Wednesday, November 4, 2020


Current markets are a reflection of current politics - no leadership...

In my last post I predicted an epic clusterfuck out of this election. So far, it's been a clusterfuck. I'm not sure I would call it epic. There is something about a global superpower with 10x the population of Canada that has its entire election held up by a handful of ballots in the middle of nowhere that makes one think, maybe this is the problem:

Writing early Wednesday, clearly this a fluid situation, however these are my thoughts relative to the election and markets, "post-election" whatever that means. 

First off, the blue wave fantasy is over. In the middle of the night as odds of a blue wave collapsed, the Nasdaq went parabolic as the deflation trade came back on in size. I attribute most of that move to short-covering, however, it may continue for a while longer. After a momentous occasion such as this one there are massive amounts of option "gamma" to unwind meaning two-way volatility could linger for the remainder of the week. That said, per my last blog post, regardless of who wins at president, if the Republicans maintain the Senate then the outcome will be gridlock and more deflation.

As far as the presidential race, it's still too close to call. Trump has already signaled that he will attempt to delegitimize any votes that come in after the election. Meaning, the closest scenario we have to compare to is again the Y2K scenario between Bush and Gore. Meaning that notwithstanding some short-term options-induced whiplash, the overall trend is down.

The fact that yesterday was the second largest election day rally in history, behind November 2008, was apparently no cause for concern. Most people apparently don't know that the biggest one day rallies are always in bear markets.

Nevertheless, as I predicted, under the divided Congress scenario, the reflation trade went bidless. Just as the Nasdaq (futures) soared, the Dow (futures) and in particular small cap (futures) crashed.

The record net Treasury shorts got pole axed.

Even before the election, the commodity trade was already signaling that reflation was a fantasy, even under the best case blue wave scenario:

The key takeaway from a political standpoint whether or not Biden wins, is that Trump's presidency is effectively over. The Democrats strengthened their control over the House, which means that Pelosi will have no problem blocking McConnell and Trump on further criminality. 

Of course a Biden win would be fantastic, however, unlike year 2000, this time both sides are committed to the fighting for the presidency to the end. Which could drag this out for several weeks. In the meantime, the deflationary forces of a collapsed economy, non-existent stimulus, and soaring COVID will be raging in the background. Ultimately these forces of reality will be the deciding factor on impending economic policy. 

Meanwhile, from an optics standpoint, the collapse of the MAGA stock bubble on Trump's watch would be highly preferable to a collapse under Biden. I could just hear my MAGA in-laws telling me for the rest of time that Biden crashed the stock market, because it was all going so well otherwise. I can't argue with that kind of logic.

This week is also the FOMC decision (Thursday) and the jobs report Friday, so the potential for options manipulation for maximum pain is enormous. So far, however, the March primaries analog is still on track. We can expect a lot of "gamma" unwind to drive the casino today:

Finally, with respect to rioting and acrimony, we can fully expect that the pressure cooker combination of a contested election and a lack of stimulus is going to raise the temperature substantially between now and year-end. If Trump loses, he has already conditioned his base to believe it's because the election was rigged against him. If on the other hand, through all forms of criminality, Trump steals the election, the alt-left will likely pick up where their most recent anarchy left off.

Either way, we can expect rising acrimony into the end of the year.

With the election date passed, the wildcard is the Fed who may decide to increase quantitative easing over the next several weeks. Which may goose markets for a few days, but will do absolutely nothing for the economy. Monetary policy is no longer effective without its fiscal counterpart. Which means that gridlock has rendered the Fed inert. Ironically, the Fed has been pounding the table for more fiscal stimulus, yet it's only because they boosted stocks into bubble highs that more fiscal stimulus hasn't arrived already. The irony can't be overlooked. They are the ultimate sponsors of the virtual economy.

Other factors to consider are European implosion shown below and the impact on Chinese markets should Donny get re-elected (not shown).

In summary, notwithstanding a massive options unwind, markets are as leaderless as the White House at this juncture. The reflation trade is over and the Tech bubble will resume imploding once this final rotation ends.

As far as this Tech bubble for all ages, what we now know is that four years of Supply Side MAGA accelerated the deflationary economic decimation that ensued after 2008. Over more than a decade, each false dawn of reflation has sponsored a larger and faster rotation into the Virtual Economy. Then COVID came along at the end and put the entire insanity on steroids.

All that's left now is an imploding Tech bubble in a collapsed economy, amid mass delusion.