Election on the Brink
Doug Nolan
“At the Trump Rally, It Was Evening Sun, Songs and Blue Sky. Then Came Bullets, Screams and Blood.”
“Biden, Trump Call for Unity in Aftermath of Trump Assassination Attempt.”
“Shooting at Trump Rally Comes at Volatile Time in American History.”
“‘I’m Tired. I’m Done.’ Nation Faces Exhaustion and Division After Trump Assassination Attempt.”
“An Assassination Attempt That Seems Likely to Tear America Further Apart.”
“VP Frontrunner JD Vance Points Finger at Biden for Apparent Assassination Attempt at Trump Rally.”
“Gun and Ammo Shares Jump After Trump Assassination Attempt.”
“Europe Fears Trump Shooting Could Deepen America’s Political Crisis.”
“Biden is Isolated at Home as Obama, Pelosi and Other Democrats Push for Him to Reconsider 2024 Race.”
“Biden Campaign Defiant as More Democrats Call on Him to Step Aside.”
“Trump Basks in Total Control of GOP as Biden Campaign Hits Low.”
Friday Drudge headlines:
“Biggest Outage in History.”
“Microsoft Crash Wreaks Havoc.”
“World Plunged Into Dark Ages.”
July 16 – Reuters (Jason Lange):
“Americans fear their country is spiraling out of control following an assassination attempt on Donald Trump, with worries growing that the Nov. 5 election could spark more political violence, a Reuters/Ipsos poll… found.
The two-day poll found Republican presidential candidate Trump opening a marginal lead among registered voters - 43% to 41% - over Democratic U.S. President Joe Biden…
But 80% of voters - including similar shares of Democrats and Republicans - said they agreed with a statement that ‘the country is spiraling out of the control.’”
An absolutely dreadful week.
Our nation is so deeply and bitterly divided.
From the public mood, one would think the economy must be in depression.
Yet growth continues, with the unemployment rate near 4%.
The S&P500 was at record highs in Monday trading.
What’s most worrying is that things will surely get worse.
Election on the Brink.
Donald Trump barely escapes an assassin’s bullet.
President Biden increasingly appears the stubborn old man refusing to accept reality.
I feel for our President.
If reports are accurate, his “seething” is understandable.
He, of course, expects respect and loyalty.
But President Biden gambled when he decided to seek a second term.
Gambling and losing comes with a cost.
As of Friday evening, betting odds have Trump the heavy favorite to win the presidency, with Vice President Harris the leading Democrat.
Markets are said to hate uncertainty, though highly speculative global markets have for a while confidently climbed the proverbial wall of worry.
Still, there have been inklings of vulnerability to political risk (i.e., Mexico and France) soon to be masked by melt-up speculative dynamics.
Speculative markets are notoriously short-term focused.
Suddenly, however, Tuesday, November 5th, feels so much closer.
July 16 – Bloomberg (Rita Nazareth):
“Stocks hit all-time highs as bets the Federal Reserve will soon start cutting rates fueled a rally in riskier corners of the market.
Wall Street extended a pattern of money rotating into small caps and out of the megacap ‘safety’ since last week’s soft inflation data.
Over the past four sessions, the Russell 2000 has beaten the Nasdaq 100 by almost 11 percentage points — a feat not seen since 2011.”
July 17 – Reuters (Arsheeya Bajwa):
“Wall Street’s semiconductor index lost more than $500 billion in stock market value on Wednesday in its worst session since 2020 after a report said the United States was mulling tighter curbs on exports of advanced semiconductor technology to China.
Remarks from Republican presidential nominee Donald Trump saying key production hub Taiwan should pay the United States for its defense deepened selling in chip stocks.”
“Market Rotation Shakes Tech Giants as Small-Caps Surge.”
The bullish narrative holds that a rotation into the small caps and underperformers provides a healthy pause that refreshes for big tech, with expectations high that another stellar earnings reporting season will have the AI/technology bull back on track in no time.
The bear case sees the sharp reversal in the hyper over-owned tech stocks as the start of long overdue Bubble deflation.
Nvida sank 8.8% this week, the largest decline since April.
The Semiconductor (SOX) Index dropped 8.8%, the steepest decline since April.
ASML sank 17.5%, Advanced Micro Devices 16.5%, Micron 14.4%, Lam Research 14.3%, and Applied Materials 13.6%.
Pretty bloody for a bunch of Wall Street darlings.
The healthy rotation crowd would note this week’s 8.0% surge in the KBW Regional Bank Index, along with an 8.6% rally in the S&P 500 Homebuilding Index.
The Philadelphia Oil Services Index rose 2.8%.
Healthcare and consumer finance stocks posted solid gains.
The “average stock” Value Line Arithmetic Index was about unchanged for the week.
To be sure, this week’s rotation caught the marketplace poorly positioned.
A late-week reversal pushed the outperforming Goldman Sachs short index down 1.1% for the week.
But this followed a notable 13.7% five-session spike (July 10th to 16th).
The leveraged speculating community (i.e., hedge funds, “family offices,” proprietary trading desks, derivatives dealers) provides the marginal source of marketplace liquidity.
When embracing risk, the expansion of leverage creates self-reinforcing marketplace liquidity.
Meanwhile, risk aversion triggers the liquidation of positions and the unwind of leverage, with corresponding liquidity destruction.
This week likely marked the onset of a period of de-risking/deleveraging.
Short squeezes are typically bullish developments.
Bearish positioning gets caught on the wrong side of a rising market, with urgent buying stoking market exuberance.
And yet squeezes can also be indicative of poorly positioned leveraged speculators caught suddenly on the wrong side of important developments – with the levered players rushing to de-risk both short and long positions.
To be sure, the entire marketplace has been overweight big tech in historical extremes.
The levered players were surely heavily long technology, while underweight (or outright short) regional banks and homebuilders (for example).
It’s worth noting that the regional bank index gained 18.9% in the seven sessions ended July 17th.
Heavily shorted homebuilder DR Horton jumped 13.1% this week.
From a big picture perspective, speculative market melt-ups unleash precarious dynamics.
As we’ve witnessed, they have a proclivity for taking on lives of their own, using bearish developments and positioning as squeeze fuel for the next market leg higher.
They gather incredible power to force everyone in.
And with skeptics and nervous nellies left in the dust, melt-ups over time ensure a general disregard for risk.
Melt-ups inevitably succumb, with reversals then unmasking latent vulnerabilities.
After fostering the perception of limitless liquidity, the abrupt switch to de-risking/deleveraging risks illiquidity, panic, and dislocation.
And the greater the degree of blow-off excess, the higher the odds of a crash scenario.
At the minimum, sinking prices spark a newfound focus on risk and bearish developments that were easily disregarded as the market marched ever higher.
After letting hedges expire during the unrelenting melt-up, suddenly there’s a rush of hedging activity that places additional selling pressure on the marketplace.
July 19 – Bloomberg (Denitsa Tsekova and Isabelle Lee):
“On Wall Street, big trades that have held sway for years are getting reshuffled as the monetary and political backdrop shifts.
Now traders are hastily rushing to the options exchanges, paying up to protect — or juice — their portfolios after a turbulent week in the world’s largest stock market.
With the election cycle kicking off in earnest, demand for portfolio insurance in the event of a market crash is surging, as so-called tail-risk contracts register their biggest rise in costs all year.
A broad measure of equity volatility has also increased at the fastest weekly pace since March 2023, just as investors have been plowing record cash into exchange-traded funds tracking the S&P 500.
Previously money-minting derivatives bets on tech bastions such as Nvidia Corp. are being abandoned with gusto.”
The VIX (S&P500 volatility) Index jumped 4.1 this week to 16.52, the largest weekly increase since (banking crisis) March 2023.
The VIX closed Friday at the high since the April (Israel/Iran missile tit-for-tat) spurt of de-risking/deleveraging.
The big tech-dominated Nasdaq100 VXN Index surged 4.25 to 21.51 – the largest weekly increase since August 2022.
The VXN ended Friday also at the highest close since April.
Importantly, this week’s “risk off” was a global phenomenon.
Emerging Market (EM) CDS jumped 12 to 167 bps, the largest weekly gain since the first week of the year.
Brazil CDS gained 11 to 158 bps, matching the France political instability mid-June surge.
Mexico CDS rose eight this week to 108 bps.
The Chilean peso dropped 4.4%, the Brazilian real 3.0%, the Colombian peso 2.9%, the Mexican peso 2.4%, and the South African rand 1.7%.
Local currency bond yields were up 24 bps in Brazil, 22 bps in Mexico, 13 bps in South Africa and 12 bps in Colombia.
This week’s 3.2% drop in the Bloomberg Commodities Index further supports the global de-risking/deleveraging thesis.
July 19 – Bloomberg (Anya Andrianova and Vinícius Andrade):
“Latin America is being replaced as the go-to trade for currency investors as politics turns double-digit gains into losing bets.
After minting outsize returns in currencies like the Mexican peso and the Brazilian real for much of the past two years, investors are turning to less risky alternatives such as the Australia and New Zealand dollars for carry trades…
Developments in Latin America — from Mexico’s surprise election results to Brazil’s deteriorating fiscal outlook — are part of the explanation.
But traders are also fretting about volatility tied to the US presidential race.”
From the South China Morning Post:
“China battens down the hatches for blustery trade winds as odds of Trump victory rise.
China has made ample preparations for the tsunami of tariffs likely to reach its shores if former US president Donald Trump returns to the White House, analysts said, as its government and private sector have all but resigned themselves to a worst-case scenario.
‘Another trade war seems inevitable,’ said Chen Fengying, a researcher with the China Institutes of Contemporary International Relations…”
China sovereign CDS rose a notable 10 this week to 66 bps, the largest weekly gain since August 2023.
China’s “big four” banks posted the largest weekly CDS price gains since November 2023.
Today’s backdrop differs significantly from the previous fledgling de-risking/deleveraging episodes that were relatively quickly resolved.
October 2022 UK bond deleveraging was remedied by BOE intervention and Liz Truss’ resignation.
Huge Fed and FHLB liquidity injections mitigated the March 2023 banking crisis.
Neither Israel nor Iran sought to escalate their tit-for-tat.
More recently, the French left and centrist parties successfully thwarted the far right’s power grab.
There are only 108 days until one of the most consequential elections in U.S. history – 108 days of extraordinary and unresolvable uncertainty.
Policy platforms of the two parties could not be more polar opposites.
“Trump Vows to End Electric Vehicle ‘Mandate’ on Day One.”
“Drill baby, drill.”
Donald Trump:
“We will end the ridiculous and actually incredible waste of taxpayer dollars that is fueling the inflation crisis.
They’ve spent trillions of dollars on things having to do with the green new scam.
It’s a scam.
And that has caused tremendous inflationary pressures in addition to the cost of energy.”
July 19 – Bloomberg:
“Republican presidential candidate Donald Trump vows to end support for electric vehicles and ‘bring auto jobs back to our country’ through the proper use of taxes, tariffs, and incentives, while not allowing auto manufacturing plants to be built in Mexico, China, or other countries.
He pledged to redirect money from the ‘green new scam,’ referring to Biden’s policies to fund renewable energy projects, to infrastructure projects like bridges and dams.”
I believe a majority of Americans see climate change as a serious threat.
Many believe the climate poses an existential threat that demands extraordinary global action.
An administration hostile to renewable energy would be highly disruptive to an increasingly important segment of the economy.
Economist: “Tech Bros Love J.D. Vance. Many CEOs are Scared Stiff.”
Reuters: “Trump VP pick supports Big Tech antitrust crackdown.”
July 15 – New York Times (Lisa Friedman):
“Senator J.D. Vance, Republican of Ohio, is a strong supporter of the oil and gas industry, opposes solar power and electric vehicles, and has said climate change is not a threat…
As Mr. Vance sought Mr. Trump’s endorsement for his bid for the Senate, his positions on climate change took a sharp turn.
‘I’m skeptical of the idea that climate change is caused purely by man,’ Mr. Vance told the American Leadership Forum...
He acknowledged that the climate was changing but said that humans had no role in the changes.
‘It’s been changing, as others pointed out, it’s been changing for millennia,’ Mr. Vance said.”
The unfolding risk to big tech is substantial.
Beyond antitrust, the massive energy-guzzling AI buildout is parallel to renewable energy development.
Pulling the plug on renewable energy subsidies would have significant consequences.
“Solar Stocks Tumble as Clean Energy Investors Fear a Trump Win.”
“Trump Storm Batters Wind and Solar Stocks.”
Excerpts from Friday’s WSJ (Andrew Restuccia) article, “How an Unrestrained Trump Would Govern in a Second Term.”
“Behind all the pageantry, the Republican convention made clear what Donald Trump’s governing style would look like in a second term: assertive, adversarial and unconstrained.
If he wins the November election, Trump would return to the White House unburdened by ever having to appear on a ballot again, with more conviction about his vision for the country and more knowledge about how to execute it.
The cabinet secretaries and White House aides who once beat back… his most radical ideas would be replaced by loyalists eager to push his agenda even further.”
“‘Nothing will sway us, nothing will slow us, and no one will ever stop us,’ Trump said…”
“Less of a focus for Trump and his team are the core tenets conservatives have embraced for decades: free markets, strong international engagement and reining in deficits.
Trump presided over four straight years of rising annual deficits…”
“Trump’s running-mate selection of Sen. JD Vance (R., Ohio)—a younger, more intellectual avatar for the former president’s brand of economic populism and suspicion of foreign entanglements—signals his intention to supercharge, rather than modulate, his transformation of the GOP.”
“As he prepares for a second term, a handful of advisers have influenced Trump’s thinking…
They want to eliminate the independence of certain federal agencies, reduce protections for civil servants and wrest control of some authority over spending from Congress—all proposals that Trump has endorsed.”
“If he’s re-elected, Trump has promised to expand on the targeted tariffs that he used throughout his four years in office.
He has proposed a 10% across-the-board tariff on imported goods as a way to punish other countries and protect domestic industries.
And he has promised to impose even steeper tariffs on China.”
“The former president has called for strengthening domestic manufacturing, lifting restrictions on U.S. energy production and overturning swaths of the wide-ranging climate law that Biden signed in 2022.”
July 16 - Bloomberg (Nancy Cook, Joshua Green and Mario Parker):
“And while polls universally show that American voters favor Trump’s stewardship of the economy over Biden’s, it’s unclear to many exactly what they’ll get if they opt for another round with him.
He waves away such concerns.
‘Trumponomics,’ he says, equates to ‘low interest rates and taxes.’
It’s ‘tremendous incentive to get things done and to bring business back to our country.’
Trump would drill more and regulate less.
He’d shut the Southern border.
He’d squeeze enemies and allies alike for better trade terms.
He’d unleash the crypto industry and rein in reckless Big Tech companies.”
July 17 – Yahoo Finance (Jennifer Schonberger):
“New comments from former President Donald Trump are turning up the political pressure on the Federal Reserve as policy makers make it clear they are getting closer to cutting interest rates.
In an interview with Bloomberg…, the Republican nominee again reiterated that central bank officials should not ease monetary policy before the November election.
‘It’s something that they know they shouldn’t be doing,’ he said.
But Fed officials… are suggesting that the time for cuts is in fact drawing near.”
There’s certainly plenty to keep the markets on edge.
At least this week, Treasuries didn’t see a safe haven bid despite heightened market instability.
Deficit reduction is not a priority, and there are certainly scenarios where inflation would be a risk under a Trump administration.
Fed independence is a legitimate concern.
Bonds should be nervous.
Adding to the guesswork, the Democrats might actually somehow get their act together and make it a race.
And a close race would come with its own serious risks.
Extraordinary uncertainty beckons for de-risking/deleveraging.
0 comments:
Publicar un comentario