The market meltdown triggered over the weekend remains, with the Dow Jones Industrial Average and S&P 500 down more than 2% at press time and the Nasdaq 100 broaching correction territory. In large part, Monday's sell-off at the morning bell was instigated by the Bank of Japan's rate hike, which effectively ended the country's negative interest rate policy precedent and, in turn, led to a 12% crash of the Nikkei 225. But the market movement seems to be less about a fear of an imminent recession and more about the perils of geopolitical chaos sown in part by the failures of Joe Biden's presidency and now the increasing odds that Vice President Kamala Harris succeeds in beating former President Donald Trump for a second term in office.
It's true that July's jobs report from the Bureau of Labor Statistics triggered the Sahm rule, which determines a recessionary cycle has begun when the three-month average unemployment rate reaches a half-point above the 12-month low. But July's unemployment rate of 4.3% remains below the historic average of more than 5%, and perhaps more importantly, our persistently inverted yield curve has reverted to normal, a sign of confidence from Treasury investors that we're actually moving away from the risks of a recession. The dramatic decrease in short-term Treasury yields, which have an inverse relationship with the value of a given Treasury itself, also signifies increasing confidence that the Federal Reserve will finally pivot and cut the federal funds rate from its 23-year high at next month's Federal Open Market Committee meeting. Further bolstering the notion that U.S. bonds remain the global haven of value is Berkshire Hathaway's recent reveal that Warren Buffett has amassed a quarter-trillion dollars of short-term Treasurys, more than the Fed itself has in its balance sheet.
All of this is to say that investors aren't simply responding to the risks of a recession. Rather, the long-needed correction of asset bubbles inflated by rampant deficit spending — for the past 3 1/2 years, the inflationary fiscal policy of Bidenomics — has collided headlong into the practical ramifications of Biden's foreign policy and the highest odds in months that Trump actually loses to a de facto extension of the Biden doctrine.
It's not a coincidence that Monday's mayhem has occurred in tandem with Trump's most precipitous drop in the betting markets, which now have the Republican approaching a dead heat against Harris in their respective odds of winning the presidency. At the same time, the Biden doctrine of maximum appeasement of the Iranians has come to its logical conclusion. While this White House has never been confident in presiding over peace through strength in the Middle East, the power vacuum in the Oval Office has become particularly impossible for Tehran not to take advantage of. With Biden a lame duck vacationing in Delaware and Harris preoccupied with campaigning for the top job, Iran cleared out its airspace to make way for a full-scale incursion on Israel following a series of proxy attacks by Hezbollah and the Houthis.
Sure, some of the sell-off may be the usual desperation we see from Wall Street when it wants to goad the Fed into doing its bidding and reduce the price of borrowing with a premature rate cut. But part of it is the basic calculus that every investor, like every world leader, is weighing in their heads: If you are Iran or one of its proxies, do you begin your barrage of attacks on American allies such as Israel now, when the White House is effectively empty, or do you wait until Trump is in office?
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Some specific bad news in equities are a direct contradiction of the promises of Bidenomics. For example, Intel, which projected it would create more than 10,000 jobs as a consequence of the billions of dollars it received from the CHIPS Act, announced last week that it would actually be cutting 15,000 jobs, with the chip manufacturer's stock plunging some 34% in the past five days.
But the leading economic indicators make it seem less like we're approaching a technical recession caused by consumer demand, which remains robust, unemployment, which remains historically low, or a crunch on credit, which remains historically inexpensive when gauged by the federal funds rate and mortgage rates. Rather, a justified market correction has run alongside the exogenous reality that the American electorate may give us four more years of bad fiscal policy and even worse foreign policy.
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