Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Markets and the US Election Outcome No One Is Thinking About

Stock-Markets / US Presidential Election 2016 Nov 07, 2016 - 02:11 PM GMT

By: John_Mauldin

Stock-Markets

BY JARED DILLIAN : I’ve been saying that the Fed is more hawkish than people think for quite a while, but nobody is listening to me.

This is not a good Fed. They aren’t making decisions on a predictive, forward-looking basis. They are very concerned about optics—how things look. And to them, right now the optics of having Fed funds at 0.375% with unemployment at 5% are very bad.


But that isn’t how it’s supposed to work. The Fed has a few hundred PhD economists who are supposed to be doing the heavy mental lifting, trying to predict what is going to happen in the future.

And the future doesn’t look so good. The data is weakening, not strengthening. And yet here we are, talking about rate hikes.

There are other considerations.

The Fed is political

The first is politics. Everyone at the Fed—down to the janitor—has spent the last few months denying any political influence in monetary policy decisions. Of course, that means there is political influence in monetary policy decisions.

If the rate hike comes in the first FOMC meeting after the election (December)—it won’t be a coincidence.

But there’s more to it than that. We are beginning to learn that the Fed (much like the Bank of Canada) takes fiscal policy into account when making monetary policy decisions. And fiscal policy, up until this point, has not been all that stimulative. But it will be, soon.

The bad news is that either Trump or Clinton will become the next president. Bad if you’re a deficit scold, like me. Clinton wants to raise taxes and spend the money on free stuff (like college tuition and infrastructure). Trump wants to cut taxes and spend even more (on a wall, and infrastructure, and the military).

Either way, we are staring down the barrel of quite a bit of fiscal “stimulus.”

A few Fed speakers have even hinted they are taking this into account in their forecasts (you can read more details here).

To the extent that you think government spending causes economic growth (a tenuous relationship, for sure), the central bank should respond by keeping monetary policy tighter than it ordinarily would. That means the Fed is more likely to hike rates right after the election. Maybe because of politics, but also because of projected fiscal policy.

When I mention rate hikes to people, they are very dismissive. The Federal Reserve has disappointed many investors who were betting on rate hikes for many years. It is a classic boy-who-cried-wolf scenario. Of course, I have been saying since the SIC conference that a rate hike was imminent, so we shall see.

What if the Democrats take it all?

So if you ask people about the election, they generally give you two possible outcomes.

Outcome 1 (most likely):

Clinton becomes president
Republicans may or may not keep the Senate
Republicans do keep the House

Or…

Outcome 2 (also likely):

Trump becomes president
Republicans may or may not keep the Senate
Republicans do keep the House

At The 10th Man, it is my duty to disagree. Just for the sake of disagreeing.

What if this happens…

Outcome 3:

Clinton becomes president
Democrats take the Senate
Democrats take the House

Nobody is thinking of that possibility.

Lots of people think that if Trump wins, the market tanks. Probably not. People have been thinking about that possibility for over a year; it isn’t news.

Outcome 3 is where the market’s weak spot is. If it’s a Democratic sweep, the market will be down 10–15% in a matter of days, and the VIX will find the 30 handle in no time.

I’m not saying Outcome 3 is going to happen. It’s definitely the least likely scenario. But it’s the scenario that people (and the markets) are least prepared for. Which means, as an investor, that is where the asymmetric payoff lies.

If you are good at math, you can estimate the probability of a Democratic sweep, then go in the option markets and compare it to what is being priced in. This is the sort of thing I do all the time (it’s not priced in).

Smart beta strategies are a fad

I’ve been around long enough to see investing fads come and go. I’m going to be that guy—that solitary codger who yells at those daggone kids to get off his lawn and wonders where he left his soup.

In this writer’s opinion, smart beta strategies are a fad. Smart beta is the idea that you can construct an index based on some arbitrary criteria that will outperform a traditional market cap-weighted index. In this sense, people think they are capturing alpha, but I don’t think that word means what they think it means. Probably what it means is that you can back-test something but not forward-test it.

Funnily enough, all the big ETF launches this year have been for miscellaneous smart beta strategies.

There is this fantasy in the finance business that you can create some kind of magic pill or potion, or magic beans that you can plant in the ground and grow the money tree. If only I had a formula, or an algorithm, or a system, or a silver bullet that would make money all the time in every market environment.

Doesn’t work that way. The market exhibits what is known as “nonstationarity”—it is a game whose rules constantly change.

People seem to be pretty happy with these smart beta ETFs right now—and I’m glad they’re happy—but very likely, these indices were built to outperform in one set of market conditions, and one set only. We are already seeing cracks in the low-vol ETFs .

Go take the magic beans someplace else—we’re all stocked up here.

Get Thought-Provoking Contrarian Insights from Jared Dillian

Meet Jared Dillian, former Wall Street trader, fearless contrarian, and maybe the most original investment analyst and writer today. His weekly newsletter, The 10th Man, will not just make you a better investor—it’s also truly addictive. Get it free in your inbox every Thursday.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in