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US Midterm elections : Half victories 

It wasn’t the crushing defeat we feared for Donald Trump nor was it the triumphant victory the US democracy needed.

The US mid-term elections yielded a result that contained the powers of the most abrasive US President in decades but also showed that America’s shift towards isolation and bullying strikes a chord with a large chunk of the American population.

The elections were neither a catastrophe nor a landslide for either Republicans or Democrats.

So what were they?

To make sense of the November 6th midterm elections, it is necessary to think in less polarized terms. It was a complex, subtle outcome, which demands a more thoughtful interpretation.

Since the election of Donald Trump in November 2016, it has been a rough ride for America, for half the American population and for large parts of the world.

America is divided between the “America First ” people and the “Fighting for America’s democracy” people.

The elections were not a blue wave as we expected ( Blue as in democrats ). It was more like a blue whimper.

Democrats won a narrow majority in the lower house, while Republicans strengthened their majority in the Senate.

Democrats won some surprising governorships, while losing more elsewhere. This is hardly the stuff of a tidal wave, a grand shift in politics.

So what is it? It’s something more like the most barely adequate minimum, a leaky wooden lifeboat on a stormy sea, the least possible salvaged at the last possible moment.

It wasn’t a stinging rebuke of authoritarianism.

Democracy retained one half of the legislature. But extremists have still captured the executive, judiciary, and the other half of the legislature.

Really repudiating authoritarianism would have meant something more like taking the Senate, winning by a much larger margin in the House, and winning at least some of those hotly contested governorships. It would have meant sending a clear message that authoritarianism is not welcome here.

It wasn’t either a stinging rebuke of the politics of hate.  Minorities, women and women minorities made historical inroads indeed, but that was largely in places where they had a cultural and social chance to.

Largely, voting split along the same old lines — tribal ones. Lines of race and ethnicity, which are often mistaken for those of geography.

The fissures which have always divided America aren’t just suddenly visible. In many ways, they are deepening deeply. For example, white women still largely voted (LOL) for Ted Cruz.

A stinging rebuke of authoritarianism would have been sending a much clearer and more unified signal, across social groups..

The good news is that Americans did something not just urgent, but difficult. It was a welcome event to see Americans bucking the tide of recent history, and rejecting extremism to even a mixed, middling degree. The 2016 tide has been contained and reversed

There is no doubt that Democrats should have done better than they did. 70% of Americans want things like public healthcare, education, retirement, childcare, and so on — yet if you add up the numbers, only something like 60% of Americans voted for Democrats.

The Democrats would probably have won bigger if they’d had a clear and resonant plan, not to mention a message, to give people a working social contract.

But they didn’t — they seem unable to think, much less act, on that level. The campaign was focused on Donald Trump and that appeared not to be enough.

Moreover, the strongest labor market in 48 years, the highest stock market in history and a phenomenal tax cut just nine months old also made it difficult for the Democrats to make a significant difference,

The central question that these elections pose is what will change for the last two years of Donald Trumps’ campaign.

Is a changed Majority in the House a “check” on extremism? Yes and no.

It’s true that it gives Democrats a little more power. But they are hardly likely to use it  and much of that power is symbolic.

They will certainly subpoena people and make Donald Trump’s life more difficult — so what? The President can pardon them and he forced Jess Session out the morning after the elections.

The true power the Democrats have in the House will be to veto legislations, but they will find it difficult to push their own agenda considering the strong Republican majority in the Senate

The Presidency, which started abusing executive orders decades ago now, is likely to respond by issuing more of them, and more absurd ones, too.

When challenged, they will go before the judiciary, and the judiciary, in many cases, will see no problem — precisely because Republicans have worked so hard to stack it with extremists.

So the idea that worst depredations of authoritarianism are now going to magically disappear is a mistake. The fight has just begun. And if anything, The elections comforted Donald Trump that his approach and ways and means were approved by his electorate.

The Democrats reclaimed the House without having anything resembling such an agenda or vision — which is something to be wary of, because without one, what gains they have made will necessarily be limited, and then erode.

The the way to defeat extremism is proactively, with a better social contract and a real vision, not just by reacting more furiously every day to it’s latest outrages and scandals.  The democrats failed at inspiring the nation in these elections.

The stakes were high, and the Democrats didn’t quite rise to the challenge.

The feeling is that there was a great vacuum in front of Donald Trump, a leaderless and leadership less opposition, no one outstanding a the rudder and no vision capable of countering the -real or perceived – economic success of Donald Trump.

Still, Americans did something urgent, which is to begin the work of rebuilding a broken democracy — from the ground up.

Work like that takes time and will probably require much worse economic times.

To sum it up, not much has changed with the outcome of the mid term elections. Save for maybe two things : 

Donald Trump no longer needs to confront the entire world for political reasons and he desperately needs to keep the economy and the stock market going up till November 2020.

Unfortunately we doubt thatches will be the case.  He will be the President that Presided over the peak of the secular 2009- 2018 bull market and the end of tech.

The next bear market in US equities will weaken him considerably.

If the democrats take advantage of the coming two years to groom an inspiring new leader, that is.

Stock Market Statistics Point to Year-end Rally

In a year where the 10 first months have yielded negative returns for both equity markets and bond markets, fund managers are finding it difficult to remain bullish, particularly after the significant damage inflicted to sentiment in October.

As our readers know, we have already called the end of the 2009-2018 bull market with global markets having peaked in January and the US markets on September 20th 2018.

However, statistics are there to give some hope that 2018 may not end in negative territory.

When it comes to the USA, the S&P 500’s has rallyied in the fourth quarter, 25 times in the past 30 years.

Even more compelling is the index’s propensity to rise after a midterm election. In 18 instances since 1946, it has always gone up.

Characterizing trends in equities is however not easy. Major technical breakdowns took place and volatility is high as equity markets gyrate form one day to another.

Last week, the Nasdaq 100 had a two-day drop that ranked with the worst of 2017, though framed against the prevailing turmoil can be viewed as a blip in a two-week rally.

October was the worst month since 2011, but two gains in the Nasdaq 100 over the last 10 days exceeded 3 percent. That also hasn’t happened since 2011.

The last two months have been tough for fund managers. After a banner month in September, where 68 percent of them were beating their benchmarks, large-cap active managers were seriously hit over the next five weeks. 

When the dust cleared, only 39 percent were ahead of their index, compared with 55 percent at this time last year according to Bank of America’s research.

The last part of the correction was particularly painful.  Indeed the global environment is not that bad overall.  Earnings have been great, monetary policy is still not restrictive, consumption is soaring and companies are busy using their cash hoard to buy back their equities even at elevated valuations.

The main negative has been the US – China Trade War and the mid-term elections results comforted Donald Trump in its aggressive positioning.

Another major negative has been the significant breakdown in confidence in the hyper elevated technology stocks, a segment where portfolio concentration is at all-time highs.

October’s correction has certainly corrected some of the exuberance that was prevalent in tech but we are nowhere near anything called capitulation.

In the last two months of the year, even long term investors become short term investors and are putting money at work to end the year in positive territory.

There’s evidence hedge funds are doing the same. Technology and consumer stocks may have led the sell-off last month, but rather than bail out of them, hedge funds increased their exposure, buying those two groups more than any other in the last five days of October, Goldman Sachs data show.

Research from JPMorgan also suggests hedge funds have built up their broad equity positions from low levels. It’s notable that more than $10 billion was pulled from hedge funds before they even gave up all their gains for the year.

If history is any guide, they should have some help from statistics and seasonality :

Since 1988, the S&P 500 has closed higher in the fourth quarter more than 80 percent of the time, returning nearly 5 percent on average. Add in an election year and calculate from the October low, and that gain more than doubles, according to LPL Research.

From the bottom on Oct. 29 this year, we’re already about halfway there, the S&P 500 up 5.3 percent since.

For us the real turn will come from Europe, China and Emerging markets.

These equity markets are heavily oversold and showing extremes of undervaluation.

A marginally depreciating US dollar and a softening of the Trade War could provide the catalyst for a strong year-end and first quarter rally.

Another positive could come in the from of a successful if not perfect end to the BREXIT negotiations.


An extremely uneven set of reactions to the US mid-term elections. A relief rally in the USA and a sharp fall in Chinese equities. As if Donald trump was given a clear mandate to intensify his Trade war with China.

Time will tell, but we see it more as the short sighted interpretation of hedge funds and traders of his half-victory.

Nevertheless, it puts the omen on China to start addressing things in a structural way and send clear messages in terms of currency appreciation, opening up of the financial markets and enhancing the rule of law and intellectual property protection.

Latin America reacted negatively to the news with Brazil falling -3.19 % and Argentina erasing all its gains for the year.

Japan and Europe remained little moved, with Japan interpreting the results as positive and Europe feeling comforted by the reduced power of Donald Trump.  Two key highlights in Europe were the strong performances of Greece and Spain, where the economic tide seems to be turning.

India confirmed its recovery and Abu Dhabi’s stock market now ranks as the best performing market of our entire universe a year-to-date basis.


The Fed meeting left investors worrying about what they already knew. It did not raise rates this time round but promised to do so in December. As a result, the US dollar rose sharply on Friday, but not enough to reverse the overall basing of the US currency.

The Chinese renminbi weakened on the news while the Australian and New Zealand dollars confirmed their reversals.

A significant move was the -2.6 % depreciation of the Russian ruble, a logical move considering the staggering 25 % fall in Oil prices in the past 4 weeks. If anything, the speed of the fall in oil reveals the size of the speculative long positions that had been built to lift oil prices artificially in the past few months.


Oil again. Down 5 % last week and trading the entire 30 % gains recorded in September when compared to the beginning of the year.

We remain structurally bearish oil but have taken our profits on our short positions as we are trading on a support that should lead to atacticla rebound.  OPEC is starting to worry and the next meeting will address production cuts again.

Metals also fell sharply on Donald trump’s victory as investors rightly worry about an escalation of the US – China Trade War. Copper was down 4 % and Silver 3.8 %

Soft commodities were also lower but Lumber is delivering the first BUY signal since we shorted it back in April 2018.


A countertrend rally in bonds as risk-off take hold and investors digest the sharp falls of the previous week.

U.S. producer prices rose more than forecast in October for the biggest jump in six years on broad gains in costs for goods and services, a Labor Department report showed Friday.

The producer-price index rose 0.6 percent from September after a 0.2 percent advance, and climbed 2.9 percent from a year earlier after a 2.6 percent gain.

Excluding food and energy costs, the core PPI readings were also up more than forecast, rising 2.6 percent from October 2017 and 0.5 percent from the
prior month.

The figures, which measure wholesale and other selling prices at businesses, indicate that price pressures in the production pipeline are advancing steadily.

Along with solid demand, the tariff war with China has raised concern that producers will face rising prices and supply-chain disruptions for materials.

The Federal Reserve on Thursday reiterated its plan to keep lifting interest rates gradually. 

While the consumer price index — due next week — is considered a more important indicator of inflation, data on producer prices help provide insights into the direction of input costs that businesses are facing.

The strength of October’s PPI is unlikely to be sustained given recent developments in the oil markets, though.

However, the buildup in service-price inflation is notable as it could be a sign of intensifying pipeline price pressures in the sector.