DON’T lock her up…

  • Don’t write off a Trump win yet
  • If you think that’s crazy…
  • Those no-good banks
  • Total control

It’s ‘bounce back’ time for stocks.

The Aussie S&P/ASX 200 is up 1.21%. On the futures market, the Dow Jones Industrial Average futures are up 1.19%.

Gold is down 0.9% from Saturday morning’s close.

Why?

As the Washington Post headlines, ‘FBI won’t recommend charges over Clinton emails’.

It’s a wonderful day in politics when a presidential candidate isn’t indicted…yet.

All hail the (presumptive) chief-elect…

Markets

Over the weekend, the Dow Jones Industrial Average fell 42.39 points, or 0.24%.

The S&P 500 fell 3.48 points, or 0.17%.

In Europe, the Euro Stoxx 50 index fell 18.96 points, or 0.64%. Meanwhile, the FTSE 100 fell 1.43%, and Germany’s DAX index lost 0.65%.

In Asian markets, Japan’s Nikkei 225 index is up 217.71 points, or 1.29%. China’s CSI 300 index is down 0.22%.

In Australia, the S&P/ASX 200 is up 62.48 points, or 1.21%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$44.50 per barrel. Brent crude is US$45.94 per barrel.

Gold is US$1,292.81 (AU$1,683.75) per troy ounce. Silver is US$18.21 (AU$23.71) per troy ounce.

The Aussie dollar is worth 76.8 US cents.

Don’t write off a Trump win yet

So, Clinton’s gonna win, right?

Hmmm. Maybe. Possibly. Probably.

But is it a dead certainty?

Not yet, it’s not.

According to the FiveThirtyEight website, Hillary Clinton ‘only’ has a 64.5% chance of winning, compared to Donald Trump’s 35.5%.

You can see from the graphic below that Trump’s chances surged from late October. The surge started just before the US Federal Bureau of Investigation’s (FBI) reopening of the Clinton email server issue:



chart image

Source: FiveThirtyEight.com
Click to enlarge


With the closure (for now) of the Clinton email server investigation, no doubt Hillary Clinton’s chances will rebound before Tuesday’s (Wednesday Aussie time) election.

Even so, it’s not yet a done deal. It’s also worth checking out the current calculations for the Electoral College vote. The winning candidate needs 270 Electoral College votes to win the presidency.

Today, the forecasts are that Clinton has 290, compared with 246 for Trump:



chart image

Source: FiveThirtyEight.com
Click to enlarge


The shaded area shows the effective margin of error.

Importantly, given the relatively small margin between the two, if one state with a large Electoral College vote flips from Clinton to Trump, it could upend these numbers.

For instance, Pennsylvania has 20 Electoral College votes. It’s currently counted as a Clinton state. But if it flips, that’s 20 off Clinton’s score, and 20 added to Trump.

Then there’s New Hampshire — also currently a Clinton state, with four Electoral College votes. If that flips, take four off Clinton, and add four to Trump, and whammo, Trump for President!

It’s all coming down to the wire. And it will have huge implications for investors, whoever wins.

For now, while the numbers suggest a Clinton win, we’re still not convinced it will be as clear cut as the markets think. Yes, markets have fallen as Trump’s odds have improved, but, if Trump does pull off the unimaginable, our bet is that it will hit stock markets hard.

At the same time, if stocks fall, another asset should rise in value. That asset is gold. And if gold goes up, we’re banking on something else going up too: gold stocks.

The good news is that the ‘mystery gold stock-picker’ behind our new Gold Stock Trader service says he’s found the best tiny gold stocks to capitalise from any surge in the gold price.

For details, go here.

If you think that’s crazy…

If the mere presence of Donald Trump heightens the risks to markets, how about this for a scenario:

As I mentioned above, the US presidential election system uses an Electoral College system. There are a total of 538 electors.

The number of electors per state is determined by the number of congressmen in the House of Representatives and the number of Senators in the Senate.

Each state has two senators, regardless of size and population. The number of congressmen in the House of Representatives for each state depends on each state’s population.

California, the most populous state, has 55 electoral votes.

States with the lowest populations, such as Alaska and Delaware, have just three votes.

But here’s where it could get really exciting. What do you notice about the number of electors?

Think about it.

That’s right, it’s an even number.

That means it’s possible the election could end in a tie — 269 votes each.

In which case, the decision on who becomes president moves to the House of Representatives, where each state delegation gets one vote (26 votes needed to win).

Ominously for the markets, the current House has 246 Republicans and 186 Democrats. According to website 270towin.com, Republicans would likely control at least 24 delegations after the election, with another five in play.

Many folks have said this is the craziest US election in history. If the Electoral College votes end in a tie on Wednesday, Australian time, the election could get a whole lot crazier.

That’s another reason to consider your investment options.

Those no-good banks

Back to stocks.

If you have any bank shares in your portfolio (who doesn’t?), things aren’t looking good for the future.

As Bloomberg reports:

Westpac Banking Corp. cut a key profitability target, blaming the need to hold more capital and increased regulatory costs after reporting full-year cash profit was little changed.

Return on equity, a measure of how efficiently a company invests shareholders funds, fell 185 basis points to 14 percent, prompting Chief Executive Officer Brian Hartzer to say the bank’s target of 15 percent “is no longer realistic.” Australia’s second-largest lender will now target ROE of 13 percent to 14 percent, it said in a statement to the stock exchange.

But profitability isn’t just about profits. It affects dividends too.

This is where it could get bad for shareholders. From early 2014 to late 2015, Westpac Banking Corp’s [ASX:WBC] dividend edged up from 89.5 cents, to 91.4 cents, to 92.4 cents, to 94 cents.

Unfortunately, that’s where it has stopped. The two dividends since then have also been 94 cents.

That’s not how it used to be for bank stocks. Bank investors are (or were) used to a gradual ratcheting up of dividends…year after year.

Part of this is due to forced capital raisings by the Big Four Aussie banks, as part of local banking regulations and international banking standards.

As Bloomberg reports, ‘Australia’s four largest lenders added a record A$20 billion in capital last year…’

The higher capital requirements hurt the banks’ growth, because, in effect, the banks have to keep more cash (capital) in reserve, rather than use those reserves to create new loans and deposits.

Not only that, but the big banks have to face higher funding costs and higher bad debts. If another report from Bloomberg is any indication, those funding costs could rise further — and so could bad debts.

From Bloomberg:

Australia could be stripped of its top credit score by S&P Global Ratings as early as next month if the government’s interim budget review shows further deterioration, according to BlackRock Inc.

Cue the comedic double-take: Next month!

Yikes.

Aussie interest rates have already spiked higher, even without any official Reserve Bank of Australia interest rate rise. Check out the chart of the 10-year Aussie government bond:



chart image

Source: Bloomberg
Click to enlarge


In early September, the 10-year yield was 1.814%. Today, it’s 2.35%.

It’s the same pattern for Westpac’s corporate bond yields. The following is a chart of Westpac’s November 2023, 5.25% bonds:



chart image

Source: Bloomberg
Click to enlarge


In September, the yield fell to 2.583%. Today, it’s 2.97%.

This is, in part, a reflection of expectations that the US Federal Reserve will raise interest rates this year, and the increased risks caused by the US presidential election.

But even the non-indictment of Hillary Clinton hasn’t done much to push yields back down again. Perhaps that shows fundamentals are back in the fore when it comes to banks, their funding requirements, and the impact on their profitability.

Or maybe not. As we write, Westpac’s shares are up 2.65% on news from the US.

What will happen next is anyone’s guess.

Total control

Speaking of trouble for the banks, consider this from the Financial Times:

Countries around the world — the UK, Russia, Canada, Australia, China and many more — are examining how they might mint their own digital currencies and put money on the blockchain. Efforts have intensified this year, although research is still at an early stage and many puzzles have yet to be worked out. But most agree on one thing: that the world is moving towards use of digital currencies.

We’ve had many things to say about the concept of digital money this year. Our main problem with it is the power that it puts in the hands of the world’s central banks.

Why is that so bad for retail banks? In such an instance, it’s questionable why retail banks would need to exist. The central bank could accept and control deposits. Any retail banking system that did exist would just be an agent of the central bank.

If bank margins are low now, they would be even lower if their ability to create money and credit from thin air passed back to the central bank.

Aside from that, if money is no longer physical, but only electronic, individuals will be hostages to government and central bank control.

That’s also clear from the FT article:

Charles Hoskinson, head of IOHK, a company that makes cryptocurrencies, says being able to “programme” cash held in accounts will benefit ordinary people, corporations and governments. “You can put all kinds of extremely advanced terms and conditions on a digital account for money: where, when and who can spend it, and how much I can spend. That can happen with a bank account on a digital ledger.”

There you have it. Exactly why we fear government and central bank-controlled electronic money. Governments and central banks would be able to control ‘where, when and who can spend it, and how much [they] can spend.

If that doesn’t frighten you, we can only conclude that you’re a very obliging person. That’s the nice way of putting it, anyway.

Cheers,
Kris