By Amine Bouchentouf
As the election dust settles, there are several issues and metrics that investors need to monitor.
As the Democratic Party celebrates the re-election victory for incumbent President Barack Obama, the next few days will be marked by celebration and the joyful mood of the winners.
On the other side, the Republican Party will be looking at why it lost the presidential election and seeking a strategy to position itself in a demographically and socially shifting United States. After the dust settles, the real task of governing and legislating begins, and it won’t be easy.
The U.S., by far the biggest economy in the world, is still facing anemic internal growth, relatively high historical unemployment, and a weakening globally economy. In addition, even though the Democrats were able to keep the White House for a second term, the political environment in Washington is in a political gridlock and is faced by a divided Congress; therefore, getting practical policies passed will remain challenging.
In this week’s column, a follow-up of the previous column, The Commodity Investor examines some of the key issues facing the markets and whether the U.S. political system will be able to address these issues.
When Obama begins his second term in office, he will still be faced with the same economic issues that characterized his first term. Granted, the economic situation isn’t as dire as it was when he first took office in January 2009. Back then, the U.S. economy was extremely weak and was in the midst of the biggest financial collapse since the Great Depression.
When Obama entered the office, the market was in a free fall following the collapse of Lehman Brothers, and the government had to actually nationalize several financial institutions to keep the financial system alive. Obama had to act aggressively and swiftly to prevent the auto industry -- namely Chrysler and General Motors (GM) -- from going belly up, and he did.
While the situation has stabilized since those dark days, the economy is still not running on all cylinders. Economic growth is still anemic and downright declining in certain states. GDP is at 2 percent and market performance is still relatively stagnant.
When the economy is doing well, that translates into higher equity prices and commodity prices, which is positive for investors. Commodity investors in particular should be constantly monitoring these GDP and economic numbers since they have a direct impact on the demand for key raw materials such as iron, coal, oil, and natural gas. A stronger economy generally means robust commodity prices.
One of the top market agendas facing the president and Congress in the coming years is the issue of market regulation. Following the 2008 financial crisis, Congress enacted a series of laws to regulate the markets and market participants to prevent the behavior that led to such a massive collapse. However, several years after the regulations were approved, regulators and the market are still struggling to implement them in a coherent way.
This lack of clarity is having a negative impact on investments since investors aren’t completely sure of these new rules of the game. These regulations affect everything from banks being able to run internal prop desks (essentially making investments through their own proprietary accounts) to the position limits on commodities futures contracts such as soybeans and gold. For investors focused on commodities, these market regulations are critical because they will provide the "rules of the road" going ahead. Without clear definitions and guidelines, investors will remain hesitant and lack the visibility to execute their investment strategy with confidence.
For instance, the Dodd-Frank Act has plenty of regulatory stipulations that will affect all investors, including in the commodities markets. However, the law is so broad and the provisions so numerous that it will take several years to be implemented. For the sake of all investors, the political establishment should accelerate the implementation of this policy.
Another regulatory body that has direct effect on commodities markets is the Commodity Futures Trading Commission (CFTC). The CFTC has had several rulings, but the market isn’t fully aware of the effects of these new rules. For example, the CFTC is now increasing position limits on various futures contracts such as soybeans and gold. While those are fairly straightforward, there are other rules that require more understanding and a fundamental shift in trading strategy.
The CFTC recently asked all foreign companies with operations in the U.S. markets to comply with position limits vis-à-vis swaps -- that’s a complicated regulation and the CFTC hasn’t done a good job of communicating with the market. Government and regulators have to communicate better with the market and its participants to clarify all policies and their impact on investors.
Now that the U.S. election is over, the real work of governing begins. For investors in general, and commodities investors in particular, the election will have an impact regarding which economic policies and market regulations are implemented. The next four years will surely bring many opportunities, and it’s the obligation of the astute investor to remain tuned to the political process to make sure they are looking after their investments.