, however, happened more than 30 years later.

 

That's when The Eastern Gas Shales project, a research effort supported by the DOE in the Appalachian Basin, proved shale rock was rich in natural gas. It was no accident that this was the same year (1979) that the second oil embargo took hold in this country (the first was in 1973-74, in response to U.S. support of Israel during the Yom Kippur War). This second time around, the price of oil doubled, and I remember standing in gas lines for hours, as did many other Americans. There was a general feeling among us of helplessness and anger that, for the first time in a long, long time, we were not in control of our own destiny.

 

In the meantime, a Houston oilman by the name of George P. Michell was poring over those DOE Eastern Shale analysis and used the results to develop today's fracking technology. The rest is history. The government continued to support fracking by funding research and providing subsidies to all sorts of renewable energy projects.

 

As a result, fracking has not only boosted productivity in our energy sector but has also reduced costs and single-handedly increased the output of U.S. oil by 84 percent over the last decade. It has also increased the production of natural gas by 39 percent since 2009. We are, by the way, the world's top producer of natural gas as well.

 

All of this production means that the U.S. is less reliant than ever before on foreign oil. Net OPEC imports of oil and petroleum products fell to 1.5 million bpd so far this year, which is a 75 percent decline over the past decade. By next year, some energy experts believe imports could total just 100,000 bpd and in the final three months, we could become a next exporter at long last.

 

The morale of this tale is that this country can still accomplish astounding things when we put our mind to it. If only we stopped fighting and started cooperating again, think of what could be accomplished.

 

Value stocks, those equities that have fallen out of favor, have made a comeback this week. These underpriced orphans have become the new darlings of Wall Street, while high-flyers (think software and some tech) have sold off. What does this say about the markets?

 

The short answer is that we have more room to run. It means, in my opinion, that we will reach and break historical highs in the U.S. averages and that we should have fairly smooth sailing into October. If, at that point, there are breakthroughs in the trade issue and the Federal Reserve Bank cuts interest rates, we could see the markets continue climbing. If, on the other hand, Trump trashes Chinese exports again and/or the Fed disappoints, than be prepared for a rout.

 

Now, let's handicap this binary event. If one asks Corporate America what's the chances of a deal, some 65 percent of Chief Financial Officers would tell you there is no hope of a deal over the next six months. That was the results of a CNBC Global CFO Council survey released on Friday. The survey included some of the largest public and private companies in the world.

 

This echoes what has become consensus among investors. The Chinese will wait until after the elections next year before striking a deal in the hopes that Trump loses the election. As a contrarian, that bothers me, so I started looking for what could go right in this area.

 

This week the White House floated an idea, first denied, and then confirmed. Trump is considering an "interim" trade deal with the Chinese. To me, that makes sense. It allows the president an escape hatch in a trap of his own making. He can claim a shallow victory (but more than anyone else has been able to win from the Chinese) by announcing a deal before the elections. Yes, it may simply be the same deal that the Chinese offered him a year ago, which begs the question of why he didn't take it a year ago and save investors and the world so much anguish? In any case, the tariffs could then be set aside, allowing companies and the economy to recover from a burden they have been under for the last two years.

 

Of course, President Trump (and everyone else) would rather get a whole trade deal with China, but why not settle for half a loaf and worry about the rest after the election next year? Several additional actions this week support my argument.

 

First, the president announced he would delay the imposition of tariffs on another $250 billion in Chinese exports "for two weeks." In response, the Chinese Ministry of Commerce, headed by Beijing's hard-liner, Minister Zhong Shan, said it will exempt U.S. agricultural products, such as soybean and pork from additional tariffs.  These products have been added to 16 other types of U.S. imports that will be exempt from tariffs.

 

Does anyone sense a deal in the making?

 

As for the Fed, I expect at least a 25 basis-point cut in the Fed Funds interest rate. Now that the European Central Bank announced a new stimulus program this week (see yesterday's column on the event), the pressure is on for our central bankers to at least act a bit more dovish.

 

But back to value stocks and their recent outperformance. Recently, the price divergence between value and momentum/growth stocks has been greater than at any time since the 1990s. The same holds for small-cap companies versus large-caps. The darlings of the investment world, the FANG stocks, for example, have carried the stock market higher for years. A rotation into the sectors that have largely been ignored by investors makes sense to me.

 

As such, the averages that most investors use to gauge performance may not be telling the whole story. Basic materials, industrials, small cap, even commodities, may outperform, while the growth and momentum names could underperform, at least in the short-term until they catch-up to the markets in terms of valuation.