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What Could Shock the Markets Before Election Day
What Could Shock the Markets Before Election Day
We’ve entered October, a month that has a history of producing surprise events that can change the course of an election. With the country already facing economic, political, and geopolitical turmoil, what are you expecting?
You'll recall what Mark Twain said many years ago. Something along the lines of "the most dangerous month in the stock market is October. The other dangerous months are November, December, January, February, March, April, May, June, July, August and September." And that was before the October crash of 1929, which permanently queered people's perception of the month.
I tend to look at the stock market from a long-term historical perspective. And by absolutely any parameter, it's now insanely overpriced and in bubble territory. But that's been true for several years, as it powered from one height to the next. So, is there any special reason the bubble should break now as opposed to next month or next year?
One reason it may continue is because the government and the Fed, which prints the money, will do anything they possibly can to prevent a crash. About 35% of the stock market is concentrated in just the so-called "Magnificent Seven" hyperstocks. They're betting the farm on AI and data centers. Not only are they deploying all their cash and mortgaging their cash flow, but they're borrowing hundreds of billions of dollars in addition. That's on top of OpenAI and Anthropic going public at, presumably, trillion-dollar-plus market caps very soon.
I've explored this before (link) at some length and remain of the opinion that whenever that much money goes into one place that quickly, it absolutely guarantees big problems.
But the biggest problem for the stock market is war. Any of the three ongoing wars on the other side of the world could, and likely will, spin out of control into World War III.
The stock market remains elevated despite high interest rates, rising energy costs, and growing geopolitical risks. What could happen in October that would cause investors to suddenly reassess the risks they’ve been ignoring?
Non-high-tech stocks are expensive, but not even in the same ballpark as the Magnificent Seven. The money being raised now, mainly for data centers, is equal to all the money ever raised in the entire history of IPO’s put together. There will be huge misallocations of capital. And that amount of money will require 8 or 10 percent of the U.S. GDP to be spent on AI in order to justify it. Five or ten years from now, analysts will look at today's market and ask themselves what people were thinking. Much the way we ask ourselves what 17th-century Dutchmen were thinking when they were bidding for tulip bulbs.
But, as I said before, the real risk is war.
The war with Iran has already disrupted global energy markets, pushing up oil and creating serious pressure in diesel markets. What's next?
We discussed oil and diesel last month . The fundamentals remain the same. The wars in the Ukraine and with Iran are not going to end anytime soon. There will be a lot more damage done to production and the ability to transport energy, but especially to refining facilities. Diesel, heating oil, jet fuel, kerosene, and gasoline are all going higher.
That's especially true in Europe. The continent seems to have a death wish with its outrageous taxes and regulations. This could be the long-awaited winter when they all freeze in the dark. Plus, the governments of almost every country in Europe are doubling their military budgets and actively pushing for war with Russia. The nonentities in charge are criminally insane.
And it doesn't seem anybody is taking the threat from Yemen very seriously. People seem to have forgotten that Yemen has been in a war, on and off, with Saudi Arabia for the last 20 years. The Saudi Armed Forces are next to worthless. They have lots of expensive weapons they've bought from the Americans, but their military is incapable of using them effectively. Not that high-tech weapons are any good against primitive desert fighters like the Houthis to start with.
I suspect that the current Saudi regime, a family that's been in control of the country for the last hundred years, will be overthrown. They seem to be in genuine financial trouble, not just because of the problems with the war but the disastrous investments that MBS has made.
It’s said they’re into Neom City, a proposed 100-mile-long line in the middle of nowhere, for over $50 billion. But work has stopped, and it’s going back to the desert. For sheer grandiose megalomania, the only thing that can compare to what MBS is spending are the data center bubbles. $10 billion for ski resorts. $13 billion for an entertainment complex. $15 billion for "the world’s largest living museum", $22 billion for Riyadh’s new mega airport, $10 billion for 50 luxury resorts on the Red Sea, $45 billion into a SoftBank Vision Fund, $50 billion into the Mukaab, a 400-meter cube building in Riyadh.
These are just a few projects that stood out to me.
My guess is that most of this money will be nearly totally wasted. Young Saudis will be very unhappy. Meanwhile, the Yemenis will see the opportunity and try to take over the whole country. My guess is that they'll succeed. Very likely it will turn into yet another tar baby for the U.S. to punch, trying to stop the inevitable.
Especially in view of the new alliance between Saudi Arabia, Pakistan and Turkey. That is liable to turn into what's commonly known as a clusterfuck.
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Americans are dealing with high fuel costs and persistent pressure on household budgets at the same time the midterm elections approach. How could deteriorating economic conditions affect the political landscape—and what would a Democratic takeover mean?
You may remember when Clinton was running for president. He put a sign on the wall in his headquarters saying: "It's the economy, stupid." That, and the wars, are why the Republicans will be kicked out in November.
The fact is that the average American now relies on the government to control the economy. When things go poorly, he blames the current administration. The average guy may not know much about the wars or economics, but he knows that prices have been skyrocketing under Trump. He listens to the absurd things that Trump has been saying and can see they're either lies, prevarications, or fantasies.
Prices have skyrocketed over the last two years—far more than government statistics report—only partly due to Trump's extravagant spending. The consequences of the three ongoing wars are turning the economy into a witch's brew. $6.50 diesel and $4 gasoline are just the most obvious parts of it.
Mortgage rates are now over 7% as well. Trump has said, in effect, that he plans on inflating away the national debt. Who is going to lend money at a "reasonable" interest rate when they can see that the government is planning to actively destroy the dollar?
Stepping back, we have war in the Middle East, stressed energy markets, high interest rates, political instability, and an expensive stock market all converging at once. Where are the greatest dangers and opportunities if October delivers a genuine surprise?
We're at the edge of a precipice in many ways. If something nasty happens this month, I'm not going to be surprised. In fact, I'll be surprised if something really nasty doesn't happen before the year is out. It's more important to look over the next six months or several years than the next few weeks.
The current diesel and energy crisis is not getting better for a lot of reasons. It's going to get worse. Much worse. There will be cascading effects throughout the economy. I expect the Ukraine-Russia war to drag on and the Iran war to heat up after the elections, as Trump has promised. Of course, after the Republicans lose the elections, Trump will be impeached again. That's only one of a half dozen reasons why I doubt he will complete his term.
But those are just the obvious problems we all can see. Meanwhile, black swans the size of Pteranodons are circling.
When markets face this many potential shocks at once, the obvious places to invest aren’t always the ones with the greatest upside.
The bigger opportunities can emerge in overlooked corners of the market—before serious capital starts pouring in.
That’s why been looking beyond today’s crowded trades.
They recently identified one speculation they believe has the kind of asymmetric upside investors look for when searching for potential 10X—and even 100X—opportunities.
