Hello Stock-Market Volatility, My Old Friend
"Hello darkness, my old friend
I've come to talk with you again
Because a vision softly creeping
Left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains
Within the sound of silence"
--Simon and Garfunkel, "The Sound of Silence"
At a time in which valuations are stretched, the base case is becoming vague and hard to predict as there is the emergence of numerous and uncertain market, economic, geopolitical and political outcomes.
Risk is being underpriced and volatility likely will be on the rise in currencies, bonds and stocks:
* The Orange Swan (the Trump presidency) raises a number of risks and little legislative agenda promise: Donald Trump will make market volatility and economic uncertainty great again.
* The nature of the G-20 meeting between Trump and Russia's Vladimir Putin raises more questions and uncertainties than answers.
* Conjecture about the Mueller (criminal) Russia investigation likely will intensify in the months ahead. U.S. policy may not be able to move on until months (or more) of investigations are conducted, given that nearly every week discovers a new meeting that was not previously revealed.
* Seeming Russia amnesia and more false statements relative to encounters and communications with Russian officials or representatives by Attorney General Sessions, Donald Trump Jr. and Jared Kushner have been revealed. Fake news reports and multiple false security applications have undermined and revealed a potentially uncomfortable relationship between the Trump campaign and the Kremlin.
Remember Donald Trump Jr.'s September 2008 statement:
"Russians make up a pretty disproportionate cross-section of a lot of our assets... We see a lot of money pouring in from Russia."
* More revelations that could place the administration in peril. Over the weekend there were new issues regarding the interface between Trump campaign advisers and Russia. Donald Trump Jr.'s first version of a June 2016 meeting, seemingly related to child adoption -- though he invited Jared Kushner and Paul Manafort -- with an individual who was unknown, has been reversed as The New York Times has uncovered the true nature of the meeting (he was promised damaging information on Democratic presidential nominee Hillary Clinton) and Jr. was forced to fall on his sword yesterday, saying his father had nothing to do with the aforementioned meeting. This morning, on CNBC's Squawk Box, Sen. Pat Toomey, R- Pennsylvania, flat out said how bad this is and that the nature of the meeting and others no longer will be a mystery. In all likelihood more will be revealed by the Mueller investigation and the uncertainty will persist.
As it relates to market volatility, this is no longer a trivial issue.
* A disorganized administration threatens market stability: In what might be marked as the shortest initiative in Washington, D.C. history -- "an impenetrable cyber partnership with Russia," which was forcibly endorsed by Secretary Steve Mnuchin over the weekend -- was abandoned only 13 hours later in a Trump tweet on Sunday. As well, Mnuchin reversed a well-publicized Steve Bannon policy statement from early July on taxing the wealthy on Sunday.
These events and reversals underscore a disorganized administration that spells ever-more market volatility.
* Uncertainty over the effect of global monetary policy and global tightening: After more than eight years of monetary largesse, the Federal Reserve and other central banks are taking away the punch bowl. The Fed is raising rates and plans to institute quantitative tightening at a time when the U.S. economy faces continued intermediate-term challenges and a weak core foundation. Stated simply, the implementation of emergency monetary policy is a thing of the past. Without that benefit, can growth be self-sustaining?
* Uncertainly regarding U.S. fiscal policy (tax, regulatory and infrastructure):The overlay of Russian problems likely has strangled the administration's policies. The thing that is new recently is that senior Republicans (Toomey, Sen. Lindsey Graham, Sen. John McCain and others) have found more strenuous voices in their objection to the relationship between the president and Russia.
In relation to policy issues, this morning Jim "El Capitan" Cramer writes:
"Trump hasn't delivered, and there is tremendous gridlock. It is true that there's been no progress at all in Washington on pretty much anything, including deregulation. But let's remember we had no trouble having a bull market with gridlock. And we aren't getting new regulations, which is incredibly bullish.I would love to see tax reform and lower corporate rates and repatriation. And maybe we will get some in 2018. The White House keeps saying it is committed to tax reform and Trump simply hasn't yet turned on Congress, which is the roadblock. In retrospect, Trump was finished as a force when health care consumed the agenda."
* Political uncertainties in the U.S. and around the globe have multiplied.
* Global cooperation has been diminished: Underscoring this point was the G-20 meeting where Trump seemed friendless as the president seemed to isolate the U.S. Are we America alone now, or, as seemingly wanted by the administration, is America First? (It was no accident that the Europeans signed a trade deal with Japan.)
* Geopolitical threats likely will intensify.
* Amazon's assault on the retail industry will have far-reaching ramifications: How broad we don't yet know, but the impact of Amazon (AMZN) on malls, real estate, employment and other retailers is likely to lead to more uncertainty and volatility amid uncertain domestic economic growth.
* Amazon's disruptive thrust on the American economy is multiplying. The uncertainty of this threat on new industries will be a constant influence in raising volatility as investors ask, "What industry is next?"
The associated uncertainties raised from the issues listed above likely will translate into heightened volatility over the balance of the year.
