What the US midterm elections and bitcoin drama mean for investors: Robert Gottliebsen

In the days leading up to the US midterm elections, Wall Street had the future mapped out. Shares rose strongly and bond yields declined in anticipation of a strong Republican vote that would cause the Democrats’ big spending plans to be trashed, which would take the pressure off US interest rates.

And, as Wall Street saw it, the rumble in the cryptocurrency market was just another disturbance that would be overcome by support from the big institutions.

But the next 24 hours changed the game. While it’s likely the Republicans will control the US lower house, the result was not convincing and a lot more of the Democrat’s spending may pass the Congress because of nervousness among Republicans. So unless the US downturn gathers pace quickly, that means interest rates will rise and stay higher longer.

And the rumble in cryptocurrency is turning into a collapse as rumours swept the market, later confirmed, that the plan by large crypto exchange and Tesla supporter Binance to rescue the problem racked FTX exchange was in jeopardy because FTX was in too big a mess.

The cryptocurrencies plummeted and the big institutions which normally support bitcoin when it gets into trouble were missing.

And that fear turned to selling, and the large institutions began dumping their solid share investments to cover their losses. This year, almost $US2 trillion ($3.11bn) has been lost.

Wall Street is nervous that in the crypto decline we’ll see some very nasty losses in unexpected places. Elon Musk sold more Tesla shares.

For Australia, the fact that US President Joe Biden avoided a mauling in the polls will give the US confidence to continue to advance the AUKUS alliance. Picture: Mandel Ngan/ AFP

But in many ways the world is now a much safer place and unless the bitcoin mess is serious we have a better chance of coping with the downturns that will come with prolonged high interest rates.

What is emerging in both the US and Australia is that many enterprises, particularly those who are supplying affluent consumers, are trading well but others are struggling.

Meanwhile, to increase Wall Street nervousness an ominous sign has emerged from China.

The Wall Street Journal reports that prices charged by Chinese companies at the factory gate recorded their first annual fall in almost two years – a signal that high stock levels and cautious consumers in the US and other western countries are reducing overseas demand for Chinese-made goods.

Chinese producer prices fell 1.3 per cent in October compared to the previous year, and earlier in the week China reported a drop in exports for October. Again with US leading the way.

In wider areas, paradoxically, among the two most obvious beneficiaries from the Republicans failure to maul the Democrats are Ukraine and Australia plus the environmental movement.

President Joe Biden will now be able to continue supporting Ukraine. While it might have been a coincidence, when it became clear that Donald Trump backed Republicans were having a tough time in the polls, Russia announced it would withdraw its troops from Kherson.

And for Australia, the fact that Biden avoided a mauling in the polls will give the US confidence to continue to advance the AUKUS alliance, and its nuclear submarine strategies. It is also just possible that US rumblings casting doubt on the JSF-F-35 aircraft will come to the surface to the greatest benefit of the western world. Biden’s environmental policies and undertakings will continue.

There is at least a chance that the Republicans will now put up a strong candidate for the next presidential election that is not Donald Trump and the Democrats will also find a candidate that can handle the pressures of the office.

One of the great threats to the world and the level of share markets is that American divisions will make the country almost ungovernable. That risk is still there, but it has been reduced.

The pressure facing all governments is that cost of living is causing voters to demand help, but the whole purpose of trying to slow an economy via interest rate rises is to cause pain in the community that reduces spending and increases job losses, so forcing wage and price restraint.

When governments relieve that voter pain, under present rules, the central bank must increase interest rates to neutralise government action and restore pain.

That conundrum will play out in both America and Australia, and I suspect we are going to emerge with a world that does not see inflation return to the very low levels of previous years. And interest rates will stay at higher levels for longer.