friday speedrun

Is it over yet?

Everyone’s watching the election. Around the rest of the world, we have settled into a comfortable equilibrium.

November 1, 2024

Hello. It’s Friday. Thanks for signing up. I’m Brent Donnelly.

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Here’s what you need to know about markets and macro this week

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Global Macro

Election odds are grinding back towards Harris, and the election looks like a coin toss. I think the market is assuming that polling errors in 2024 will be similar to 2020 and 2016, but that’s not generally how this works. Pollsters tend to overcorrect and the errors mean revert.

The idea that there is still a shy Trump voter is absurd.

Anyhoo, from here I’m going to excerpt most of today’s am/FX, because I think you will find it useful. If you already read today’s am/FX, scroll to the next section. And if you would like to subscribe to am/FX, please click here. The price of a subscription is going up on January 1, so get going.

Excerpt:

One salient feature of the 2020 election was the ability to track market pricing of the outcome in real time via the FTX token. At that time, FTX was a new and exciting platform where everything would be tokenized and SBF was known mostly in crypto circles as some kind of crypto wunderkind that found a way to arbitrage global crypto markets and turn $10 million into $10 billion. Here’s a screenshot I published the day after the 2020 election.

A few things have happened since that night. Sometimes, when I dig up old back issues of am/FX, I get a jolt seeing either how different or similar things were in prior years. While my memory tells me that the Summer of 2020 was the big, scary time for riots and protests and all that, my fact of the day from November 2020 reminds me that the US was prepared for the worst that night.

Here’s my fact of the day on Thursday, November 5, 2020:

So, I guess you could say we have come a long way?

Anyhoo, in ye olden days of 2020 we were tracking the BIDEN token on FTX and watching the New York Times needle fly all over the place, but now we have more sophisticated methods as US courts have overruled the CFTC and those who do not find US election psychodrama stressful enough can now add risk of personal financial ruin to the list of post-election impacts. While potentially bad for society, the “let’s gamble on everything” world provides great tools for real-time election analysis. Let me go through a few that I find useful.

First, pre-election we might want to know what is priced for the timing of the outcome. There’s a bet for that! You can see at right that the immediate to 07NOV range captures about 80% of the distribution with dates after 11NOV tailing off towards zero.

As a reminder, here are the prior settlements.

When was the US election result confirmed by AP?
2020 4 days later (was pretty much known day after)
2016 2:30 AM
2012 11:20 PM
2008 11:00 PM
2004 The next day around 2:00 PM
2000 December 12
1996 9:30 PM

The next tool that will likely be useful on election night is the specific state election odds. There are only seven states that matter.

Here are the gambling odds for each of those states, via Kalshi.

Needless to say, the polls are much, much closer than the gambling odds as people are assuming that the pollsters will make the same mistakes as they made in 2016 and 2020. I differ with that assessment as history shows that pollsters tend to overcorrect pretty quickly, usually after getting it wrong twice. Anyway, polling errors tend to be correlated and so as soon as we see which way one state is going, we will get a read on which way the entire race is going. The errors are not perfectly correlated, but they tend to lean the same way.

Source: https://centerforpolitics.org/crystalball/polling-error-in-2016-2020-look-out-for-wisconsin/

So, you can really argue it probably comes down to Michigan, Wisconsin, and Pennsylvania. If Harris wins all three, she probably wins. If not, she’s in trouble.

In 2020, Wisconsin was called at 2:16 p.m. Wednesday, Michigan was called at 5:56 p.m. on Wednesday, and Pennsylvania was not called until November 7 at 11:25 p.m. Here are all the times of the AP calls:

https://blog.ap.org/behind-the-news/calling-the-2020-presidential-race-state-by-state

and 2016:

https://blog.ap.org/behind-the-news/calling-the-presidential-race-state-by-state

My view is that Harris will win by an extremely narrow margin and the result will take days as recounts and challenges are nearly guaranteed. The view is mostly driven by the idea that polling errors tend to mean revert and overcorrect and therefore there is better chance the polls are overpricing Trump here and that would mean the gambling odds are even more off base.

OK. I hope you found that useful.

End of excerpt

Elsewhere, Europe is in a quagmire of sorts as industry bulwark Volkswagen struggles against Chinese competition and the eurozone as a whole is in a similar spot to Canada and New Zealand as real rates are restrictive, the jobs market is pretty solid, inflation is falling, and GDP growth is embarrassingly bad. That said, economic surprises in Europe are going up, not down.

None of this global macro stuff matters much right now. Yes, China has plugged the leaky bathtub, but they refuse to fill it. Yes, Europe is a bit less bad, but it’s still bad. And all anyone cares about for now is the election. Good news is, we should know the US election outcome before the end of this year.

Don’t forget to buy the 2025 Spectra Markets Trader Handbook and Almanac here.

Stocks

The most important thing to know about stocks right now is that everyone is bullish and rarely have they been more bullish. That’s not bullish.

Take a look at this next chart. The Conference Board asks survey respondents whether they think stocks are going up or down. This chart goes back to 1986!!

What are we doing here?

For the third straight week, I will use the same 14-word stock market summary:

Everybody is mega bullish into the 2024 presidential election. What could possibly go wrong?

Interest Rates

Trump’s odds have fallen, and we got a weak NFP release, and yields are at the ding dong highs. This is a bit alarming for bond market bulls as it’s very difficult to explain here why yields are doing this. Unexplained / unexplainable moves are often a sign of something more nefarious, but in this case there’s not much point trying to do a read through to the future because the election will decide the short-term path of yields, not positioning or momentum.

The scariest thing would be if Harris wins and yields go down for a day then rocket higher. That’s gonna be a bloodbath for anyone newly minting bond longs or USD shorts in the moments after AP announces a Harris win. I am not predicting that, I’m just saying that’s a scenario that should terrify bond bulls.

Around the rest of the world, we have settled into a comfortable equilibrium where most of the central banks are in a predictable mode. Here’s a nice snapshot of expected global rate paths using the MIPR function in Bloomberg.

A few things stand out here. The curves in Brazil and Japan. The juicy expectations for New Zealand. The uniformity across USA, Canada, Mexico, and Europe (all 100 bps over the next year). And the low, low, low level of yields in Switzerland.

Fiat Currencies

The UK budget came out this week and the market tried to play it like Truss Part Deux. That worked for a brief moment, but then the pound came raging back. The bond vigilante trade is tempting for specs because it appeals to the prevalent intellectual bias which tells us that countries cannot run infinite deficits forever without some impact on yields and the currency. Especially in countries where they don’t have the global reserve currency. Because the “sell bonds, sell currency” trade worked in 2022, the market was quick to get excited. I was excited too, to be honest. It looked like Reeves might have uncorked another bloodbath.

As a refresher, in normal developed markets, when yields go up, the currency goes up because normally higher yields reflect stronger nominal growth expectations. But when bonds are selling off on credit risk, not growth expectations, you can get more of an emerging market style reaction where both the bonds and the currency sell off at the same time. That’s known as the bond vigilante trade because the narrative in that situation is that bond buyers are on strike as a protest against reckless fiscal policy.

Here’s a 5-minute chart of UK yields and GBP. Again, normally they should be going up and down in tandem.

So GBPUSD got whacked from 1.2980 to 1.2840 even as UK yields went up. That’s the bond vigilante trade. But you can see it only lasted a few hours and then GBP squeezed and has recaptured just about the entire move. The jury is out on whether UK finances are sustainable, but the market will always use a ready, shoot, aim approach and then ask the hard questions later.

Meanwhile, the USD was soft for a bit this week but has come back hard after today’s jobs report. Unlike yields, which are dancing on the ceiling, the dollar is kinda midrange. Here is the Dollar Index over the past month.

Consensus is that the USD will go up or down around 1.5% to 2.0% on a Trump or Harris win, respectively.

Crypto

Wow. Crypto played major catchup this week and is now on par with the performance of the NASDAQ (vol-adjusted) as both are near, but just off their all-time highs. Michael Saylor is all-in, doing clips of $1 billion or $700 million in bitcoin over the years, and now has announced a $42 billion plan to buy more bitcoin over the next three years.

Let that sink in for a second.

$42 billion. The company’s market cap is $50 billion. Their annual sales are $400 million.

https://blinks.bloomberg.com/news/stories/SM8GZGBNG4XT

Anyway, if you like financial engineering… It’s a great time to be alive! This continues to pressure ETHBTC, which is a great reminder that the OG in any world is almost always the most surefire bet. Action Comics #1 is better than Action Comics #2. CryptoPunks are better than Bored Apes. Rookie cards hold more value than second year cards. First is most often best because the OG has a natural advantage over all future competitors.

ETH has competition, BTC kind of doesn’t?

The huge rally in the price of BTC was driven by huge flows.

What about ETH? Oof.

The election is probably less important for digital assets than it is for TradFi, but there will certainly be a major dipto in crypto if Harris wins.

Commodities

My brother is not a financial markets guy. He doesn’t ask me about markets much. This week he sent me this text:

Meanwhile, the banks are holding conference calls:

Tomorrow: Call #86: Is gold a safer investment than Treasuries?

Gold and Precious Metals Update: The FIS-ical Drivers of Our Bullish Gold Forecast

And The Economist hates to be left behind on stale narratives, so they decided to mint four stories about gold in a single week… This is the kind of stuff you only see when gold’s weekly RSI is at multi-year highs. Like now.

Never underestimate Betteridge’s Law. While the prospect of shorting gold, even when it’s up 40% on the year, is terrifying… The most terrifying trades are very often the sexiest ones.

Insert joke about college girlfriend here.

If you just absolutely must short gold, you might get more mileage selling silver because it tends to have very high retail participation and there is no central bank on the bid. Not investment advice, but yeah. Short silver.

Whew! OK! That was 9.538 minutes. Thanks for reading Friday Speedrun.

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