The Day Democrats Return To Wall Street

If there’s one thing the market has become spectacularly good at, it’s extrapolating today’s political environment out to infinity.

If there’s one thing the market has become spectacularly good at, it’s extrapolating today’s political environment out to infinity…and “pricing in” things (like the end of the Iran War, Trump Tax cuts, future rate cuts, etc.) over and over again until one day of bad news turns into a year of “market optimism” about things getting better, prompting the S&P to rally to new all-time highs 17 days in a row despite the fact that nothing has changed on the ground.

And today, the market is acting as though Washington’s current regulatory philosophy, which appears to be pardon everyone who has ever committed obvious white collar fraud and take a “hands off” approach to new enforcement is simply...permanent. But it isn’t.

I think one of the biggest risks investors aren’t even remotely considering is what happens if Democrats take back the House this fall, or even more importantly, win the White House in 2028?

There’s a real chance this could lead to a wholesale repricing of the excesses that have flourished under an administration that has made it abundantly clear it would rather participate in markets than police them.

I still think Trump is a better option than anyone on the left side of the aisle when it comes to the Presidency. But ironically, Trump may have handed Democrats the perfect campaign issue. Forget whatever slogan focus groups come up with next. The message practically writes itself: corruption, self-dealing, insider enrichment, pardons for politically connected allies, regulatory capture, and a government that looked the other way while fortunes have been minted in increasingly questionable ways.

Republicans, including myself, cried wolf over Nancy Pelosi’s trading, Hunter Biden’s take from Burisma and President Biden’s dealings with China. But this administration’s cash grab, flanking all areas of the market from crypto to hi-speed algorithmic trading, puts Biden to shame.

If Democrats regain power, I think there is virtually no chance they don’t campaign on restoring “accountability” to Wall Street, crypto and corporate America. Sadly, they will point to the effects of monetary policy widening the wealth gap that their party also supports as an impetus for change. And unlike every election where politicians promise to lower drug prices by seventeen cents, accountability on Wall Street is actually something they can begin doing on Day One simply by changing who’s running the agencies.

Markets aren’t remotely priced for that. Today’s investors have become accustomed to a free-for-all style environment where enforcement often feels optional and the line between financial innovation and outright promotional nonsense has become increasingly difficult to distinguish. Insider trading on prediction markets, one crypto scam after the next, trillion dollar IPOs for companies that aren’t profitable, NBA players rigging games, members of congress insider trading. It’s the wild fucking west out there. That’s part of the reason I’m curtailing being an active trader. It’s all rigged.

Crypto has been one of the biggest beneficiaries. The industry has spent years fighting regulators, only to find itself operating in perhaps the friendliest environment it has ever enjoyed. That can change astonishingly fast. A Democratic administration would almost certainly take a much harder look at exchanges, stablecoins, token offerings, disclosures, anti-money laundering rules, and whether many digital assets belong under securities laws.

The Crypto Risk No One Is Discussing

The important part isn’t whether every proposal succeeds. Markets don’t wait for legislation. They price expectations.

Somewhere along the way, Wall Street seems to have decided that “vision” is a perfectly acceptable substitute for profits, promotional CEOs deserve celebrity status, retail investors exist primarily as liquidity providers, and every wildly optimistic forecast deserves a trillion-dollar valuation until proven otherwise.

Questionable accounting? Bullish. Aggressive projections? Bullish. Financial engineering? Bullish. Serial dilution? Bullish. It’s become difficult to tell whether we’re allocating capital or handing out participation trophies for coming up with nonsense stories. Every new S-1 reads like sci-fi pulp fiction L. Ron Hubbard wrote for a penny a page back in 1964.

And a Democratic administration doesn’t need to outlaw any of this. It simply needs regulators that remember their job description.

Suddenly the SEC starts asking questions again. The DOJ develops an interest in corporate misconduct. Congressional hearings reappear. Enforcement actions increase. Companies spend more time paying lawyers and less time posting rocket emojis. That alone changes behavior. Speculative markets don’t like adults entering the room.

Could Democrats also push for higher corporate taxes, tougher antitrust enforcement, tighter rules around buybacks or capital gains changes? Of course. Maybe half those ideas never become law, but the possibility alone forces investors to rethink the multiples they’re willing to pay for companies whose business models seem to depend on regulators never opening the filing cabinet.

What’s remarkable is how few people seem prepared for any of this. The consensus appears to be that today’s regulatory climate is simply the new normal forever. That’s usually how markets get blindsided.

Nobody spends years saying, “Careful, the political pendulum might swing.” Instead, everyone gets caught leaning the same direction until suddenly they’re not. The ole’ “when the music stops” adage comes to mind…

And listen, quite frankly, I don’t think Democrats know much about finance. They’ve historically shown they’re more than capable of misunderstanding markets, overregulating industries and proposing policies that create plenty of unintended consequences.

But I’ll also admit something that probably won’t make me popular: it wouldn’t be the worst thing in the world if a few very obvious frauds were actually held accountable again.

If we truly lived in a pure free market where everyone understood the risks, did their own homework, and accepted the consequences of losing money, I’d be perfectly happy letting buyers beware and pulling all regulation. But that’s not the market we have. We have companies that wind up inside passive index funds. Retirement accounts own them automatically. Pension funds own them automatically. Millions of ordinary investors buy them without ever making an active decision because they’re simply embedded inside ETFs and benchmark indexes.

When obvious promotional garbage gets institutionalized like that, it stops being just another speculative bet between consenting adults…people are getting screwed without even realizing they’re participating.

That’s the part that has me, somewhat reluctantly, yearning for just a little more regulation than we’ve got today.

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