THERE WILL BE NO WINNERS TODAY
2016-11-08 12pm EDT | #President #Hillary Clinton #Donald Trump #US Dollar
I thought after the Obama Presidency there was no way America could become more divided. And before someone incorrectly misconstrues I am taking sides, let me assure you - I have absolutely no interest in assigning blame. I am more concerned about understanding how the political landscape might affect markets..
When I look at the discourse of the past couple of days it frightens me. The election seems to be ripping the United States in two. The trader in me tries to see both sides, and I understand the reasons emotions are running so high. There is a lot to be angry about.
As I peruse my twitter feed I am shocked at the level of aggressiveness. Seemingly normal traders are filled with rage towards the other side. It is like nothing I have ever seen.
I have absolutely no idea which candidate will emerge victorious tonight. I could be persuaded that the Clinton ground machine will ensure her lead in the polls translates to a Presidency. On the other hand, there is a possibility the polls are not reflecting the anger felt by many Americans towards the political establishment and that Trump might garner more of a protest vote than indicated. I have read many different reports by many smart people that are all over the map.
I have precious little to add on whether Clinton or Trump will win, and what the market will or won’t do after the results are announced. There are more than enough opinions out there for you to read.
Instead I want to talk about the possibility that whatever the outcome, the damage done dividing America will reverberate for years to come. I don’t see how when we wake up on November 9th whoever is elected President will be able to bridge the gap and bring the two sides together..
It is no stretch to say that few Americans are terribly happy with their party’s choice in candidate. Too many are voting against the other candidate instead of for their leader. Whoever wins will, at best be barely tolerated by their own party, and absolutely despised by the other.
How can this environment foster any sort of cooperative spirit? Will either side have any desire to work with whoever is elected President?
Now some of my libertarian friends might be saying, “good - a President that can’t get anything done is better than one with the ability to pass all sort of spending bills.” Yeah, I get it. The idea of gridlock is awfully appealing for many. But what did the gridlock of the past 8 years get us? Whereas we could have used a fiscal response, the gridlock forced fiscal policies to be shelved, and monetary solutions became the only game in town. Sadly we got more and more, and more, QE and other bat shit crazy monetary stimulus. So much so that the Central Bankers distorted the entire financial system into one big clusterfuck. So although my libertarian friends might welcome gridlock, I hate it. It means that fiscal solutions will be difficult to negotiate, and that the Federal Reserve will be more likely forced to come back with more aggressive monetary stimulus. All of this will only exacerbate the inequality problem and further divide the country.
Here is my conclusion about the what the election means for the market. The campaigning has become so vitriolic that whoever wins will actually be losing. Over the past few months the market has become optimistic that monetary stimulus will be put on the back burner and fiscal cooperation was right around the corner. Both Trump and Clinton campaigned on more infrastructure spending. The tide seemed to be turning towards government actually investing in the country instead of trying to cut its way to prosperity..
The market was probably overly optimistic about the possibility of fiscal stimulus. Just because the two candidates promised spending doesn’t mean they will be able to enact it. I don’t think the winner will be able to accomplish much.
Although I am in general, more optimistic than many of the doomsday hedge fund managers, I suspect the trend of American economic outperformance has past. For the past few years investors have flocked to the United States as they seemed to be the proverbial cleanest shirt in the dirty laundry pile. After the 2008 credit crisis the United States was quick to recognize the losses in the banking system. They did not hesitate to recapitalize their banks and clean up the mess. Combine that with the most aggressive Central Bank Chairman, and you had the recipe for US outperformance. Capital was attracted to America. It poured in and the US financial markets soared.
Yet as with most things in the markets, a good idea has been taken too far. Today US risk markets are expensive relative to the rest of the world. The Federal Reserve is no longer accommodative and is in fact, the only major Central Bank tightening. And when you combine the disturbing developments of the past few months during the election, suddenly even the political situation leaves investors with a sense of uncomfortableness.
I am not predicting that America is about to plunge into the abyss, but for the first time in a long while, I could see the rest of world outperforming the US relative to expectations. Investors are overweight American financial assets and I suspect they will rue thinking the US shirt was so much cleaner than the rest of the pile.
I am still deciding what this might mean for the markets. I am beginning to wonder if we are experiencing the last days of the US dollar rally. I know this is an out of consensus view, but markets have a way of going where no one expects them. Wouldn’t a US dollar bear market be the biggest surprise out there?
Or maybe shorting the US stock market against buying some other cheap market is the best way to play it. I am not sure yet…
As for my positions going into the election, I am as flat as I have been in a long, long time. The only position I have decided not to pare down is my gold position. Even though most libertarians have long abandoned me as some Keynesian fool, I am still clutching my precious yellow brick with both hands like Rand Paul.
And for my American friends, please do not misconstrue any of these comments as a judgment on your country or the wonderful people who live there. First of all, as a Canadian I have no right to an opinion. But secondly, and more importantly, I live in Toronto where we elected a crack smoking buffoon as Mayor, so Billy Joel’s glass houses and all of that.
But I will leave you with this one thought. If you are offended by any of my comments, then I will paraphrase my inner Greenspan and say, “If I seem unduly clear to you, you must have misunderstood what I said.” This is a nuanced and extremely complicated event. I think America is a great country. Yet if anyone claims either Hillary Clinton or Donald Trump represents the best example of her greatness, then it is them that are selling her short.
I truly hope the election presents a clear victor the country can rally behind. Yet I fear that whoever wins today will be faced with an almost impossible task of uniting the country. And I don’t think that’s the environment bull markets are made of…
Thanks for reading,