Domestic Politics

China removed checks and balances in its political system to deal with a very dangerous economic transition. The transition is going badly, yet investors cannot rely on checks and balances to correct or prevent policy mistakes. The Taiwanese election is a looming bellwether.

Investors should prepare for an equity market pullback this fall, prefer Treasuries over stocks, and US defensives over cyclicals. A pullback could also morph into another bear market given that monetary policy is tight, policy uncertainty will spike, global growth is slowing, and geopolitical risks are still high.

The global economy will not enjoy an “immaculate disinflation” but will suffer a very maculate one due to China’s growth slowdown and restrictive monetary policy in the developed world. Investors should stay overweight low-beta assets.

The Supreme Court is a generator of certainty rather than uncertainty for US markets. In the event of a constitutional crisis, a court intervention will likely reduce volatility.

The snap election which took place on Sunday resulted in a political deadlock in Spain. No single party has won enough seats to form a government. More importantly, both the left-wing bloc and the right-bloc fell short of the 176-seat majority needed in the 350-seat lower house. Negotiations are taking place as we publish, but neither side can see a clear and straightforward path to form a working government. Spain is heading into a political deadlock.