November Surprises?

While pundits like Dick Morris are wary of an "October surprise," voters and investors should be aware of three possible scenarios in November. One involves market volatility, one a political party civil war, and the other deals with civil unrest. First, let me provide a little back story about the first possible surprise.

It's been strangely calm in financial markets coming up to the election. Crude oil, gasoline and precious metals have all gone down... the Dow has stayed above 13,000... and it's been very quiet on the European financial front. This hasn't been because of any change in economic fundamentals. Many European governments and banks are still over-leveraged, and still need to be bailed out (again). German Finance Minister Wolfgang Schuable warns that the worst economic events are yet to come with the Euro crisis. 

Ditto for the United States, with an official national debt of over $16 trillion - plus unfunded liabilities of anywhere from $50 to over $200 trillion.

It's not a matter of if the global financial system collapses, but when. The laws of mathematics are as solid as the law of gravity. Doesn't matter if you believe in it or not, it still works every time. Printing money, borrowing and spending can solve the problem in the short-term, but it's like trying to keep a beach ball below the water - inevitably, it'll pop back up again.

That's what I see when the election is over, and the short-term financial "patches" don't (or can't) work anymore.

Here's November Surprise #1: Increased volatility in world stock and commodity markets.

If Romney gets elected, the US stock market will probably go up in the short-term. But that still doesn't change the ugly fundamentals a Romney Administration will deal with the next four years. No matter who gets elected President, it will be tough financial and political sledding. Democrats will want to maintain the welfare state, Republicans the warfare state.

The President and Congress know that any real cuts in federal spending will cause short-term economic pain, and political hari-kari. Voters will be angry because their federal ox has been gored, and they'll be open to attacks that he or she didn't "care" because they cut spending and programs.

We'll probably see Washington continue to "kick the can" down the road as far as possible, until we hit a currency or cash flow "crisis wall" that will force Congress and the President to make these tough decisions.

I believe that European banks and governments have been kept quiet this election season, because they've gotten financial assistance from the IMF, Federal Reserve and/or other institutions to stay solvent. The day of financial reckoning is coming closer, and the massive amount of debt will have to be repaid or defaulted upon.

This debt and derivatives de-leveraging will result in much higher volatility in world financial markets.

However, if Obama wins re-election, this will lead to November Surprise #2:

A civil war within the Republican party.

It's no secret the Establishment never really liked Ron Paul or his libertarian supporters. Reports of vote rigging in Iowa, Maine and other states - not to mention the fiasco at the national convention in Tampa - left a lot of folks unhappy with the formerly Grand Old Party.

If the Republican nominee can't beat a President with the worst economic performance since Jimmy Carter, that would be pathetic. Limited-government and 'small L' libertarians will escalate their political uprising against party leadership.

And if you thought the natives were restless before, just wait if the Establishment's choice for President loses again.

This will be the beginning of the end for the Republican Party. Even a Romney victory will only delay the inevitable. I don't believe that a big-government, Rockefeller Republican from Massachusetts will be serious about limiting the size, scope or spending at the federal level. Once enough Republicans wake up to the fact that he's doing the same thing as Bush and Obama did, the political jig will be up.

For the last few years, the GOP has been a loosely bound coalition of imperialistic war hawks, social conservatives and libertarians. While there's some overlap between these factions, many folks in each group tolerate each other only for political convenience. Under the surface, there's real animosity between the limited-government faction and the rest of the party.

Ron Paul Republicans played nice because they wanted the Congressman to get nominated, and now the Establishment is pleading with the Ron Paul folks to support Romney. If the Establishment thinks that Ron Paul supporters will come back and lick their political boots, they've got another thing coming.

While older Republicans look down upon younger, more liberty-minded activists, they do so at their own risk. The Establishment needs limited-government and libertarian voters to maintain power. Libertarian voters haven't gotten any support from the Establishment, so why should they help out or stick around? When the GOP eventually breaks up, social conservatives will probably migrate to the Constitution Party... limited-government activists to the Libertarian Party... anarcho-capitalists and frustrated activists will probably re-register Unaffiliated - or drop out of politics altogether.
 
However, if Romney does manage to get elected (as I think he will, by a small margin), that could lead to November Surprise #3:

Civil unrest in poor, urban areas around the country. Although there's little difference between Romney and Obama, the perception is that Romney will cut federal spending and programs. People who are dependent on those entitlements will be angry because they may lose that support, and the country's first black President has been defeated.

The U.S. is more polarized and divided than any time in history, with maybe the exception of the Civil War. Americans are frustrated because of a stagnant economy and tight job market. They're worried about their futures because most of them don't understand the economic causes (or solutions) to America's problems.

Unfortunately, a lot of Americans - both Republican and Democrat - have been conditioned to believe that elected officials have magical powers to overcome laws of economics, mathematics and finance. Some "true believers" buy into their candidate's rhetoric, some voters will vote for their party's candidate no matter what, and some citizens just want someone to believe in.

They understand very little about what causes booms and busts, and what it takes for a country to make its way back from an economic recession or depression. Too many Americans have put their trust in charming personalities, instead of sound financial principles.

I'll add a fourth November Surprise: Americans of all political stripes will be disappointed with President Romney, and a still-sluggish economy between 2014 and 2016. 

I know this may sound like heresy to loyal Republicans. However, it will take several years - and maybe a decade or more - before the financial excesses get cleared out of the financial system, and we see true, sustainable economic growth again. It doesn't matter who gets elected to the White House, this will have to happen... or else the US stays mired in a longer-term recession/depression for at least 10 years.

Fiscal conservatives will probably be disappointed, unless President Romney gets "fiscal religion" and makes the tough budget choices in Washington. Based on past history, I'm not optimistic that will happen.

While this isn't a complete list, these are a few things to watch for. As the Chinese blessing (or curse) says: "May you live in interesting times." That's the best description I have for our world in October 2012. I hope that you and your family are prepared today for the interesting times to come.