[The key comment was: “If we do get the crazy spike in fixed income, that’s an amazing sell.“]

 

Trump vs Clinton.  I am still dumbfounded that these two ethically-challenged people are who we are left to choose from, because they ran against two even-worse candidates in the primaries.  America is truly the land of opportunity, if one of these knuckleheads can make it.  However, this is not meant to be one of the countless political rants you have probably been exposed to (or have given).  I want to discuss the political confusion that seems to be going on in the markets:

  • “The election could drag on long after Wednesday.” People seem to think it’s 50-50 the election is conceded by Wednesday.[1]  Whether it goes past a few days is the more important question.  Both sides have reason to contest the election.  I suppose the only recent precedent was in 2000, where the Supreme Court had to step in and made a decision on December 12.  So what is a month (maybe more) of wrangling and uncertainty worth in the markets?  But before we even get to that, we need a close  If one of the parties wins by a large margin, the pleas for injustice are going to just sound like sour grapes and everyone else will have moved on.  But even if it is close, you actually need to have a case for people to care.  Just claiming something is rigged, Russians may be hacking, Comey wasn’t fair are not valid causes to overturn an election.  We have uncertainty now, but I think 85+% of the uncertainty will be gone after Wednesday.  The most interesting scenario is what happens to Clinton if she wins and is indicted.  The short answer seems to be that Obama could just pardon her.  And if the indictment comes after the inauguration, Clinton could just pardon herself.  But it’s possible if she is indicted early enough, the electors (Electoral College) may decide they need to cast their vote for someone else.[2]  Again, I think the vote needs to be close enough for this to matter.[3]  Clinton is a 75+% favorite to win the election at this point.  Yes, yes – I remember Brexit.
  • “If Trump wins, Yellen is going to be asked to step down.” The Fed is supposed to be independent, and separation of powers is what the US is built upon.  If you are making this argument, you are also saying that President Donald Recep Tayyip Trump could ask Justice Ginsburg or Minority House Leader Nancy Pelosi to step down.  Yellen is not stepping down!  “Women in power” is going to take a 2 generation step backward if she does.  “Go in the kitchen and make me some pie!”  Besides, the vast majority of the Fed (i.e. economists) thinks Trump is a moron.  If Yellen has no problems reminding Congress of the independence of the Fed, I’m certain she will have no problems telling the Donald, and in fact could take delight in it.  And if Trump persists in badgering Yellen, Melania can start her anti-bullying cause on her husband.[4]
  • “The Fed may not hike if Trump wins.” I was looking at a survey on MacroMan,[5] that said the Fed funds rate at the end of 2017 under Clinton would be 80bps, and under Trump would be 67bps.  And this seems to be somewhat corroborated in the markets.  Trump is going to spend a ton of money on fiscal stimulus, give massive tax breaks to individuals and corporations, and somehow there will be less need to hike?!?  This is especially confusing if you also claim Yellen may step down.  If Yellen steps down, how is taking one of the most dovish members of the FOMC going to result in lower rates?  It’s unlikely to.  The more interesting question is, if there is a viable contested result[6] and the winner is not clear at the time of the December meeting, does this put the Fed on hold?  As Lockhart said Friday, “There’s a relatively high bar, at least in pure economic terms, a relatively high bar to not moving in December.  There are other things that go on in the world that could give pause and I don’t completely rule them out.”  Even if the Presidency is conceded, a December hike probably depends on what equities do.  If the S&P is below 1800 (or equivalent), then they will probably be on hold.
  • “Trump will bring nuclear war.” Think about it… Trump owns major properties in the cities most likely to get hit in a nuclear war, or any kind of retaliatory action.  Why would you fear he would do anything to hurt his net wealth?  Really?!?  C’mon!  He’s an ass, but he’s a selfish  You don’t get to be a billionaire by not thinking about the financial impact of your decisions.  He’s already suggested giving massive tax breaks to the wealthy and to corporations.  If you want to be afraid of something, be afraid he will reduce hotel taxes (he owns many), reduce real estate taxes (he owns much), reduce estate taxes (he can’t take it with him and seems to like his kids), or reduce taxes to people whose last name ends in “rump” (he literally is an ass).
  • “Stocks are going down because of the uncertainty around Trump.” Is it the uncertainty of Trump, or the prospect of Trump?  The market seems to think that Clinton is good for equities, and Trump is bad.  And you’ve heard different versions of this narrative in the media over the past couple of weeks.  That same MacroMan poll also showed the average S&P expectation being 51points higher under Clinton than Trump.  But this does not make sense with the lower corporate tax rates that Trump is proposing.  Trade barriers could stunt growth, but considering we have a massive trade deficit, couldn’t you also argue that trade barriers could be good for the US?  The problem seems to be that the wealthy/educated tend to be Clinton supporters, and many of them are terrified of a Trump presidency.  If you are a Trump supporter (a poor deplorable), you have no money for stocks – you pretty much just spend your Walmart salary, welfare or (fake) disability check when you get it.  The markets are not reacting to the nation’s unease over the new President, but their own!  It just seems “strange” that the people who stand to gain the most from tax cuts (wealthy individuals) would think life under Trump would be that terrible.  Trump is wealthy and probably one of the most “me first” people out there.  By definition, a majority of the country will be happy after the election – he should be good for the wealthy and the deplorables like him at the same time.  We may not be able to rely on his intelligence (if any) or his maturity (if any), but we can certainly rely on his selfishness.  Stop being afraid of him.  He will look out for you (as long as your personal interests align with his).
  • “The stock market is predicting that Trump will be the winner.” Apparently, since 1928, the 3 month performance of the S&P has correctly predicted the president 86.4% of the time.[7]  The logic makes sense – the incumbent party wins if stocks do well.  If the incumbent is terrible, stocks do poorly.  Where the logic makes NO SENSE this year is that stocks are allegedly going down BECAUSE OF TRUMP.
  • “Fixed income is higher because of a crisis rally.” Surely the markets don’t think that Trump could be any worse than any of the previous administrations that gave us the Obamination that is Obamacare, the never-ending war in the Middle East, and the widening class and race divide.  C’mon… I know Trump is an idiot, but are things going to be so bad that the markets need to be that afraid?  And even if they are, why would they buy US fixed income?!?  US assets are the last place you want your money if Trump is bad enough to cause a crisis rally.

I think the markets are instinctively comparing the current vote to the last vote we had, which was Brexit.  So we are pricing in a chance of an equity melt-down and a fixed income spike.  Of course, the terrorism alert doesn’t help.  That Brexit spike in fixed income was absurd – and this was proven to be so in subsequent days.  We again have a situation where the results will probably come out during off-hours, liquidity may be thinner, and the panic algos could run wild.  It’s not crazy to think the “rise of the proletariat” we saw in the UK could happen in the US.  So perhaps part of the move we had in recent days is just preparation – to make room if we do get any crazy moves.  This reduces the likelihood of a Brexit-like spike.  If we do get the crazy spike in fixed income, that’s an amazing sell.  It makes no sense for people to want to buy US fixed income in a Trump presidency.  What is the upside?  The economy collapses?  And who exactly is going to want US fixed income if the collapse is in the US because of the leader?  People must know he’s made a living out of renegotiating with creditors.  Go buy gold or CHF or some other universally-accepted crisis hedge (possibly vs Treasuries) if a crisis is your concern.

[1] https://www.predictit.org/Contract/4115/Will-Clinton-or-Trump-concede-the-presidential-election-by-November-9#data

[2] For a list of key dates, see: https://www.archives.gov/federal-register/electoral-college/key-dates.html

[3] http://lawnewz.com/high-profile/a-hillary-clinton-indictment-could-create-a-constitutional-crisis/

[4] Surely, I can’t be the only one seeing the irony in the choice of causes?  It’s second only to her choosing sexual assault as her First Lady cause.

[5] https://macro-man.blogspot.com/2016/11/survey-results.html

[6] And not just the Donald saying “it was rigged.”

[7] http://www.zerohedge.com/news/2016-11-04/market-indicator-gives-trump-86-chance-winning-election