Using history as a guide, historian Niall Ferguson, told a conference that there won’t be a U.S.-China trade deal this year, that the probability of Sen. Elizabeth Warren (D-MA) becoming the Democratic presidential nominee is not priced into the market, and before New Year’s Day, the stock market could experience a sell off similar to the one a year ago.
It wasn’t quite what the crowd expected to hear.
Ferguson, a senior fellow at the Hoover Institution, gave the keynote address earlier this month to the Reaching Higher Ground conference sponsored by Pictet Asset Management, a London firm. A group of investors had come to celebrate the announcement that the firm will open its first New York office.
“Think about where we are today,” said the author of The Rise of Populism. “Everything is awesome on Wall Street, because there’s going to be some trade deal. And there’s really nothing to worry about because Trump will get re-elected and the Federal Reserve will just keep cutting rates by 25 bips [basis points] whenever we get any stress in the system. So, let’s just send the equity markets to a new high and prepare for the Christmas party. Did you get your invitation?”
Ferguson asked the crowd if they remembered the fourth quarter of 2018. “There was nothing to worry about, then there was a massive market sell off that goes to Christmas Eve. I don’t know quite why that wouldn’t happen again this year and I can think of a whole bunch of reasons why it would.”
While Ferguson is not a financial advisor, he is a well-known writer and speaker about international history. He is specifically focused on economic and financial history and British and American imperialism. He looks at the current state of affairs and asks, “What is this like?” Then he tries to find a historical comparison to help understand the world today.
He told the audience that he doesn’t think there will be trade deal between the U.S. and China.
“Unless the negotiators convince [Chinese president] Xi Jinping to fold, there is no deal,” he said. “The Chinese just asked that before there could be any kind of Iowa meeting, that the U.S. commit to roll back tariffs. Do you think that’s going to happen in return for nothing? That’s highly unlikely.”
The history of Chinese-U.S. negotiations goes back to 1971, when Kissinger secretly flew to Beijing and was introduced to the Chinese way of negotiation.
Ferguson said it goes like this: “We are a civilization 2,000 years old and you guys are in preschool. So, we have a long vision and you are just in a big hurry.”
That’s the way negotiations are going now, he said, because the Chinese know there is an election a year from now. And Xi Jinping does not have to worry about a re-election at this point. Or any point.
Meanwhile, in the U.S., no one is guaranteed re-election.
“I don’t know when, but at some point investors will realize that Elizabeth Warren is the favorite to win the nomination for the Democratic Party,” he said, adding that she has the most left-wing policies ever in the history of the Democratic Party. According to the probability markets, he said, she currently has a 25% chance of winning.
With Warren proposing $20 trillion dollars for a health-care plan, the abolition of fracking, and a wealth tax, Ferguson said, “I don’t see how the market goes ‘La La La La Christmas is coming’.”
He said Wall Street would soon wake up to the probability that this election will be close like most recent elections. In this case, either Trump wins and we get another four years of ‘Make America Great Again,’ or Warren wins, which could bring in a radical restructuring of the American economy.
“Once you price in the Warren risk, the market sells off,” said Ferguson quoting hedge fund manager Steve Cohen, who said the market could fall 25%. “If the market sells off, the economy looks less strong and the probability of Warren getting elected goes up.”
He said CEOs have not registered that Warren has a probability, that’s not zero, of being president. With the election a year away, she could flame out, but if she or Sen. Bernie Sanders (D-VT), or another left-of-center candidate get the nomination, then people in corporate boardrooms will start to worry.
In response to these views, Ferguson told the crowd that he’s been taking money off the table since mid October.
He continued his bearish case by saying there is not as much good news on trade coming in and that it’s more likely that tariffs escalate, rather than come down. The most likely scenario is that the tariffs stay where they are, but he thinks it’s slightly more likely that it escalates because I don’t see a deal.
With the Warren risk not priced in, economic indicators showing a slowdown, and the feeling in the market that the Fed will keep cutting interest rates, even though it said it won’t go to negative rates, he said, “I can’t help feeling the lessons of history.”
“Maybe there’s a market melt up, but what history is telling you is that the major reasons for why there was a big sell off a year ago, are still here,” he said. “I just don’t see that we are in such a different place. And it would only take one really negative piece of news on U.S.-China trade or one sudden moment of truth about the election for the markets to roll over in quite a nasty way.”
Ferguson concluded by saying, “I’m going to leave you with the thought that Christmas is coming, and if it’s like last Christmas, don’t say I didn’t warn you.”