Increased volatility is not debatable. It will be the outcome of the uneasiness of global politics. It seems that the present state of affairs reflects the vast chasm between those who have benefited from GLOBALIZATION and those who have seen their lives and incomes being disrupted by a world experiencing dynamic change. Brexit was a vote of the nationalists versus the Davos crowd, or those seeking the comfort of the world they know versus those who have profited mightily from the first mover advantage of being prepared for the post Berlin-wall global economy. The central banks’ efforts to prevent a massive liquidation of global assets and harm that would have befallen the global economy as left many participants in a state of financial repression.
The outcome of the maintenance of ZIRP–and now NIRP–has been an increased amount of global debt as businesses, consumers and governments add more and more debt in an effort to keep the economic growth expanding. The efforts of the central banks have pushed the structure of global finance into very dangerous over-leveraged situation. The move in the British pound last Thursday night is an indicator of the potential volatility lurking within a broad array of asset classes. To initiate the discussion I will entertain a few possibilities:
1. The U.S. equity market rallied today in response to the idiocy of Donald Trump’s comments on a tape recorded 15 years ago. It has caused many Trump “supporters” to disavow the GOP candidate and try to secure the strength of the GOP on a local and state-wide basis. The equity market would enjoy the known entity Hillary Clinton then the wild card of Trump. [ASIDE: If I was Lorne Michaels I would be writing an SNL sketch announcing Donald firing his current campaign manager and replacing her with Andrew Dice Clay.] But the post-election equity rally may well be vulnerable to a selloff as long-held equity longs sell their stocks for the current capital gains rate versus a possible higher rate or more restrictive conditions on capital gains, thus creating potential volatility.
2. There will be volatility if the FED moves to raise rates in a post-election response to its declining credibility, even if the economic growth is tepid. On a global basis yield curves will be in flux as the U.S. and Japan both try to provide some steepening in an effort to answer the needs of insurance companies and pension funds, let alone the heavily burdened savers of the world. Violent interest rate moves will result in all assets as the algos are programmed to react to higher interest rates–at least initially. The extent of the U.S. election outcome will be important as to whether the Republicans can hold at least one part of Congress. If the Democrats sweep all branches of government the U.S. yield curve will steepen as bondholders fear the enactment of the Larry Summers efforts to boost the economy through massive fiscal stimulus. This will be discussed as the election results become known but I advise against trading assets on the yields of the long-end of the curve. IN MY OPINION, STEEPENING CURVES ARE NOT BULLISH THE DOLLAR OR BEARISH EQUITIES ON THEIR OWN. The ebb and flow of values will be determined as much by politics as by anything else.
3. Francoise Hollande and his ramblings has shown the world the pervasive drama of global politics as the French president continues to show his stupidity. President Hollande is a socialist, who interacts with his political opponents as a FASCIST. In this regard he believes that Britain should be punished for its temerity to vote to leave the EU. In a classic fascist sense he wishes to punish the Brits in an effort to keep others from wanting to leave the EU.I n a Guardian article Hollande said “firmness was absolutely necessary otherwise ‘the principles of the EU will be questioned’ and ‘other countries or other parties will be minded to leave the European Union in order to have the supposed benefits and no downsides or rules.” The desire to severely punish any political actor in an effort to get unconditional compliance is an act of fascism and certainly lacks any sense of Kantian morality.
The Hollande declaration is a huge problem for the entire edifice of the ECB‘s balance sheet, which is predicated on forcing Germany to be the credit card for the entire EU entity. Hollande better hope that the AfD does not continue surging in the German polls. When the issue of financial repression becomes front and center in the German political discussion how will President Hollande react when Germany questions its position in the EU under its current structure? Throw in some active anti-NATO activity from Vladimir Putin and the European situation will become very volatile. The idea of the ECB tapering fails to consider the need for President Draghi to trap the Germans under a massive amount of EU sovereign debt. Draghi is a man in a hurry so as to invoke Operation Bronx Tales: NOW YOUSE CAN’T LEAVE. Do not be LULLED into a false sense of complacency or certainty for the 3:00 a.m. phone call is upon us.
4. The British pound move on Thursday night was interesting from my perspective. USUALLY sharp currency moves are the most out of line in the IMM/GLOBEX market versus the cash currency markets as the “thinness” in the GLOBEX price books result in greater price aberrations. But this time was different. The Thursday night low in the British pound on GLOBEX was 1.2034 versus a low of 1.11489 in the interbank market. This is anomalous and reflects that some traders with large cash stops ran through the market and set a possible fill price at crazy levels. This was not a fat finger or failed algo model. Not in the way the Globex price reacted. Just another example of how volatile the markets are set-up to behave. Keep this in your minds as we enter the fourth quarter and politics are the key fundamental in play!
Tags: British pound, ECB, EU, Hollande, volatility, yield curves