| Malcolm Gladwell is out with a sequel to his bestseller The Tipping Point, called The Revenge of the Tipping Point. In the New York Times, Anand Giridaradhas subjected it to one of the most brutal reviews I have ever read. The whole concept that there's a point in society where opinion or consumer behavior just "tips" is questionable, and possibly exaggerated. With this huge caveat in mind, the US political narrative has changed in the last week, in what looks like a Gladwellian tipping point. That shows up in prediction markets, in any amount of hair-pulling Democratic commentary, and more significantly in polling data. This narrative may or may not be correct — at this point eight years ago, the Donald Trump campaign was reeling from the Access Hollywood tape and the story was that Hillary Clinton had the presidency wrapped up — but it doesn't need to be right to move markets. After two months of gauging whether Kamala Harris could win, and might even have a Senate majority behind her, the question is back to whether Republicans can pull off a landslide and clean sweep. The Real Clear Politics polling averages provide a projected Electoral College vote, based on every state going to the current leading candidate, even if their lead is within the margin of error. This is a statistically questionable exercise, but it reveals that Trump has his nose ahead in almost as many states (albeit by less than one percentage point in six of the seven swing states) as when Joe Biden stood down. The only one where he hasn't retaken the lead is Wisconsin: That suggests as dramatic a tipping point as Harris' entrance to the race in late July. And to be fair to Gladwell, the design of the Electoral College means that a very small shift in the votes can indeed tip into a big margin in the forum that counts. Meanwhile, the Senate looks a lost cause for Democrats, and prediction markets now say their chance of retaking the House is in jeopardy. The 2022 elections were affected by factors in New York that won't be repeated, and the assumption has been — with the exception of a few days between Joe Biden's terrible debate performance and the first attempt on Donald Trump's life — that Democrats would regain it. Polymarket has recently narrowed the odds and polls show it will be very close, depending on the suburban vote. The House has tax-writing power. A Republican House under a President Trump would be a very big deal financially: The tipping point analogy is tempting to use because there's no obvious explanation for why the race appears to be moving like this. In the summer, Trump had successfully made the election a referendum on Biden, which he could win. Harris succeeded in making it a choice for a while; now, somehow, it's back to being a referendum on Harris (and Biden). Why might Harris lose a referendum to a candidate who appears increasingly erratic? The travails of Keir Starmer might provide some clues. His first 100 days as UK prime minister have been disastrous. Harris and Starmer are very different, but they are both prosecutors who worked in law enforcement until their fifties. Both are good at asking questions, as a prosecutor should be. Neither is very good at answering them. Lawyerly caution and precision with words don't come over well in the heat of an impassioned political environment, and both look unconvincing. In economic terms, it's possible the inflation spike of 2022 was unforgivable, and fatally undermined any chance Harris might have in a referendum. Back in April, Points of Return introduced the concept of anti-core inflation, covering just the food and fuel elements that are hardest for central banks to control, shown in the chart below. Many consumers experienced it as an insult:  In this double-scale chart from the terminal (there's statistical mischief to be done with two scales, but the point in this one is solid), inflation is shown inverted on one axis, so that rising prices show up as a declining line. The other shows the University of Michigan's measure of whether consumers feel themselves better off than five years before, which was revised last week. This latter number, remarkably, barely budged during the pandemic year of 2020, or in the early months of the Biden administration; stimulus checks did their job. Once inflation took off, we have a plausible tipping point as the proportion feeling better off plummeted. They continue to dwindle, even as victory is declared over inflation, and the data suggest that most are, indeed, better off:  For the financial implications, it's worth going back to the Points of Return written after the first assassination attempt, as the political narrative is now back to that point. Trump has been promising ever more tax breaks on the campaign trail, which would raise the deficit. The effect on trade policy could be galvanizing, and not in a good way, if tariffs really rise as much as promised. Tax cuts would boost stocks, as they did under Trump 1.0. Trump 2.0 would be stock-bullish. The question is what would happen to bonds. Yields rose sharply after his surprise victory in 2016. With inflation higher now, and far higher tariffs on the table, it would be fair to brace for an even sharper rally in bond yields this time, or even a bond revolt. On which subject... Narratives drive markets, just as they drive politics, and are also prone to tipping points. At present, US stocks show unbridled enthusiasm. The S&P 500 finished last week at yet another all-time high. It did this without relying on the Magnificent Seven tech platform companies. Take the equal-weighted version of the S&P 500, in which every company counts for 0.2% regardless of their size, or Bloomberg's index of the "other 493" large-cap stocks excluding the Mag 7 altogether, and the market is at a record: With expectations relatively muted for third-quarter earnings season, there will probably be more to buoy share prices in the days ahead. And the credit market could scarcely be more optimistic. The spread of the main US Bloomberg corporate index over equivalent Treasury yields is at historic lows, suggesting minimal concern about the economy and, indeed, great optimism: So why might it make sense to talk of tipping points? Because rate expectations are beginning to shift, taking the market narrative with them. Compared to a month ago, Bloomberg's World Interest Rate Probabilities function shows that the expected low for the fed funds rate has drifted up by 50 basis points: That's also had an impact on the 10-year yield, which is moving roughly in line with fed funds expectations for two years hence: The five-year inflation breakeven, calculated by the difference between fixed-income and inflation-linked securities, has also sneaked up significantly, after briefly falling below the 2% target. Doubt is starting to seep in as to whether inflation is truly beaten: Meanwhile, the latest Michigan sentiment survey continued to show an extraordinary rise in the mean estimate of inflation over the next five years. This is distinct from the median, and is driven by a significant coterie of respondents who think inflation is going to take off in a big way. It's also possible that Michigan's shift to online surveying has affected the outcome. But still, if the average consumer thinks inflation will be 7% in five years' time, that looks like trouble. With such sentiment, tariffs jolting up prices would have a big psychological impact: If this sentiment-based estimate is right (it probably isn't), then the fed funds rate won't drop much further. It also, incidentally, shows tellingly how trust on inflation has been ruptured. Are such nerves about rising prices consistent with a stock market at record levels? In a word, no. One of the simplest rules of thumb in finance is to compare the earnings yield on stocks (the inverse of the price/earnings ratio) with the 10-year Treasury yield. When stocks offer much more yield than bonds, it's hard not to buy them — the ironclad truth that has propelled them forward ever since the Global Financial Crisis. But the earnings yield has dropped, and Treasuries are back to offering a higher yield with much less risk: Big gaps between the two measures are unusual. When in stocks' favor, they signaled historic buying opportunities (as in early 2009 when the worst phase of the GFC was coming to an end, and again during the 2020 pandemic lockdowns). The last big gap in Treasuries' favor, in early 2000, signaled correctly that it was time to get the heck out of stocks. For decades, it was the norm for bond yields to be higher. There's no reason to predict a big equity selloff from the crossing of the lines. But if bond yields rise significantly from here, and inflation recurs — which is exactly what should be expected after a Republican clean sweep — it will be hard for stocks to continue their advances. That's not in the price yet, but if the current political narrative continues, it will be. When I set up my account on what was then Twitter, I described myself as a Mexicanophile. That was because I lived there for four years, loved the place and often tweeted about it. Since about 2015, it's been perceived as a political statement, which it absolutely wasn't when I made it. But as a Mexicanophile (and an indeed an immigrant who casts their first vote as a US citizen next month), I do understand and feel the horror of current anti-immigrant rhetoric. This essay by the Peruvian-American Carlos Lozada for the New York Times is quite beautiful and I recommend it to all. Que tengas una buena semana.
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