Markets politics volatility

Deutsche’s Kocic Flags ‘Fear Of Massive Risk-Off Trade’ Amid Unprecedented Political Entropy

Earlier this month, while appraising the twisted, smoldering heap of institutions, norms, and principles that not so long ago constituted the scaffolding of America’s democracy, I noted that for market participants, the one thing that seems certain is that nothing is certain.

We are just weeks away from what is almost sure to be a contested election outcome, presaging, at best, months of litigation. At worst, a disputed result could entail an effort to delegitimize the vote or nullify it altogether. That is a real possibility. Just ask Facebook which (ironically, given what happened in 2016) is said to be readying contingency plans in the event the president attempts to (quite literally) snatch victory from the jaws of defeat.

Relevant markets are trying to price this in, but that’s impossible, almost by definition, given the sheer indeterminacy of the situation.

Read more: A Disputed Election And An ‘Institutionalized Powell Put’

In a Tuesday note, Deutsche Bank’s Aleksandar Kocic underscores the above, writing that “there’s no point invoking the past – when elections were calm and transfer of power orderly — because there is nothing useful we can learn from it, except only to agree with the obvious that this time the story is completely different”.

Indeed it is. Even if you’re inclined to say that those who worry America is on the brink of becoming an authoritarian state are overdramatizing the situation, it is impossible to ignore the juxtaposition between widespread mail-in voting and a notoriously litigious incumbent who (to this day) claims the last election was rife with voter fraud despite his having won.

That certainly seems to presage troubled waters, and the president has done nothing to dispel the idea that he may well challenge the results or simply refuse to accept them.

“Uncertainty is now the only certainty”, Kocic goes on to say, in the same short note cited above, before delivering the following straightforward recap of recent events:

In many respects, 2020 has been a wild year and in the center of everything resides politics. The markets have taken note. We saw the first glimpse of this on Aug-3 when November elections entered the horizon of 3M options. Since then, many things happened – one month has passed, but it feels much longer. We had an all-out assault on the US Post Office, the President has encouraged his supporters to vote twice, and his AG has pleaded ignorance when asked to confirm that voting twice is illegal, while the protests across the entire country continue to escalate with so called armed militias becoming a common occurrence at these events (just to single out a small subsample).

Once again, one struggles to come to terms with this being our reality. The deadpan nature of Kocic’s delivery serves to accentuate the surreal character of the circumstances. One no longer has to try when it comes to dramatizing the situation. The fact is, the world’s foremost democracy is in a downward spiral, defined by generational socioeconomic turmoil and an existential crisis of government.

“No matter what the initial outcome of the elections might be, the results are likely to be contested with a prolonged period of uncertainty and disorder for many weeks after November 3”, Kocic goes on to say, in the course of looking at vol flies across assets and noting outliers in USDJPY and VIX futures.

The read-through, from Kocic, is simple. “All this is indicating a fear of a massive risk-off trade which has intensified further as the political entropy escalated in the last month”, he warns.

In rates, he notes that there’s “less disruption”, or at least an absence of outright outliers. One reason for that is that monetary policy isn’t likely to change course.

On Monday, while writing to one of the few friends I still keep in touch with from a previous life, I said a disputed election result would almost surely be destabilizing for US assets, from stocks to bonds to the dollar. Kocic echoed that Tuesday.

“Risk asset and currency… are on the front line when it comes to the actual elections and details of transfer of power”, he remarked, cautioning that “social disorder and violent contestations cannot possibly be non-negative for US credibility and confidence of investors”.

The title of the note: “Between crazy and insane”.


15 comments on “Deutsche’s Kocic Flags ‘Fear Of Massive Risk-Off Trade’ Amid Unprecedented Political Entropy

  1. Emptynester says:

    In addition to Trump’s assault on democracy, his actions against the rule of law and the right of parties to enforce a legal lease are very unsettling because if the government can override a legal right to collect rent, what is next?

    I am certainly not in favor of evicting anyone who is not able to pay their rent and putting them out on the street, however, when did this become a burden that landlords are expected to shoulder instead of putting that burden on the public, as a whole?

    Even though the moratorium does not erase the debt of past due rent, given that the moratorium will have been in effect for about 10 months as of December 31, 2020, it is unrealistic to think that tenants who could not pay their rent during the moratorium will suddenly be able to pay past due rents.

  2. Ria says:

    It seems a contested election is the accepted dominan consensust theory out there. I would bet that Trump is going to lose in a blowout- his polling is terrible and did not get a bounce from the convention. If he does not get reasonably close in the next couple of weeks, he is going to desperately need a win in his first debate. Sitting Presidents often do not do well in the first debate with a challenger. It could really go south for Trump and the GOP come this fall…..Wall Street is going to whiff on this one is my guess….

  3. Expect Mnuchin is talking with Trump today and I do not expect Trump will be shy about beating up on Powell to exercise a put.

  4. derek says:

    Welcome to a POPULIST country.

    Over the last two+ years, Trump and the whole right wing loved to point at Venezuela as an example of what will happen if the “socialists” win power.

    Think about that in the context of Emptynester’s post above.

    That measure is pure populism and probably would not have been out of place in “socialist” Caracas.

    Nor would be the attacks on US companies who “Create jobs” in China.

    The stock market once was called the Great Discounter or something like that. In recent times that market does not respond to the obvious until any widely-anticipated negative actually hits. Probably thanks to all of those price-momentum and volatility-driven trading models now dominating the market.

    • I believe you are right on point comparing Trump’s populist tactics with those Venezuelans experienced during the Chavez/Maduro regimes. The tools of autocrats and demagogues are similar regardless of whether they claim to adhere to a left or right wing ideology. I have many family members in Venezuela and some that now live in the US, they have fully bought into the propaganda narrative that Biden is a socialist trojan horse without realizing the obvious, Trump is undermining democratic institutions, ignoring the rule of law, creating a cult of personality and blaming all misfortunes in others while demeaning the opposition. This was exactly Hugo Chavez’s playbook and it has been the blue print for autocrats for ages, sad to see the US succumb to it.

  5. Emptynester says:

    I think this election might be the lowest turnout ever.

    Where is a nice moderate candidate, with a sense of morality and a vision for America and its global role that does not pander to the religious right nor do they want to defund the police?
    I have read that approx. 40% of Americans consider theirselves “independent”.
    Fiscally responsible and socially liberal.

    Middle ground, anyone?

    • Umm, Biden does not want to defund the police. Politicians do not come much more moderate than Biden. Which is why progressives have not endorsed his candidacy with anything approaching energetic support.

      Incidentally, I do enjoy your comments, in spite of your repetition of demonstrably false Republican talking points.

    • Darkstar says:

      I think this is going to be the highest turnout election in a long time. Trump is whipping up his base, they’ll all show up. And the Republicans are making a big mistake thinking there’s an “enthusiasm gap.” It’s true, many (most?) Democrats aren’t excited about Biden – but they are VERY excited to vote against Trump. I’m also expecting an unusually high turnout by the Zoomers (18-24). Those kids are smart, they’ve been paying attention (how could they not?) and man are they pissed off!

  6. jamaican says:

    Well, there is a candidate who fits your description.
    He’s been titulated a “beltway wall fixture” once or twice in these pages 😉
    Let’s hope that “middle ground” will be attractive to enough Americsns come November

    • Yeah, I mean, Joe Biden is the literal definition of “nice, moderate candidate”. There is nothing (nothing) “radical” about Joe Biden and he is the consummate establishment politician.

      It’s amusing that so many people claim to not believe Trump’s rhetoric and yet many of those people clearly do believe at least some of it. This is in part why some worry we’re already too far down the road to authoritarianism. There’s a very real sense in which many Americans who disavow him have subconsciously accepted a lot of his talking points, despite almost all of them being blatantly, demonstrably untrue. His rhetoric about Biden is all false. Every last bit of it as far as I’ve heard. That doesn’t mean you “should” love Joe Biden. But it certainly means that you shouldn’t form your opinion of him based on anything Donald Trump (or Fox News) says.

  7. brc says:

    I guess it is only right that after Nov. 3, Wall Street will feel like Main Street. Some cliche’ about “blood in the streets…”

  8. Emptynester says:

    I actually agree that Joe, on his own, is a nice moderate candidate.
    My concern is this- Does he have the backbone, capabilities, vision and support to stay moderate and not get “steam rolled” ?

    • Steamrolled by…? The anarchist left? Radical left? City dwelling crime loving liberals?

      I think Heis, Tom, and jamaican have all pointed out the illogical tropes about Biden. Now that you have capitulated, we must speculate as to whether or not this champion of moderation will be too fragile to withstand the Squad and Antifa. All of which are now regular RNC talking points.

      This is supposed to be about macro economics. I think you can tell from these missives that it seeks to cipher out the bologna. It just so happens those serving the slices dominate the side of “probably won’t accept” the results of what was once regarded as the moral standard bearer of democracy.

      Talk macro, or talk big level politics. Don’t come in with party talking points. It sullies the mutual respect.

  9. Xeger says:

    Thank you for bringing Kocic’s opinion to us at this timely juncture, H.

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