Markets stocks volatility

Crazy Times, Brave Vol Traders, And The ‘God Forbidden Realization Of Chaos’

Crazy times

On Tuesday, after a half hour search finally turned up my missing envelopes (in the kitchen drawer, of course), I slung my Citynews messenger and took a stroll down to the post office.

It’s cool here now. There were days last month when walking any distance was an intolerably sweltering slog. If past is precedent, there won’t be many more scorching days this year — October here tends to bring temperatures so agreeable to the human condition that being outside is experiential perfection.

On the way, I passed the local gun shop. Terry, the owner, had affixed a large sign to the window. “No ammunition sales without the purchase of a firearm”, it read. He was outside, in his rocking chair. As always, it was the uncharacteristically affable German Shepherd that greeted me first, tongue forward and deliriously elated, as though I hadn’t just seen her on the beach barely 24 hours previous.

“How does a gun shop run out of ammo?”, I joked, bending down to acknowledge the dog.

“Gunsmith“, Terry reminded me. That distinction is important to him. Terry is a craftsman, not a shopkeep, he’ll assure you. I find the nuance humorously quaint, but I eventually learned that failing to acknowledge it risks literally hurting his feelings, so I try to be accommodating.

“Shortage. Why? You out?” (He knows better — I don’t hunt and I don’t shoot for pleasure.)

“No. But I really am curious.”

“Just crazy times”, he said.

Fuel on the fire

Crazy times, indeed. The locals aren’t much interested in what Wall Street thinks, and most of my neighbors still don’t know what I do or what I did previously, despite my having told them dozens of times.

But, if they were inclined to engage in something more than idle, island small talk, they’d be interested to know that consensus among market participants seems to be coalescing around the view that a disputed election outcome is a virtual certainty. Not only that, one gets the sense that a contested result is actually the “best case”, with the more adverse, tail risk scenario defined by acute, widespread societal unrest.

Goldman recently flagged “the potential for an extended period of post-election uncertainty”.

“Option markets have gradually been shifting risk premium from 4-Nov to later in November and beyond. The market now shows an extended period of high volatility well beyond Election Day”, the bank’s Rocky Fishman wrote late last week. “This likely reflects the potential for election results to be finalized with a delay, the potential for an extended equity market reaction to what is currently a competitive race, and the potential for vaccine news around the same time”.

Earlier this month, Deutsche Bank’s Aleksandar Kocic wrote 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”.

The passing of Ruth Bader Ginsburg raised the stakes even higher for what was already expected to be an epoch-making election.

TD’s Priya Misra and Jim O’Sullivan called the Supreme Court fight “fuel on [the] election fire” in a note dated Monday. “The Supreme Court fight serves as a double-edged sword to energize both the Democratic and Republican bases”, they wrote, adding that,

Democratic donors broke fundraising records… after Justice Ginsburg’s death. As such, we think this might do more to invigorate enthusiasm for Biden than for Trump. At the same time, we think there will be a boost for the conservative movement (Evangelicals in particular and to some extent, undecided voters in the suburbs). If Trump is able to install a conservative, he would cement a 6-3 conservative majority on the court. 

This throws a wrench into the election process and would likely tilt the odds in favor of President Trump. If a vote is not held and RBG is not replaced prior to the election, it leaves the risk of a Supreme Court outcome against Biden. If a vote is held and RBG is replaced, the balance of risks would probably tilt in favor of President Trump in a contested election with a 5-4 or 6-3 outcome. Democrats would need to convince two conservative justices, which is a big ask. This could be especially relevant if Trump loses the popular vote but can still regain an electoral college advantage with a conservative Supreme Court.

Those are all crucial points.

With American society arguably as polarized as it’s been since the Civil War (and certainly the most divided in modern history), the potential for social unrest around a contested outcome decided by a Supreme Court to which Trump will have appointed either two or three justices, is very high.

Additionally, the president’s remarks about mail-in voting have sowed considerable doubt about the reliability of the process both in the minds of Republicans and Democrats. In other words, all voters, regardless of party affiliation, are likely to be suspicious of the results if they produce a clear winner. That too could spark social unrest.

Brave vol traders

In a short Wednesday note, Nomura’s Charlie McElligott wrote that “the SPX curve / term structure was already steep, and [Tuesday] saw election straddles ‘trueing up’ higher again”.

“After all”, he said, “it has become consensus thinking that recounts and likely a Supreme Court decision [may] drag the determination of the next POTUS through the end of the year”.

Indeed that is “consensus thinking”. And if the uncertainty does drag on beyond the end of 2020, the prospect of “President Nancy Pelosi” comes into play.

“This also likely means that some brave vol traders will try to take advantage as a perceived ‘generational’ opportunity to sell this post-Nov election ‘richness’ (Dec / Jan)”, McElligott went on to remark, calling the trade a potential “career ‘maker or breaker'” that could deliver “monster returns if the event were to pass and all that crash is puked back into the ether”.

Of course, if things go awry, all bets are off, figuratively and perhaps literally too. McElligott underscores as much. Selling election vol richness “could be turned to dust” in the event that “God-forbid” the nation witnesses “the realization of chaos, with civil disorder and dual claims to the throne”.

Looking out from the back deck this morning, I could see for miles in the crisp air. Five years ago, some folks questioned my decision to live in relative isolation. I had no such reservations then, and I certainly don’t now.


 

9 comments on “Crazy Times, Brave Vol Traders, And The ‘God Forbidden Realization Of Chaos’

  1. Bill says:

    A well written column by David Brooks on September 3, in the NYT titled “What will you do if Trump doesn’t leave.” Is a good read and follow on to this article.

  2. Ria says:

    It would be ironic indeed if the election was not that close and the results were known pretty quickly. It is a distinct possibility – in fact at this point it is a probability in my view. Despite all kinds of voter suppression attempts, my sources tell me that early voting turnout is high, and it is not in the Trump demographic particularly. High voter turnout favors Democrats generally. Also, Trump is pretty well behind in both head to head polling and approval ratings- never a good sign. Generally, incumbents do poorly in their first debate with the challenger. I expect this time will be no different. If that is the case, Trump will have a little over a month to turn it around. The market is expecting a contested election. I do not. If that is the case, the entire Supreme Court being right of center will not matter. This has many parallels to the 1932 general election in the USA. At that time, if you read history, nobody expected Roosevelt to be a change President. Nobody expects that of Biden either. I think folks will be surprised if he pulls off a large win. Change is in the air. The appointment by Trump of another justice and a rushed confirmation in the Senate will damage the Court and the sitting justices will have to be careful to not damage the institution of the court- I expect the court to move less to the right than people think as a result. If abortion is restricted there is going to be tremendous blowback. Likewise for the Affordable Care Act. Roberts is well aware of this fact and is keenly aware of his legacy being at risk.

    • Great observations, largely I agree. The fact that the street’s consensus (both wall and main) is to expect a protracted period of post-election day uncertainty makes me seriously consider the alternative view, that we will know by Nov 3rd or soon after. Clearly anything is possible in our current political environment but I believe if Biden emerges as a clear winner early a lot of rats will jump ship fast on the GOP side, quick to place some distance between their political careers and a sinking administration. As Charlie notes, there is a contrarian trade here, risky indeed but with a juicy potential return.

    • Anaximander says:

      FDR came of age during and was shaped by the progressive era. Biden, more like the opposite. Also, I’d argue that without FDR’s personal misfortune of suffering through and mentally overcoming the adversity of polio for a decade prior to his rise to power, he would not likely have had the empathy that was his most crucial quality, and would not have had the courage to turn against his class. Making these comparisons, against all available evidence, looks like wishful thinking to me.

      • Ria says:

        Biden grew up with a disability as a stutterer. He lost his first wife and daughter in a car accident when he was in his late 20s. He lost his son, a rising political star several years ago to terminal brain cancer. Biden has his flaws but lack of a challenging life and empathy is certainly not one of them. He is being underestimated- and he reflects the center of the party- the party has moved left- so has he. He sees his mission to get things back to some kind of normal and repair some of the damage and unify his party and the country. So far he seems to be doing fine. One of his big flaws is hoof in mouth disease- and so far that has happened few times. See how frustrated Trump is getting? Nothing is sticking right now- and part of it is that Biden is playing a smart tennis match and making few unforced errors. Same with Kamala Harris….

        • jamaican says:

          totally agree.
          If there is one person in Washington comparable to FDR in terms of empathy built through personal suffering it’s Joe Biden.
          I also would not underestimate his potential to be a change president.
          First of all, he certainly knows that given his age he will most probably be a one-term president (IF he’s elected, that is), meaning he won’t be loosing much time.
          Secondly, as you stated correctly, the entire Democratic party has moved to the left, including the candidate. If (again, IF) he’s elected, his cabinet will most certainly reflect that.

        • Anaximander says:

          I’m aware of the tragedies he’s gone through in his family life, and I of course hope you are right. The world should hope you are right. But I have yet to see it reflected in policy positions, communications, or personnel. And as such the “change-agent” ask right now is mostly faith based, similar to 2008 but even more so. Fine if it works as a strategy. The difference is Biden is not a young and charismatic Obama, a representation of change, with a strategy that welcomed people to project their hopes and dreams onto him, however contradictory those desires may have been to his own rather conventional views. To see if such a strategy has promise in 2020, one could review evidence like the African American Research Collaborative Poll that was published today in 538 (https://fivethirtyeight.com/features/the-partisan-gender-and-generational-differences-among-black-voters-heading-into-election-day/). 79% of Black voters under 30 believe Trump is a racist, and yet only 29% are definitely motivated to vote, and only 49% say the Democratic party is welcoming to Black Americans. I think these young Americans know very well the country they are living in. And it’s not as if they are politically apathetic; they are ones animating the historic protests. Democrats could ask condescendingly why these Americans don’t any longer have blind faith in them, or alternatively, they and their leader could do some actual self reflection and ask themselves why they haven’t given them any good reason to.

  3. Tom Swift says:

    And folks in my old hometown Still ask why my family and farms relocated to Chile/Ecuador starting 2016.

    It doesn’t take a genius to predict chaos.
    I like a country that has 4 major political parties.

  4. babeinwoods says:

    This post had me googling the best US islands to move to. H you’ve been saying trump wouldn’t leave long before anyone in the media and now here we are. Ria you’ve been right before, I hope to god you are right again.

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