Limbo Land
Weighing the options
THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.
I don’t know who is going to win the election. The market is placing a bet on Trump.
The knee jerk reaction:
If Harris wins, stocks down, bonds up.
If Trump wins, stocks up, bonds down, maybe a lot down.
Split Congress narrows these tails, a sweep magnifies them.
When Harris beat Trump at the debate (which seems like a long time ago), overnight futures moved in the way I described (bonds up, stocks down). More recently, as betting markets have put a Trump victory as likely, bond yields have risen 50 basis points (from 3.7% to 4.2%). Given that a Trump victory is now partially priced in, this means if Harris wins we get a possibly violent move in the other direction.
I am not trading the election. I am waiting for the result and trading that. And I’m not trading on the first order effect, but the second.
Trump is ahead in the polls, though of course the polls have error. In a vote that comes down to centrist voters in a few swing states, the choice is between, essentially, a rule breaker versus a rule follower. Both of them have traveled far using their respective techniques and thus they believe in their process deeply.
When it comes to entrepreneurs or artists or scientists, rule breakers can be great. When it comes to running a Federal bureaucracy, I’m not a fan. It’s administrative work, paying bills, paving roads, collecting taxes. I’ve voted for candidates of both parties, both in national and regional elections. For me January 6 is a key data point, accepting election results is following a rule. Not following election results is chaos.
Each side believes victory by the other will be apocalyptic. My Trump loving acquaintances don’t just dislike Biden, they loathe him. The fact that unemployment is low, stocks are high and Putin isn’t dining in Kyiv tell me the big things are intact even with rule followers in charge. This is why a split Congress would be such a powerful anchor, it moderates the ability to break rules.
Given that I can’t predict the election, I am imagining policy scenarios.
Tax cuts and tariffs, Trump’s signature ideas, will increase bond supply and inflation. The Fed, currently discounted to ease over 100 basis points, may need to raise rates. Moreover, if Trump follows through on his vow to erode Fed independence, confidence in US institutions will weaken. Don’t forget the 20% decline in stocks when Trump rolled out tariffs the last time. Now imagine a 5% bond yield on top of that.
A Democratic sweep is unlikely but, if one were to occur, the expectation is higher taxes, which will narrow the budget deficit and hurt corporate profits. Thus, bonds up, stocks down. I suspect once the shock subsides, it would be bonds up, stocks up.
This reminds me of investing around Ukraine in 2022. There was a discrete outcome. And there were very clear consequences if that discrete outcome unfolded. I couldn’t predict what Putin would do, but I could predict the consequences, which was complete capital loss if he invaded. Once I learned of mobile crematoriums put up at the front, I sold every Russian asset I owned. Sometimes investing is just that, avoiding losses, rather than seeing an opportunity.
This post popped into my head today, thus no post on Friday.
As always - THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.