After the total rout of the Republicans and the total repudiation of Trump’s second term, the financial markets have been all over the place.  The day after the election, stocks soared.  The next day, they crashed.  It has been a wild roller coaster ride.

It is funny when heavily partisan people open their mouths in reaction to a one-day move.  When stocks soar, some Democrats are celebrating because they take it as approval of their election.  When stocks crash, Trump has to say that it is because the country elected Democrats.  The two sides tend to not make comments about the market when it is going against them.

It is impossible to read what stocks or the economy will do with a heavy Democratic majority in the Congress.  Some might view it as gridlock, but it isn’t even clear if gridlock is good or bad for stocks.  Some might think the war against Iran is effectively over because the Democrats won.  But Trump still has a lot of power, and it is highly unlikely that the Democrats are going to defund the war.

There is one thing we can all count on, and it wouldn’t have mattered who won the election.  We are going to continue to see runaway spending and runaway deficits.  The higher interest rates mean that the Treasury will have to pay out even more in interest payments on the debt.  The only way for the government to cover this is to issue even more debt and get help from the Federal Reserve by monetizing the debt (i.e., creating new money out of thin air).

There is almost no chance that the government is going to cut spending, even with the so-called gridlock.  Most of the big items (military, Medicare, Medicaid, Social Security, and interest on the debt) are essentially automatic.  Sure, the military could stop dropping bombs and fighting wars, but we would still have massive deficits.  Even if they “save” $200 billion per year from less bomb dropping, we might get a deficit of $1.8 trillion each year instead of $2 trillion.

The only way Congress is going to make any substantial cuts to the federal budget is if it is forced on them.  That will only happen when the U.S. dollar is in major trouble and the Fed is forced to stop printing new money.  Only then will Congress maybe have to scale back.

Price Inflation Keeps Roaring

The latest CPI numbers came out this week for October 2026.  The CPI jumped 0.4% from the previous month.  The median CPI was up 0.3% from the previous month.  It doesn’t take a math genius to figure out that this is well above the Fed’s 2% annual target.

Even the CPI less food and energy was up 0.3% for the month.  In other words, this isn’t just a problem of oil and the Strait of Hormuz.

There is no year-over-year CPI because there was no data to compare it to from one year ago when the government was shut down and they didn’t track data for the month of October.  I remember thinking it was bizarre last year, and I still think that today.  They actually stopped tracking something that is supposedly used to manage interest rates and the dollar?

Anyway, the year-over-year CPI is probably in the range of 3.5% to 4%.  It is still well above the Fed’s supposed 2% target.  This means that we are highly likely to see a rate cut in the Fed’s December meeting.

Gold Signal

It is crazy that the price of gold isn’t soaring more.  It probably got a little too crazy when it went above $5,000 per ounce.  It now sits around $4,000 per ounce.

When the CPI comes in hot, as it did this week, it is temporarily bearish for gold because investors look at the fact that the Fed will hike rates.  In other words, it points to a tighter Fed monetary policy.

But the Fed’s supposed tight policy isn’t all that tight, especially when its balance sheet is mildly going up.  And the fact that they can’t get a grip on price inflation should be bullish for gold in the long run.

As discussed above, the only solution they have right now is to monetize more debt.  They can raise interest rates to 10%, but it isn’t going to matter much if the balance sheet keeps expanding and more money keeps entering the system.

If the Fed’s balance sheet keeps going up over the long run – and there isn’t reason to believe otherwise – then gold should also go up in terms of dollars over the long run.

Conclusion

The one good thing about the Democrats winning big is that it is a total repudiation of Trump and his war against Iran.  I am doubtful that the Democrats will completely defund the war, but at least a message was sent by the American people that they don’t approve of this war.

In terms of the economy, it isn’t going to matter much.  We will still get massive spending and huge deficits.  It is just a question of when the air will come out of the bubble and what the reaction will be when it does eventually happen.