It’s been my view for some time that on top of the very large list of risks to a fragile U.S. economic recovery (and increasingly vulnerable global financial markets) is the election of Donald Trump to be President of the United States. But this post is not about my personal feelings (read here), or even politics (read here). This is about the change in course Trump’s campaign has taken in the last couple weeks, and what it might mean for your money. With polls swinging heavily in Clinton’s favor recently, Trump has repeatedly claimed that if he loses the election was rigged, and that any outcome resulting in a Hillary Clinton win is illegitimate due to the collusion of the Democratic party, shadowy behind the scenes puppet masters, bankers and of course the mainstream media. That’s not even a dog whistle anymore, that’s dangerous talk used by some very bad people to justify some very bad things over the years. If you agree with that sentiment from Trump, you might want to stop reading here. You and I will never be able to see eye to eye on much, and we might as well agree to disagree. There are plenty of financial market hacks like myself on Fox Business that can offer you similar financial market musings that may better align with your political leanings.
But here is the thing, my views for this post have little to do with increasing personal disdain for Trump, and more to do with the potential for millions of Americans (possibly tens of millions) on November 9th that feel that Donald Trump was the only candidate for President over the last 18 months who really spoke to their plight. I get that, there are tens of millions of Americans that have been left behind during our country’s transition to a post manufacturing, globalized economy, and as Michael Moore recently said to Chuck Todd on NBC’s Meet the Press:
“they see Donald Trump as their human Molotov cocktail that they get to go into the voting booth on Nov 8. and throw him into our political system,.. I think they love the idea of blowing up the system,”
A lot of them maybe don’t hear those dog whistles, they are less focused on the vessel for change, wearing blinders in their pursuit of change. There are plenty of legitimate reasons to feel that way and for the many that don’t feel the need to go down the conspiracy theory wormhole shows more maturity and intelligence than the candidate himself. So what does an increasingly likely landslide defeat mean for those disaffected voters? It’s like a gut punch while they are already bloodied. If their reality show ‘billionaire’ comes out the biggest loser in this election (or of any presidential election in recent memory), and the Republican establishment uses his own reality tv tagline on him, what does that mean for their own hope of merely getting off of the mat?
Regardless of who you support, and regardless the outcome, America’s democracy is founded on the faith that our elections are legitimate and that part of that social contract is to have a peaceful transfer of power. Trump’s rhetoric of late clearly flies in the face of this (google it kids, its not only the mainstream media reporting on it). It seems that the in the face of defeat he also wants to take the system down with him, or at least badly damage it. And the fact that he will not be able to concede a loss to his millions of faithful followers, means that even with polls showing a predictable election, Nov 8th could still be the single largest risk to financial markets because of the unpredictability of its likely loser.
I have been fairly consistent on these pages (and on my appearances on CNBC) that a growing lead in the polls by Clinton would be received favorably by financial markets here in the U.S. despite many of her policies (higher taxes & increased regulation) traditionally being viewed as hampering economic growth near term. But at a dicey time when the Federal Reserve looks ready to raise the Fed Funds rate at their December 14th meeting, Clinton’s traditional Democratic economic policies are at least predictable. I obviously have no idea what financial markets will do day to day, and it was my view that while we could have a sell the news no matter what happened on Nov 9th. But since a Clinton victory would be viewed as a vote for the status quo as it relates to U.S. equity markets (and the economy) and that I see little reason why under that circumstance stocks should not close at least at current levels or possibly at new highs on the year. It’s primarily a seasonal thing, as we get into year end most large investment pools like to see their investments in the green, and as high as possible (they have way less “control” over this than most think, just that many will try to goose a market already going in that direction), cause that’s how they get paid$$! And as Business Insider reported this weekend, the S&P 500 (SPX) has closed up 82% of the time in election years. But as they note this is not a “normal election year”.
But from where I sit (and many others), Trump has chosen the nuclear option over the last week with his candidacy facing an existential crisis. He has not only set his sights on promising to “lock up” his opponent if he wins, but also gone to war with the leaders of his own party, the media, big business and has intertwined all this with a handful of widely debunked conspiracy theories. Trump has, to quote Stephen Colbert, Cranked Up the Crazy and Ripped Off the Knob.
Maybe this is all a big joke to save face with his adoring fans, or maybe its just another chapter in the long con. And if the big joke is on those fans, that’s the real shame. It’s increasingly looking like he only wanted to turn those eye balls gained from a Presidential run to sell ad supported alt right conspiracies to a niche media operation after the loss of the mainstream media platform of The Apprentice. From this morning’s FT.com:
Donald Trump’s son-in-law Jared Kushner has informally approached one of the media industry’s top dealmakers about the prospect of setting up a Trump television network after the presidential election in November.
Mr Kushner — an increasingly influential figure in the billionaire’s presidential campaign — contacted Aryeh Bourkoff, the founder and chief executive of LionTree, a boutique investment bank, within the past couple of months, according to three people with knowledge of the matter.
But the problem is that all the wink-wink nod-nod to his most die-hard supporters could turn into something else. And if the legitimacy of a Clinton win is challenged, even among a third of his voters, then all bets are off for a peaceful transition for financial markets because we could see dead-ender opposition affect the transition. If the surprise of the Leave vote in the UK demonstrated anything in late June, is that financial markets don’t like anarchy votes. It’s likely the media attention fades nearly instantly for Trump after the election. And with the spotlights off, this message will not be able to get the attention it has gotten to this point. But it sounds increasingly likely that there could be a little anarchy afterwards among some die-hards, and just how much that affects the transition and opposition within the (likely still) Republican house is what to watch for in financial markets.
My friend Carter Worth of Cornerstrone Macro on Thursday’s Fast Money on CNBC highlighted the precarious technical set up of the SPX, as it just broke the uptrend that had been in place from the February lows. On Thursday though, it stopped almost to the dime where it should have at a prior resistance level (now support), but what is clear is that there is little support till 2050 on the next break:
This with the backdrop of Treasury yields rising to levels not seen sine early June:
And the U.S. dollar (DXY) up 2.5% in a month, and nearly 7% from its 2016 lows made in May:
And crude oil, despite little news on the demand front, hovering near 52 week highs, up 93% from its Jan lows:
Maybe all of these charts signal a return to confidence in the U.S. economy and financial markets. Maybe two months before the Fed’s second rate hike in 9 years we are finally ready to enter a path towards normalization of monetary policy. If that were the case with a stable political backdrop then I could see new highs and possibly a sustained breakout of the SPX into the new year. But I am becoming increasingly less confident in that view.
The 213 SPY straddle (the call premium + the put premium) is offered at $6.75, or about 3.2% of the etf’s price, if you bought that, and this the implied move you would need a move above $219.75, or below $206.25 to make money. If you are looking for portfolio protection, paying 1.6% for an at the money SPY puts through the week of the election may prove to be cheap insurance given the recent ramp in negative rhetoric regarding election outcomes. I am less than sanguine about the course of this rhetoric between now and Nov 8th (which may ramp up even more after Wednesday’s debate), which may be enough cause for portfolio protection, especially when you consider their may be tens of millions of U.S. voters who are inclined to blow up the system.