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Trading  | July 2, 2018

Authored by Tom Luongo,

Populism is popular.  Andrés Manuel López Obrador won yesterday’s election in Mexico with enough of the vote to have a clear legislative majority in the lower house.

Most of the commentary on this is fatuous.  The right wants to harp on Obrador’s past statements about the corruption in Mexico is so bad that Mexicans should seek a better life in the U.S.

The U.S. establishment derides his and his proposals as unrealistic and unworkable, which they may well be as the corruption in Mexico runs deep.  But, that said, the main reason they don’t like Obrador is because he is an outsider to the political establishment and the ruling caste of Mexico.

Martin Armstrong’s conclusions may well be right that Obrador can’t fight the tide in the short run.

He will raise taxes dramatically and we will see Mexico spiral downward into 2020. He is ill-prepared to get rid the government of corruption when the bureacracy is the problem. In fact, many who were deeply involved in the corruption saw the shifting trends and were a part of Obrador’s campaign. It is also not likely that he will make a dent in the unyielding violence of the drug war. The people are fed up with the drug wars which has escalated out of control. There were more homicides last year in Mexico than any time in the last two decades.

But the Drug War is the big issue here.  And I don’t think in any way that it is in Obrador’s power to change it.  That power lies with the U.S. president, Donald Trump.

And if you look carefully at Trump he has been attacking the Drug War and the entrenched power in the U.S. which supports it, albeit outside of the main headlines.

His focus on immigration and the opioid crisis is real.  It is aimed at staunching the flow of immigrants into the U.S. which was a fully-blessed policy of the Obama administration to turn the important red states — Texas, Florida, Arizona — blue.

He’s allowing Attorney General Jeff Sessions to attack the Drug War through the human trafficking angle which is the right way to keep the center of the country on his side while the Democrats fulminate and try to turn this into a humanitarian crisis.

And it’s simply not working.  At all.

The polling numbers are stark.  Trump’s approval rating is soaring.  His numbers among blacks and hispanics are at levels a Republican hasn’t seen in decades. The #walkaway movement is going viral.

By allowing the Left to immolate themselves by trying to turn every issue he tackles into a negative Trump is setting the stage for a post-mid-term ratcheting up of his domestic policy agenda.

And, I think, he’ll get a very sympathetic ear from Obrador on marijuana legalization.  Trump has already begun the about-face about legalizing cannabis.  Back in April he unilaterally abandoned the federal policy on a crackdown on recreational cannabis use, removing the inter-governmental stress between federal and state law.

President Trump personally directed the abrupt retreat, which came at the behest of Republican Sen. Cory Gardner of Colorado. White House officials confirmed the policy shift Friday. Trump did not inform Atty. Gen. Jeff Sessions in advance of the change in policy, an almost unheard of undermining of a Cabinet official.

Gardner was incensed in January when the Justice Department announced that it was rescinding an Obama-era policy that directed federal prosecutors not to target marijuana businesses that operate legally under state law. The senator had blocked Justice Department nominees in retaliation.

And he told Jeff Sessions to stuff his outdated and insane ideas about pot and shove them.  But, now is not the time to spend one erg of political capital on cannabis legalization.   Not when there are so many other things that are pressing geopolitically.

But, looking ahead past the mid-terms and giving Obrador some time to get settled into the office, Trump will be able to revisit this issue and clean up a number of dangling issues.

He can’t fire Sessions until after he gets a real majority in the Senate, not the fake one he has today.  If that occurs, and the odds are very good (c.f. the Democrats’ implosion above), then he’ll be able to get someone on his side through the confirmation process.

And you can bet a lot that cannabis legalization will be something the Democrats try to pin any AG candidate on.

And, back to Obrador, there is not one thing holding back a successful shift in Mexico’s future than a coordinated attack on the drug cartels’ power.

And what better way to start than legalizing cannabis?

So, today marks the possibility of a new era in relations between the U.S. and Mexico.  One where two outsiders can coordinate policy to attack the core issues creating tension.  My wife visited Mexico last year as part of a scouting trip in case we decide to ex-patriate.

And it’s very clear Trump is not popular with most Mexicans, and with good reason.  But, at the same time if he embraces Obrador’s reform plan and supports him then that attitude could change very quickly.

In the short-term, however, markets will react badly to all of this.  The Peso will continue falling as global trade collapses thanks to Trump’s war on the European Union.  No emerging market will be spared.  But, that also means there will be quite the opportunity opening up in 2019-2020 if Obrador is truly as advertised and Trump has created the power base he needs.

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