Is the Trump Put Expiration Date Approaching?
I am not American. And I am not willing to play any role in the political debate between Democrats and Republicans. But it is fascinating to see how elections in so-called democracies like the United States or France can drive people crazy.
From a pure investment perspective, November 3rd is a very important date, as it could mark the end of a massive intersubjective put for the US stock market.
From MAGA to MAGA
Though unconventional, Donald Trump’s political strategy has always been pretty easy to understand, just like his trademark “Make America Great Again.”
In 2016, the plan was to give back a supposed greatness to this country by doing what the previous administrations had failed to do according to Trump. That meant building “the greatest economy ever”, i.e. strong GDP growth numbers, significant jobs creations, and of course big capital gains.
What the President had in mind was to run for a second term defending a “Keep America Great” project. But everyone knows that things have dramatically changed since then.
The economic bet of Donald Trump was not necessarily an easy one when he arrived at the White House. Indeed, the US manufacturing sector had already started to show signs of weakness.
Worst, there was clear evidences of a structural and non-negligible Chinese economic slowdown, as China commodity demand growth rate peaked a few years ago, and as Xi Jinping had already expressed his wish to reform the economy. Remember that people tend to underestimate the importance of China for the US economy.
Last, there were already signs of excessive financial market valuations in 2016, as Shiller CAPE ratio was already above 25, meaning that any attempt by the Federal Reserve to normalize its balance sheet could lead to a financial meltdown.
Trump came with a very aggressive Keynesian plan to counter those negative effects. On the one hand, his goal was to stimulate infrastructures demand, support domestic industrial supply, and lower corporate taxes. On the other hand, the objective was to take control of the monetary policy to make sure that financial conditions would remain loose until November 2020.
The impact of such policy on the stock market was significant, as equities soared until 2018. However, the economic consequences were not that obvious, and the picture progressively deteriorated, even before the pandemic.
Whatever your opinion on Covid-19 and the way governments have handled this crisis, one may agree on the fact the US economy is in a catastrophic shape today.
Of course, it would be simplistic to state that Trump is the only person to blame for that, but the consequence for the White House is the fact that the MAGA narrative is now limited to one single thing: keeping a “strong” stock market at all costs.
Whatever It Takes
The impact of this administration on key federal institutions is unprecedented, and especially on the Federal Reserve. First, because of the nomination of a non-economist (Jerome Powell) as the new Chair in 2017. But also because of continuous pressures on the Fed to adopt a ZIRP policy and to launch infinite quantitative easing measures.
Who cares about the Dow? Certainly not a large portion of the American population. However, some electors still do, and Trump knows that high indices can favor his re-election. Besides, the continuous actions of authorities for years have convinced millions of inexperienced individuals around the world to rush to buy shares of tech companies. So, the stock market is not a negligible thing today.
Since September, it has becomes obvious that the Fed has obeyed to a political agenda, as there has been a record and absurd number of Fed speakers in the media. Probably to limit the probability of a large red candle on the Nasdaq before November 3rd?
Another ridiculous thing is the recent flow of headlines about the negotiations game between Pelosi and Mnuchin, to fuel optimism. Who remembers the never-ending “phase one trade deal optimism” rally? The Trump administration knows that they do not necessarily need a bill before the election. They just need to keep speculation alive.
From a pure market perspective, the 2016-2020 period is a “success” for Donald Trump as his administration has managed to keep major equity indices at record levels.
Of course, one could argue that it is the sign a of a coming financial and economic disaster, as the pump strategy has cost several trillions of dollars to the country, and as the Fed is now trapped into and endless spiral of ultra-dovishness without any consistent exit strategy.
But remember that it is all about the election.
La La Land
Therefore, as the expiration date of the Trump put is approaching (even if I prefer to regard it as a zero premium call option feeding a powerful gamma squeeze), it is worth trying to imagine what could happen after that date.
The fact that Wall Street is suggesting that this election will be “a win-win” event should not come as a surprise, as it just the continuation of the “there will always be a positive outcome” narrative that has supported stocks since 2009.
This narrative is clearly reflected in investors’ current positions as the weight of cash in mutual funds is at a low level. Moreover, even if some participants bet on higher volatility after November 3rd, it is mainly to play a bull scenario, as the put/call ratio is dramatically low.
While fat tail risks have always been misunderstood by most market participants, the Fed and the Trump administration have made things worse, increasing moral hazard beyond dangerous limits.
In other words, the market is telling us is that even a Yellowstone volcano eruption would be positive for the S&P 500.
There Ain’t No Such Thing as a Win-Win Scenario
However, things are more complicated then they look, and investors should seriously wonder if that Trump put is not about to disappear soon.
Would the stock market remain the first priority of this country in case of a “blue wave”?
What will be the reaction of the Fed if Trump loses?
What happens if Trump loses but refuses to give up the throne?
What happens if Trump wins and then realizes that he has no more interest in fueling market optimism again?
And beyond those political issues, critical questions remain intact:
Will a second Covid wave destroy hopes of a 2021 strong recovery?
Will defaults, evictions, and bankruptcies lead to an even more severe economic crash?
Will the economic war lead to a Chinese blacklist of American companies like Apple?
Butterflies and Hurricanes
Believe or not, but whatever happens in November, sooner or later Trump may stop to worry about your stocks. So may Biden. So may the Fed. So may Santa Claus.
And after all, black swans are for real. So is gravity. So is nonlinearity.