Iowans went to the polls Monday to vote in the first of 50 races leading up to the nominations of candidates for the U.S. presidency. Both the Republican and Democratic candidates continued to campaign late in the day Sunday ahead of Monday's caucuses. With a 50 percent success rate at predicting the ultimate nominee, the Iowa caucuses are less a certainty in predicting who will win, rather, they are great at predicting who will lose.
Candidates who place in the last third of the caucuses are almost guaranteed to lose the nomination and thus never run for office. Therefore, by the time this column goes to press, at least the Republican candidates for the nomination will have been thinned considerably. Look for Ben Carson, Chris Christie, Mike Huckabee, Carly Fiorina, and Rick Santorum to drop out completely should they not place in the top three candidates. How does this impact the cash in your pocket? A Donald Trump or Ted Cruz loss will only help the status quo in the United States, and therefore the dollar will gain on their loss. A landslide victory for either candidate - as is currently expected - may have already caused weakness in the dollar. Trump's statements regarding curtailing free trade and increasing tariffs on Chinese goods (of nearly 40 percent) would only hurt the U. S. economically going forward and thus weaken the dollar. Cruz echoes much of what Trump says although he might be the dark horse candidate of Wall Street banks hedging their bets against a potential Hillary Clinton loss.
On the democratic side, it appears that Clinton and Bernie Sanders are neck-and-neck, although I will predict a Sanders win in Iowa. A Sanders win implies a decrease in the income gap between the rich and poor and a stabilization of the existential threat to America that is income inequality. Sanders needs to be careful in not following in the footsteps of his fellow Vermonter, Howard Dean, whose post-Iowa concession speech derailed his entire campaign. Sanders so far has adhered to Dean's playbook in raising the most number of donations from working Americans, whereas Clinton's donors are fewer yet far larger in nominal terms.
By the time you read this column, I predict Cruz and Sanders will have won the Iowa caucuses followed closely by Trump and Clinton. A few dropouts later and the stage will be set for next week's New Hampshire primary, which has an 80 percent effective predictability rate in the last 30 years. By Wednesday of next week, clear frontrunners will most probably have emerged among the candidates vying for their parties' nomination.
Another important development in the world of finance sure to hit your pocketbookeven more directly than the U.S. presidential race in the short-run, is the actions taken by the Bank of Japan (BoJ) on Friday. The BoJ joined other nations in adopting a negative interest rate of 0.1 percent on reserves parked at the BoJ. This move means that new reserves deposited at the bank above a certain level will incur a cost, like a bank-fee, against the depositing bank. The aim here is to scare banks away from parking reserves and lending more and thus bringing down the cost of interest rates consumers pay. However, Japan has been in a 30-year slump that has seen many banks hesitant to take on new risk by lending.
The rate of the negative interest rate, 0.1 percent, may not be significant enough for big banks to invest, but more importantly, this move by the BOJ sends a message to global markets that Japan and the government of Prime Minister Shinzo Abe will do whatever it takes to shock the Japanese economy back to life. Currently at 121 yen to the dollar, the Japanese national currency is at multi-year lows not seen since the Great Recession. Continued easing of interest rates will only decrease the value of the yen further - the aim being to spur exports and promote growth. The fact that practically the entire world is marred in a similar recession does not bode well for Japanese exporters. Only time will tell if Japan can pull itself out of this double-dip of the Great Recession.
The message from Japan, Europe and other parts of the world where easing is continuing is that the U.S. Federal Reserve (Fed) got it wrong. While I agree with this statement, the Fed has little choice but to stay the course. Any decrease in the federal funds rate will only imply the Fed is indecisive and should be avoided at all costs.