Investing On Any Political Outcome Can Be Dangerous

Your Politics May Be Hazardous To Your Performance

In our modern world, keeping on top of work and family issues is a full-time occupation. Most of us are not prepared, nor do we have the competence to analyze complex economic issues. We have to rely on trusted sources. Generally, we gravitate to sources that present a viewpoint most closely associated with our own. These viewpoints, whether conservative or liberal, may be impacted political narratives rather than factual analysis. Being roped into these narratives can blur a true reading of the facts on the ground. For example, I know people who sold stocks on the re-election of Barack Obama in 2012. I also know some who booted their stocks on the 2016 election of Donald Trump. Both were the wrong moves to make at the time.

My point is that we all get wrapped up in these political/emotional narratives, and this can make us do stupid things with our money.

Many political claims seem to make sense but do not hold water

Two of the most prominent claims about the economy had to do with the inflation that erupted after the pandemic and the seeming inability of the administration to do anything about it. BTW, neither side had concrete answers about how to bring it under control, but the responsibility was lain in the lap of the Administration. The second issue, related to the first, was describe as a failed energy policy.

Let's talk about inflation

The root causes of our current inflation problem has much more to do with pandemic and tax cut-related mega fiscal stimulation (all on the credit card), $7 trillion, much of which had bipartisan support. We might also throw in, for good measure, monetary policy that was too easy, too long in response to the 2008/2009 financial crisis and the pandemic. Then there was the pent-up demand caused by the lockdowns and finally lockdown-related supply chain disruption. Oh yes, a lot of people left the job market during the pandemic and never came back. Couple this with very restrictive immigration policy and you've got wage inflation such as we had not seen since the onset of globalization's disinflationary impact on wages and prices… somewhat to blame for the distress of the middle class in the United States. Unemployment stands at 3.6%, and it has been one of the best times ever to be looking for a job in our country.

How do we reverse this… a massive tax increase (fiscal policy), massive cuts in federal spending (what's your pick?), or raise interest rates through the roof (i.e., cause a massive recession)? All are very unlikely. I might point out that none of these solutions are in the direct purview of the executive branch – usually the focal point for blame. I might also point out that the benefits of globalization are reversing. Shipping all those jobs overseas is now coming back to bite us where it hurts. We have created huge middle classes overseas, and they all want to live like you and me. This means huge competition and demand for resources that we did not face the last two decades. Prices for all kinds of commodities will be rising on a secular basis, and we cannot control that.

Unless President Biden or his Republican counterparts have a magic wand, our only hope is that the Fed's recent efforts to rein in the beast, plus greater productivity in the post-Covid world, causes inflation to moderate.

Let's look at the subset of our inflation issues … Energy Policy

Let me propose that administration energy policies, deep-sixing the Keystone-XL pipeline and prohibitions against permitting new drilling on federal land have little to do with the current high level of energy prices. On the other hand, the favoring of green energy and electric vehicles may have chilled energy firm plans to “drill baby drill”. The companies have looked into the future and seen highways cluttered with EVs, maybe making them more circumspect about how they invest and plan for their own futures. As a result, they are investing less in new production, piling up cash, paying down debt and returning cash to shareholders via stock buybacks and dividend increases. This is the soul of enlightened self interest. This whole red herring about the need to open up leases on federal lands is bogus. APA Corp. (APA), a personal holding of mine, has a ten-year inventory of drillable prospects. They and other oil companies are delighted to have the administration take the heat for something they could do to remedy the situation.

Then there is OPEC, operating with the same concerns about the long-term viability of their energy assets. If we in the US move to raise production dramatically, OPEC's normal reaction will be to flood the market and crater prices. We appear to be living in a new world where producers are more interested in maximizing profits rather than racing to raise production in order to satisfy growing demand. My sense is that the only way Congress (and it would probably take an act of Congress) might impact production would be to guarantee the producer a profit on dollars spent producing more oil (i.e., subsidies like those for agriculture). I doubt this would fly.

Market reaction to election results

Going into the November 8 election, there seemed to be a consensus building that we were going to see a big Red wave. People were fed up with the economy (which has been quite strong), and more importantly, inflation. There seemed to be an idea that the Reds would take care of inflation, as they were much better than the Blues at Econ 101. Not sure why this concept exists, because I've seen some pretty great Blue-run economies (Clinton 1 & 2 and Obama 1 & 2). I also heard at lunch on election day that a Red win would be great for energy stocks. I was not sure about that claim either, as the stocks had been great earners and performers.

As that Red wave did not materialize, the market tanked and the energy sector was hard hit, with the Energy Select Sector SPDR Fund (XLE) down almost 5% and West Texas Intermediate down over $3.00 barrel. I guess this response was in line with the thought that a more favorable legislative mix was fading away. In the final analysis, none of this makes sense.

My simplistic analysis – restraining production, which the energy industry is ok with, keeps price and profits higher than encouraging production. So why the rout? My sense is partisan rhetoric took precedence over actual fact and reasoning. Crude going down so sharply was also a complete mystery until the release of the American Petroleum Institute (API) weekly inventory report showed crude inventories higher than industry experts had estimated… all noise. On Friday (11/11), the XLE made a new 52-week high.

My bottom line is that pre- and post-election political parlance is not a good way to invest. For that matter, investing on any political outcome is dangerous because it may be done on the basis of passions rather than reason. On the other hand, these events do create opportunities. It did, with Thursday's better-than-expected CPI print. Did you leave your politics at the door?

What do you think?

Original Post