[Editor’s note: As many readers are likely aware, fan-favorite Kevin Muir — formerly head of equity derivatives at RBC Dominion and better known for his exploits as “The Macro Tourist” — this year transitioned his daily letter to a subscriber-only format. The following is reprinted here with permission and is available exclusively to his subscribers and mine.]
The bearish argument for the stock market is easy.
You can probably do it on your own, but let’s go through all the reasons to be bearish:
- The actual economy continues to stumble, and even though it’s considerably better than March and April, there is still a Titanic-amount of uncertainty out there.
- In Europe and Canada, COVID has awakened from its summer-slumber. A Fall resurgence seems destined to weigh on the global economy.
- Central Bank balance sheet expansion has slowed considerably. The rate of change in Central Bank balance sheets is now almost at human-resource-update-meetings level of boredom when compared to the past six months.
- Fiscal policy – the last hope of the bulls, has disappointed in Europe, and with the recent impasse between the Republicans and the Democrats, appears to be headed down the same track in the United States.
- Most stock indexes have exploded higher from the March 23rd lows, yet almost none have experienced a correction of more than 20% in this time. It’s almost gotten too easy to make money and it certainly feels like we are due for a shakeout that scares the late bulls.
- On that note, sentiment in speculative areas of the market has taken a 1999-dot-com resemblance. The Dave Portnoy phenomenon and EV-bubble seem straight out of the playbook from two decades ago.
- In America, given the inability for the two sides of the aisle to come to an agreement regarding an extension of the COVID emergency measures, we will see many of the safeguard measures instituted in the early days of the crisis, expire in the coming weeks. As evictions, legal proceedings and other settlement procedures between debtors and creditors returns to normal, the economy (and by extension, the stock market) will face a wave of defaults that catches the bulls off balance.
- And the last reason to be bearish (and my favorite) – markets have a habit of taking prices to pain levels, and nothing would be more disturbing than a swift stock market decline that forces government officials back to the negotiating table.
Yeah, you might even have some other reasons to be bearish. Let’s face it, the dark side is a more attractive argument right now.
What’s the reason to be bullish?
That the economy will get better? It probably won’t (at least not over the short run). That Central Banks will save us? Not sure they are in a rush to throw more fuel on the fire. That stocks are just so darn cheap? What world did you wake up in?
Nope. There is almost no reason to be particularly bullish about stocks up here.
However, before you lift the offer on that 1,000 lot of November 3,000 strike puts, I want to remind you of something.
There is a certain someone running for re-election November 3rd. You might love him. Or you might hate him. Save your insights about what’s best for the country for the family dinner table.
I’m not here to debate anything except the direction of the markets.
And although I am certain that if the stock market declines over the next month, Trump will blame Biden (“see? this is what will happen if you elect sleepy Joe!”), there is little doubt in my mind that Trump will do everything in his power to have the stock market as high as possible going into the election. Trump would much rather have the stock market roaring to new highs than try to explain why the decline is Joe’s fault.
You might say, “Trump is not as powerful as you think – what can he do to get the stock market up?”
I am not sure.
But I know that Trump hates losing. And the conspiracy-theorists have even postulated that Trump needs to win to save himself from being criminally prosecuted, so there might be more riding on this than bragging rights.
Do I think this tin-foil hat theory is correct?
Who knows? It doesn’t matter.
Whatever his motivations, Trump will do whatever it takes to win. That is not up for debate.
And if you somehow think that he has not considered how the stock market figures into his re-election chances, you haven’t been paying attention.
I used to think Mnuchin was a hapless dork. He didn’t strike me as particularly smart when he thought taking this picture with his wife was a good idea:
But, the world has surprised me over the past four years by how little this sort of behavior seems to matter.
I have begun to worry that I underestimated the dork, and maybe he is a lot more cunning than I ever gave him credit.
Remember when we spoke about the Treasury General Account [TAKING A DEEPER DIVE INTO THE TGA]?
Well, highlighting that account back in July has been a big ole’ nothing-burger.
Today, the TGA is basically at the same level as when I first wrote that piece:
There is no denying this account is complicated. There is lots of debate about whether this money is earmarked for future programs, or is truly a slush fund that Mnuchin can run down.
However, do you have any doubt that if Mnuchin (and Trump) have the ability to manipulate the economy by releasing liquidity in front of the election, that they will hesitate?
Time will tell if I am being paranoid, or whether these two are as Machiavellian as I fear.
But those shorting the stock market on the idea that it will teach Trump a lesson, I worry you might be greatly overestimating the market’s power.
Now, please don’t misconstrue this as some sort of “Trump is a genius who is one step ahead of everyone” diatribe. Those who know my politics are probably having a good laugh at that idea.
Yet, although I certainly don’t think this is a case of “Trump playing chess while we are all playing checkers”, bearish participants might be making a mistake in not understanding how important a roaring stock market is to Trump.
Trump, and Mnuchin, will do everything in their power to have the stock market screaming to new highs as the calendar turns in November. That is an easy bet.
Whether the market ends up being bigger than either of them is the real question.
I understand the argument that situations overwhelm Presidents. But even though a short-side stock market trade seems like the correct position, it feels too obvious.
I have been shocked at how quickly the trading community has flipped from all-out-bullish to screaming-for-their-mother bearish. Look at the net spec position in the E-mini Nasdaq futures:
It’s now a record short position.
Could all these new minted bears be correct? Sure. No doubt about it. Things certainly seem dire.
However, even though I have no real good reason to fade them, somehow I think they are going to be wrong. Trump and Mnuchin will pull something out of the hat. Whether it is a TGA wave that spits a huge amount of liquidity into the financial system, a last-minute trade deal or some other previously unheard of scheme, I am not willing to bet against their wily ways.
Does that mean I am buying the stock market? Well, I am leaning gingerly long, but I won’t fight if it proves me wrong. Last week I wrote a piece highlighting how during the 1998-2000 bull run, there were seven corrections in the Nasdaq between 10% to 15% that usually last two weeks. I think it took the market about four hours after I hit publish to hit new lows, so hopefully this piece won’t be as poorly timed.
I believe that the bears who are just sooooo-certain that the market is about to puke, might be overplaying their hand. That’s the real point of this piece. You might feel like there is certainty on the downside, but Trump and Mnuchin are going to do everything they can to prove you wrong.