Why Bernie Sanders’ Decline is Bad News for the Markets; Jay Powell Has a New Challenge Today

Insights and Market Perspectives

Author: Greg Valliere

September 18, 2019

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BLOOD IN THE WATER: You can sense the Bernie Sanders campaign is now well into decline, with staff shakeups, internal dissension and the loss of a key endorsement from a left wing group which — like many progressives — is now enamored with Elizabeth Warren. Oddly, the Sanders decline has negative implications for the financial markets.

THAT’S BECAUSE WARREN IS GRADUALLY CONSOLIDATING HER SUPPORT on the left, climbing in the polls, drawing an enormous crowd in New York this week and leaping ahead of all the Democrats in the all-important “enthusiasm” category. Sanders used to own the enthusiasm ratings; now Warren does.

THIS HAS ACCELERATED THE DEFECTIONS away from Sanders, who increasingly looks like a protest candidate, not a plausible president; he seemed particularly furious in the last debate, shouting and hectoring. Sanders probably has a right to be angry — the party’s establishment has never liked him, largely because he refused to declare that he’s Democrat, and the Democratic National Committee stacked the deck in favor of Hillary Clinton in 2016.

BUT THE MAIN REASON FOR THE SANDERS DECLINE isn’t his anger and tired sound bites — it’s the steely Warren, who has run the best campaign of all the candidates and has a well-oiled operation in virtually every state. She and Sanders are friends and ideological soul-mates, which leads us to the following conclusion: when Sanders drops out of the race, it’s very likely that he will throw his support to Warren.

THIS IS WHY THE MARKETS HAVE TO WORRY: Warren’s path to the nomination is fairly simple: she unifies the left, then makes her move on Joe Biden (after wisely acting deferential toward him this past summer). Why attack Biden when he’s perfectly capable of self-imploding? His polling numbers have held up well, but more gaffes surely would increase doubts about him. And there’s no dominant candidate who could seize the center if Biden stumbles.

SO WE CONTINUE TO BELIEVE THAT WARREN has to be taken very seriously in the financial services industry: she wants to break up companies, hike taxes on Wall Street, and regulate the industry aggressively. A Republican Senate would block much of her agenda, but as Donald Trump has proved, a president has vast regulatory powers, and Warren surely would use them against the banking and brokerage industries.

COULD WARREN REALLY WIN THE PRESIDENCY? Yes, she could. If the economy looks mediocre — with GDP numbers no better than Barack Obama’s — and geopolitics continues to percolate from Tehran to Beijing, Trump will be vulnerable. What a depressing choice for disenfranchised moderates: two polarizing demagogues, both appealing to the extremes, could face off in an ugly 2020 race.
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GOOD LUCK TO JAY POWELL TODAY: The Fed Chairman already faced the likelihood of pleasing no one in his press conference today — a 25 basis point rate cut will not be enough for Trump and many in the markets, while a minority of us who favor the Fed doing nothing will continue to wonder why Powell favors wasting his ammunition as core inflation creeps higher.

NOW POWELL HAS A NEW CHALLENGE: The astonishing spike in overnight lending rates, which alarmed the repo industry and prompted a massive infusion of cash by the Fed this week. This was a perfect storm, as quarterly tax payments and a $71 billion price tag for bond purchases fell on the same day, draining the system of cash.

POWELL WILL NEED TO ASSURE THE REPO INDUSTRY that the Fed is prepared to keep the system liquid — and he needs to explain why this week’s panicky spike in overnight rates caught everyone off-guard. Both the fed funds decision and the repo crisis require a deft communicator at the Fed, and a suspicion is growing, unfortunately, that deft communication is not Powell’s strong suit.