Will Chaos at the GOP and Democratic Conventions Disrupt Financial Markets?

By Victor Sperandeo with the Curmudgeon

Introduction:

Thursday’s U.S. Presidential debate has immediately changed politics in the U.S. and could have a huge future impact on the markets!

With repeated stumbling, mumbling, and pausing, often losing his train of thought, everyone watching saw that President Joe Biden is suffering from serious dementia. He often trailed off mid-sentence and mixed up topics. Also, he did not mention nuclear war as the number one existential threat to America.

“If he were CEO and he turned in a performance like that, would any corporation in America, any Fortune 500 corporation in America keep him on as CEO” asked Joe Scarborough during a tough opening monologue of his MSNBC show "Morning Joe."

-->Victor opines that Biden is not capable of being a manager at Starbucks, let alone the President of the United States.

While he has good intentions, Joe is a sick man and belongs in a nursing home. It is incredible that his wife and family allowed him to be humiliated during this debate. We feel for him and hope he gets the proper care he needs.

The NY Times Editorial Board, Atlanta Journal Constitution, and many other respected publications stated that Biden should withdraw from the U.S. Presidential race. A Morning Consult poll revealed that 60% of voters said Biden should "definitely" or "probably" be replaced as the Democratic candidate following his performance in Thursday's debate. We agree. However, Biden said on Friday, and reiterated on Saturday, that he has no intention of dropping out.

Joe Biden’s Problem:

While senility is a loosely used and somewhat inaccurate and negative reference to cognitive loss, dementia is the accepted medical term. The The word "senile" here references the age of onset, which was considered senile if it had developed after the age of 65. Joe Biden is 81 years old and will be 82 on November 20^th.

Cartoon of the Week:

There’s certainly a lot to worry about for the Dems!

The above is a parody on Norwegian artist Edvard Munch’s “The Scream,” created in 1893.

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Who Might Replace Biden as the Democratic Nominee?

The Democratic party leaders know very well about Biden’s dementia but now have a huge dilemma of what to do about it. Some of the highest-profile potential replacements have never endured the vetting and road test of a presidential race. Here are a few:

Vice President Kamala Harris has at times struggled to define her role at Mr. Biden’s side. Initially charged with addressing polarizing and intractable issues like illegal migration and voting rights, she has been viewed by Democratic donors and supporters of Mr. Biden as a potential political liability. Furthermore, she has a lower approval rating than Biden.
California Governor Gavin Newsom, the former mayor of San Francisco who also previously served two terms as lieutenant governor, has become one of Mr. Biden’s main surrogates during this campaign. Mr. Newsom would be saddled with explaining the problems California has had over the past decade: homelessness, high taxes, escalating housing costs. He will probably never be able to escape his decision in 2021 to hold a high-priced dinner with lobbyists at the high-end restaurant the French Laundry. He barely survived a recall election in 2021 (the Curmudgeon, a CA resident, voted to recall him).
Michigan Governor Gretchen Whitmer has risen quickly as a national star of the Democratic Party, helped in part by Mr. Trump’s antagonizing her as “that woman from Michigan.” A two-term governor, Ms. Whitmer led a 2022 campaign that gave Democrats in the battleground state a trifecta — exercising full control of the legislature and state government — for the first time in 40 years. Ms. Whitmer is a vice chair of the Democratic National Committee, a top leadership position in the national party. Her strengths include a “disarming” sense of humor and youth, in comparison to the other candidates.
Other possible replacements include Pennsylvania Gov. Josh Shapiro, Maryland Gov. Wes Moore, and Illinois Gov. JB Pritzker.

However, none of those candidates seem to have enough experience and “know how” to beat Trump in November. Also, the logistics of changing the Democratic ticket at the Democratic National Convention (August 19-22, 2024, in Chicago) would be a political nightmare.

If Biden drops out of the race, his 3,894 pledged delegates would arrive in Chicago uncommitted to any specific candidate, which would likely kick off a frenzied fight to win their support. On the first ballot, a winning nominee would need to secure the votes of a majority of Democrats’ pledged delegates. If no candidate won a majority on the first ballot, Democrats would continue on to a second ballot, in which so-called “superdelegates” would have an opportunity to vote. Democrats do not have a mechanism to force Biden out of the race. Unless Biden undergoes a radical change in thinking or suffers a major health setback in the next few months, he will be the Democrats’ nominee in November.

Donald Trumps’ Dilemma:

As we previously reported, Donald Trump might be sentenced to jail on July 11^th for 34 counts of felony in a N.Y. City trial which Victor feels was very unfair. That’s just a few days before the Republican National Convention, July 15^th -18^th in Milwaukee, WI. Will the GOP nominate Trump if he’s in jail? Other issues we previously identified were:

Will Trump be in jail or under house arrest in November?
While Trump could win the U.S. Presidential election from jail (he’s still ahead in the polls), but it might be overturned if the Democrats have a majority in the House of Representatives.
If a Trump presidential election is overturned, will the Republican Vice President become the President? In that case, the GOP pick of a VP candidate is incredibly important. Or will the second-place Presidential candidate (presumably Joe Biden) take office in January 2025?
Section 3 of the 14^th Amendment of the U.S. Constitution disqualifies those who have already held a public office from holding "any office" if they participate in an "insurrection or rebellion" against the United States. But since this mechanism has never been used against a president, there are still questions to resolve.

Outcome of Political Party Conventions and Impact on the Markets:

Therefore, both political conventions are in jeopardy of turning into chaos, paralysis and pandemonium. We have two unknown outcomes that the leading Democratic and Republican candidates may not become their party’s nominee for President. What will happen is anyone’s guess, but how will it affect all the markets?

Victor believes that stocks will run for cover, while bonds will rally. Yields will drop on the short end of the yield curve, and Gold will zoom higher. Commodities will be mixed. Oil should rise on any war problems. So will the grains, but copper, lumber, and steel should decline. The dollar will rally as the world runs to safety. Could the Swiss Franc or the Yen get a bid? Better to be in Gold and T-bills.

Additional comments:

· U.S. bonds, notes and bills must be issued by the U.S. Treasury to finance a U.S. budget deficit approaching $2 Trillion this fiscal year. What kind of new budget will be suggested for fiscal year 2025? Both Biden and Trump are big spenders, but will they be the Presidential candidates? Certainly, the budget is a big question for each political party.

· Gold is a chaos hedge and “IF” (for some crazy reason) there is no election, the 25th Amendment would be invoked, and Kamala Harris would become U.S. President. What would she do if China attacked Taiwan? Gold’s price would rapidly rise to above $3,000/ounce and maybe even $5,000/ounce. More below.

· U.S. Stocks, which are as overvalued as they have been in all of history, would decline due to uncertainty and profit taking. There would likely be a run to cash (T-bills or money market funds).

· What would the Fed do if Trump is jailed to Rickers Island (unlikely) or sentenced to home arrest? That would certainly put a crimp on his election campaign and cause market disruptions. Would the Fed ease credit to support the markets? That would certainly look like they are helping Trump.

· What if a terrorist attack happens to disrupt the election? The scenarios are too numerous to mention. But now everything is uncertain and that is an anathema to the markets. More below in Victor’s Conclusions.

Changes to Victor’s Portfolio:

Sell the S&P 500 (long liquidation), buy long term U.S. bonds and 5-year T-notes for a trade, stay long Gold.

BofA Global Research on Gold:

BofA’s Michael Widmer thinks a pick-up in investment demand could push gold to $3,000/oz (+30%) in the next 12-18 months. Gold ETF inflows, higher London Bullion Market Association clearing volumes, and continued central bank buying will be key signals. Global central banks purchased 1,037 tons of gold in 2023 after a record-high 1,082 tons in 2022. Gold demand should continue to rise as international central banks reduce US dollar reserves. For example, China’s U.S. Treasury holdings dropped $102bn in the past 12 months, while gold holdings have risen 8Moz (about $51bn) since January 2023. Gold is also an attractive hedge, especially as the U.S. Treasury market becomes more fragile. BofA warns that the Treasury market is one shock away from not functioning seamlessly.

The World Gold Council’s latest Central Bank Survey revealed that 29% of respondents plan to increase gold reserves in the next 12 months, while 88% cited “long-term store of value / inflation hedge” as the top reason for central banks to own gold.

Disclaimer: Both Victor and the Curmudgeon have owned Gold for many decades!

Victor’s Conclusions:

If Joe Biden is officially out of the Presidential race, and Kamala Harris becomes Commander in Chief, the U.S. will surely be tested by an adversary. That’s most likely to be Iran via a terrorist attack by one of its proxies, either within the U.S. or an overseas U.S. military base.

Iran is a likely pawn, as any U.S. retaliation would cause oil and gas prices to spike. If that happened, it would surely be blamed on the Democrats.

It’s also conceivable that Russia might fire a non-nuclear missile at a U.S. owned facility to punish America for supplying Ukraine with Army Tactical Missile Systems (ATACMS), which have a range up to 300 km. Those missiles were launched by Ukraine against a Russian airfield in Crimea that was about 165 km (103 miles) from the Ukrainian front lines, a U.S. official told Reuters. Ukraine used the weapon a second time overnight against Russian forces in southeastern Ukraine.

Again, if Trump is jailed, and/or Biden drops out (both are likely), the entire world and global markets will become very volatile!

End Quote:

“If a dog will not come to you after having looked you in the face, you should go home and examine your conscience.” Woodrow Wilson, 28^th President of the U.S.

Footnote: As a result of a severe stroke, Woodrow Wilson had similar health issues than Biden. As a result, his second wife (Edith Bolling Galt Wilson) pre-screened all matters of state, functionally running the Executive branch of government for the remainder of Wilson's second term. In effect, she ran the U.S. government surreptitiously as a shadow President.

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Stay calm (easier said than done), success, and good luck. Till next time...

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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