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October 30, 2020 | Into the Swamp

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

A few scant days before the US election and volatility’s spiked again. See the chart below – the VIX – which measures how many Tums, per trader, are popped on the world’s major stock exchanges, divided by quarts of gin consumed. It’s wicked accurate.

The VIX has spiked the most since mid-summer and will likely stretch higher in the next 72 hours. You know why. The virus is somewhat out of control in Europe and the States. Ninety thousand new cases in America yesterday. Wow. We may still hit a hundred grand by Tuesday, lousy news for a certain president who must remain nameless on this blog (lest we trigger the deplorables).

That vote looks astonishing. More ballots have been cast in Texas before election day, for example, than all the votes (in total) counted in 2016. The fact that 75 or 80 million people will have decided prior to November the 3rd is outrageously historic. But what does it mean? Good to the incumbent? Or the challenger? In any case, it’s got Mr. Market’s attention.

 

Will the second wave of the virus be as consequential for investors as the first? Recall that stocks plunged more than 30% in just a few weeks back in March before staging a massive comeback. Anyone who had the courage to go equity shopping on March 23rd soon looked like a genius. Could we be headed for that kind of correction again? If so, would it be as temporary?

October – always notoriously volatile – has delivered the worst showing since March. Investors worry about new infections, the fact squabbling US politicians have failed to deliver that new stimulus package, economic slowdown and the election. Actually the aftermath of the election – that’s the firecracker.

The virus hurts the presidency. Uncertainty reigns. Markets hate not knowing what’s next. Will there be a contested, disputed outcome next week? Trump (oops, sorry) has cancelled his election night party in his Washington hotel. Does that mean anything? He has trashed absentee and mail-in balloting. The betting now is that he may win a mirage victory Tuesday night – based on in-person votes – with that thrown into question as the advance polls and mailed votes are tallied and added. But, who knows? It’s all conjecture. And that’s the problem.

First, the nightmare scenario. Then what to do about it.

Says US economist Daniel Ahn: “If there is a constitutional crisis, we believe that the loss of political credibility and standing of the United States as a stable country could threaten its status as a safe haven with unfathomable consequences for the economy and for markets.” That crisis would come as the sitting president refuses to accept the results of the popular vote by alleging fraud, proven or not. A legal battle ensues. Perhaps it even goes to the Supreme Court. Or the floor of Congress.

Meanwhile there is no stimulus package and the year ends with a declining American economy as millions of consumers shut their depleted wallets. Should this happen, Bank of America strategists forecast that US stocks could slide 20%. Bond yields would tumble even lower. Bond prices would spike. The US dollar would be impacted. The Fed would probably go negative.

So what would benefit in this scenario?

Bond prices move in the opposite direction to rates, so investors with balanced portfolios would feel some love. Also with stocks in a post-election funk, lots of money would be looking for a safer place to land. More impetus for bonds to pop. And as the US dollar takes a hit, commodities priced in it would benefit. So cue the gold bugs.

Now, the most important points to remember are these: (a) the US election will get fixed. There will be a swearing-in on Wednesday January 20th. When the outcome is known, markets will restore. And, (b) the virus will fade. The pandemic will pass. The curve will go flat. A vaccine will come and therapies develop. The world will be a much brighter place six months hence. Plus (c) there will be a multi-trillion-dollar stimulus bill passed once the voting crisis (if it materializes) is over. Bank it.

This means if you have cash sitting around, deploy it. Monday, if you’re confident on a firm outcome on Tuesday. The week after, if you’re not. But if you’re invested now in a balanced and diversified portfolio, do nothing. The storm will come, blow down a bunch of trees and power poles, then pass. There’s no point trying to time both the sale and purchase of the same assets. Odds are you’ll get one of those wrong. So, relax. Watch the show.

Tums and gin, by the way, pretty damn awesome.

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October 30th, 2020

Posted In: The Greater Fool

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