I get my political news from two primary sources: The Economist and Seeking Alpha's "Breaking News" section. Both of these sources allow for readers to comment. These two readerships are mostly composed of people who have skin in the game: investors, traders, speculators, and money managers.
Through their comments, these readers have broadcast a clear preference for Republican candidates, and within that party Trump, according to my observations. While Seeking Alpha's news is rather objective, The Economist's is not, clearly holding a bias toward Hilary Clinton and Marco Rubio as the "house candidates." What I have not found a bias for - in any of these sources, whether they be the editors of The Economist or the readers of SA or TE - is one for Bernie Sanders, the "Democratic Socialist" candidate.
A contrarian does not take the opposite standpoint for the sake of being the devil's advocate. No, a contrarian takes a certain mindset. A contrarian simply asks the question, "What if the opposite were true?"
Using the contrarian mindset can subject you to many unobvious opportunities that the mainstream sees as "obviously wrong" or risky. Then, under the assumption that the contrarian viewpoint has merit, the contrarian looks into the issue, searching for any evidence that can support such a view. If he cannot find any evidence, he must eventually drop the viewpoint and join the mainstream.
On occasion, the contrarian is correct. That is when he must share his viewpoint with his friends, students, clients, and - if you are a Seeking Alpha contributor - readership. Consider the following examples.
- Mainstream viewpoint: Stock paying high dividend yields (>8%) are risky.
- Contrarian viewpoint: Stocks paying high dividend yields are safer.
Does the contrarian viewpoint have basis? From a purely logical viewpoint, yes, as a company that can afford to pay such high dividend yields must be bringing in enough income to sustain those yields. But logic only goes so far, which is why contrarians must rely on analyses, such as dividend safety studies.
In one of my studies, I found that companies that engage in the "risky" practice of doubling their dividends in a single fell swoop beat the market by 17% on average. On the subject of high dividends, much of the mainstream (not you, of course!) fears "too good to be true" yields without looking into the individual stock. The contrarian dividend investor likely outperforms.
Let's look at another example:
- Mainstream viewpoint: Large growth stocks provide the fastest way to get rich.
- Contrarian viewpoint: Small value stocks provide the fastest way to get rich.
Want to get rich? Just invest in TSLA, NFLX, AMZN, and AAPL. Or not…
…because many studies have shown that small-cap value stocks tend to outperform the market:
(Source: Keystone Financial)
Of course, the above examples are still argued against. For example, small-cap indexes likely have a higher survivor bias than large-cap growth stocks. But the fact remains that the mainstream thought process has some blind spots.
(Personally, I'm of the believe that the fastest way to get rich slowly is to short stocks - and yes, I understand my phrasing of this concept is a contradiction.)
So how does this apply to the presidential election and its candidates? Clearly, the mainstream investor and trader community is rooting for Republicans, with Trump - perhaps the walking definition of a capitalist - seemingly the most popular and Bernie Sanders by far the least popular. But what of the contrarian viewpoint?
Let's ignore Trump for now and talk about Bernie. We can talk about Trump some other time, but the short of it is that Trump might fix the economy, thereby making the future of the stock market uncertain. However, my viewpoint on Bernie is that he will make us all rich.
Don't take the above sentence at face value; read on…
Bernie Sanders Will Make Us All Rich
Many of Sanders's policies will affect the US economy. I will take the three policies that I believe will have the biggest effect on the economy - and stock market, specifically - and outline them as catalysts for making us all rich. Let's begin with the first catalyst.
Catalyst #1: Taxing Investments
Sanders intends to tax all investment vehicles:
- Stocks: 0.5% per transaction.
- Bonds: 0.1% per transaction
- Derivatives: 0.005% per transaction
Clearly derivative holders have the least to fear. Yet derivatives are the most likely investment vehicles to be churned in swing trades and day trades. His tax law would discourage stock holders - more likely to be investors - and funds more so than traders such as myself who opens and closes stock option positions daily.
The reaction prior to Sander's candidacy is obvious. Investors who are on the fence about selling their stocks and bonds will have much more reason to do so before the tax law comes in effect. That is, should Sander's election to POTUS look certain, investors will sell to avoid the tax, dragging down the stock market.
Buying activity would likewise be discouraged. Yes, it makes sense to buy when the market is falling, but predicting the bottom is hard. This is doubly dangerous when you have to pay an extra tax on the buying transaction in addition to the commissions and future capital gains tax (our next catalyst).
Future transactions would likely be through derivatives. Call options would allow investors to ensure that the stock price rises before buying. That is, future trades will be speculative more than anything.
A movement from stocks to derivatives will also allow for more shorting. Investors learning options would suddenly see a world in which shorting is now safe via bought puts. More downward pressure on the market would appear from thin air.
Catalyst #2: Capital Gains Tax
Capital gains tax will rise under Sanders. Capital gains tax at present is a godsend to investors in high income brackets. Without capital gains taxes, investors would have to pay income taxes twice: once on the money invested from the paycheck to the stock market and once again on the stock earnings once sold.
This new tax will not only encourage alternative forms of investments but will encourage shorter term trading. When the difference between income tax and capital gains tax is tightened, investors will become traders. And traders sell more quickly than investors; they also are more likely to take short positions, such as via swing trading the SPDR S&P 500 ETF (NYSEARCA:SPY).
Again, more selling and shorting leads to weaker upward trends and stronger downward trends in the stock market. In addition, we should see the increased taxes drive much of the 1% out of the United States. Expect more Eduardo Saverins under a Sanders cabinet.
Catalyst #3: More Spending
More spending at the hands of Sanders's cabinet will bring the US deficit to new highs. I've been saying that America is on the path of Japan. Sanders can hasten this.
(Source: The Daily Caller)
A United States run by Sanders would see consistent and reliable bearish economic indicators. Because investors and traders often act on these indicators - whether increased jobless claims resulting from higher minimum wage laws or higher debt-to-GDP ratios - we can expect more selling and shorts to be matter-of-fact in the stock market. The US economy will see a hastened debt bubble (which is already underway) that could put the stock market in long-term bear mode.
Bad News x 3 = Good News (for Traders)
The result will be a bear market or recession - or market crash. Call it what you will. I simply call it an opportunity of a lifetime.
More predictable markets means more easy money. Those of us who missed out on the easy money from shorting gold or shorting oil back when we entered the commodities bear market can now leverage the Sanders Economy. While Sanders claims to be targeting the richest in the US, he is actually helping those of us traders who make our wealth through predicting the future.
Those of us traders who "do not contribute to the economy," instead making money from investments, can ironically thank Sanders for easier investment decisions. A while back, when Seeking Alpha was running its "best short decision of 2016" contest, one reader commented, "Short everything." Another reader responded, "You win!"
This humorous exchange would actually be sound financial advice from a seasoned financial advisor under Sanders's government.
Bernie Sanders 2016!
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Disclosure: I am/we are short SPY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.