Election Crash Plan
It appears this election is the locus of crash. The primary strategy is to remain sane and solvent during these trying times in which logic has been displaced by rampant bull shit.
It's that time again when both sides of the imaginary political spectrum - in which nothing of substance is actually allowed to change - are doing everything possible to pull centrists in the direction of their own unique left and right vacuum of reason. As always, this election will be determined by a handful of undecided voters who inhabit the handful of counties that determine the outcome of "swing states" that have not already determined which way they will vote. This election is like watching a daytime soap opera in which each time you tune in it's the exact same conversation. The plot never changes. Neither side has a clue what they are doing, but they are convinced of being 100% right and the other side 100% wrong. The one thing in common is that both sides are extrapolating the insolvency of the status quo into the indefinite future. All of which means that for at least half the country sanity hangs in the balance on the results of the election. If we get a market collapse in the meantime, then the sanity of everyone hangs in the balance. In the meantime, WE are the ones who suffer, looking forward to the day when both sides realize they are TOTALLY clueless.
Wall Street has been setting the table for this fiasco by telling everyone that they should not wait for the outcome of the election, because markets always go up AFTER the election. Which is why for the first time in recent history, markets went up BEFORE the election. Pundits are calling this the "everything" rally. Which is why this will be the "everything" crash.
"The Everything Rally. That’s what they’re calling it on Tout TV, which feeds on bull markets like weather channels do on hurricanes"
Even the small fry of the Russell 2000 have joined the advance and actually have outpaced their bigger brethren so far in October."
This Barron's article was from the weekend. Then yesterday (Monday), lo and behold, the market had its worst NYSE breadth since the August crash. Here we see the S&P small cap index made a slight new high above the late July high and now has returned back to the critical support line from August:
Step back for long-term perspective. Here we see the Trump trade has been on for a full year now. Stocks made their bottom late last October and have been rallying straight line for 12 months. The only hiccup was when Biden stepped down and Harris was nominated as Democratic presidential candidate.
Here is an update on my crash plan:
Currently, the prospect of rampant fiscal profligacy regardless of who gets elected, is weighing heavily on the Treasury bond market:
Peggy Noonan put it aptly in Friday’s Wall Street Journal, noting that the presidential campaign had “reached its Oprah phase,” when TV star Oprah Winfrey would tell her studio audience, “You get a car and you get a car and you get a car.”
It's highly plausible that due to bad positioning by hedge funds which are still overweight bonds due to the recent rate cuts, combined with the forced unwinding of 60:40 portfolios, and of course Fed QT, the bond market could crash as it did in March 2020. However, I assume that amidst the carnage of the everything crash, the Fed will finally end QT and resume QE. We can assume major dislocation will have occurred by that time. That means that the TLT bond trade should recover first as it did in 2008 and in 2020. From what level is TBD.
I call that trade "front-running the Fed". Note on the left however that the TLT peaked very quickly (yields went to 0%) but then the TLT imploded quite quickly afterwards. Why? Because the Fed doesn't want deflation, they want reflation, so they flood the system with money which raises inflation expectations. What we notice is that the deflation trade ended over a YEAR ahead of interest rate hikes which arrived in 2022.
In other words, bonds are a trade. After that I will re-survey the market to determine where to dollar cost average the proceeds.
