Summer is nearly over, school is back and session, and the political season is back underway. The real fireworks can now begin in earnest. September is officially upon us.
For the equity markets, this likely means a fair amount of volatility on the horizon in the coming months -- especially as the politics surrounding the debt limit, infrastructure package, and upcoming reconciliation bill the Democrats will use to push through trillions of dollars of deficit spending all take center stage.
We remind our regular readers that -- for the Democrats -- it’s all about the midterm elections.
Historically, the majority party loses an average of 25 seats in the midterm elections. Barack Obama lost 63 seats in the House in his first midterm, and Donald Trump lost 40 seats in the House in 2018.
It all adds up to one question for the Dems, “if not now, when?”
The agenda of the Democrats requires a major win on infrastructure this fall. This is why we believe that the largest deficit spending package in history will be passed in the coming months through a process called reconciliation, which allows Congress to pass a bill with just 51 Senate votes (50 Dems + the Vice President) rather than the traditional 60. These reconciliation bills must be tied to budget bills that deal with spending, revenue, and the Federal debt limit.
The Dems simply can not afford to miss this opportunity to pass the biggest spending bill possible this year.
They know full well that the odds are against them heading into 2022 midterm elections. In fact, many in Congress see a massive spending package as imperative to their chances next fall. It’s about buying the vote. Those in the Biden administration are the exact folks who witnessed Obama get beat down, which is why it’s now or never for the progressives.
As for the Federal Reserve, while much has been made about their potential tapering this fall, we believe they have little choice to continue to be extremely accommodative in the months ahead. The only way to justify a massive deficit spending package is to sell the American people on the fact that we must act now while borrowing costs are the lowest in history.
This has been the Fed’s platform for the last 12 months, and it’s one that we expect will continue as long as possible. The Fed meeting held on September 21-22 will provide full confirmation of this, given that it’s typically the last meeting of the year where big policy changes are announced.
For an institution that is designed to be “apolitical,” the Fed has seemingly done everything possible within their power to provide the platform for the Democrats to launch their massive infrastructure package. This is a literal home field cooking political cookout. We expect the Delta Variant and the looming Debt Ceiling fight to provide all the crisis cover the Fed will need to maintain current policy.
The big debate set to rage in the coming months will be inflation. If the Fed continues to sell the world the “transitory” story, as we anticipate, we believe it’ll mean it's a “game-on'' for commodities and precious metals, especially gold.
This idea has generated deep support from technical analysts. The charts have rarely looked more bullish for gold in the short term. Some of the leading experts in the space have identified the August price action for gold as what is called a “hammer,” a rare and decidedly bullish momentum flag indicative of a big move higher. It occurs after prices trade significantly lower before returning to initial levels to close the month. August opened with gold prices at $1816 and then witnessed a free-fall drop to $1680, and then a steady climb higher and back to where we began the month at $1816.
While we at Brentwood Research focus less on the short term, it seems clear that gold has found tremendous support. Should gold break out above this current level in the coming weeks, we could see a big leg higher that could very well take gold prices back to all-time highs.
Given the politics, the Fed’s cornered position, and the looming infrastructure bill we believe the gold bull is set to run in the last 1/3rd of the year.
For our Full Faith and Credit newsletter subscribers, we have moved our monthly release date to mid-month starting in September.
Best,
Adam Baratta
Founder
Brentwood Research
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