No Church In The Wild

Journalists long ago ran out of euphemisms when it comes to describing Donald Trump’s singular talent for creating chaos.

Satire is dead (and buried) in the Trump era and belabored efforts to show the appropriate deference to the office routinely fail in the face of the objective reality that is the carnival at 1600 Penn. Financial journalists are no exception. Sometimes, there’s just no nice way to say it.

“There are good reasons why volatility markets are pricing in political fireworks well beyond November”, Bloomberg’s Yakob Peterseil wrote, innocently enough, in a piece out Tuesday. Peterseil then listed two of those reasons, citing “Trump issuing an extraordinary refusal to say whether he’d accept the election result if he loses [and] his wild campaign more generally”.

“Wild campaign more generally” is one of the more amusing throw-in-towel moments I’ve seen from the media. Past a certain point — after several trips through the thesaurus looking for more sophisticated versions of words like “wild” — folks facing deadlines just throw up their hands. It is what it is, as Trump himself would say.

In any event, the linked article above speaks to something Nomura’s Charlie McElligott wrote late last month — in fact, it quotes the same note documented here in “Crazy Times, Brave Vol Traders, And The ‘God Forbidden Realization Of Chaos’” (if you haven’t read that yet, you should — it starts with one of my signature vignettes).

Some folks will try to be heroes when it comes to fading expectations for post-election uncertainty and a disputed outcome. If those brave traders are proven right, they could generate a windfall. If there’s chaos, as many expect, selling election vol richness “could be turned to dust”, as McElligott put it last month.

Commenting Tuesday, McElligott said the market may be “sensing that all the ‘doomsday’ priced-into the Dec/Jan implied vol bucket due to concerns of extended post-election chaos may in fact reprice lower, as some of this premium begins leaking out into a world that is not ending”.

This comes down not just to how you view the odds of protracted post-election uncertainty, but what character you believe that uncertainty may ultimately take. It’s one thing if the election is close and it takes several weeks to sort out a winner. Markets can probably stomach that, and while a SCOTUS intervention would be unnerving given the potential for Trump’s stacked court to essentially hand him a second term, that too could be navigated without any kind of real disaster.

The risk is some manner of science fiction scenario — and I’ve been over this before so I won’t dwell too much on it here. The bottom line is that the real chaos would accompany a situation in which Biden wins a decisive victory, the Senate flips, and Trump (literally) refuses to accept the results.

“In our view, markets are already discounting elevated uncertainty and a prolonged period of volatility beyond Election Day – implied volatility remains elevated across assets and maturities, in particular for US Equity”, Goldman wrote Tuesday, adding that “in this regard, the news of President Trump’s coronavirus illness added further uncertainty and investors likely have priced higher risk premia”.

Commenting in his latest note, Deutsche Bank’s Aleksandar Kocic wrote that “the most recent news about the infection penetrating into the White House introduces a whole range of additional scenarios into the pre-election period, while possibly reducing the likelihood of disorderly transfer of power and, thus, front-loading the uncertainty”.

Again we see nods to the idea that Trump’s diagnosis and, before that, the cartoonish debate, have perhaps tilted the odds further in favor of Biden, thereby decreasing the chances of a disputed result.

For his part, McElligott also notes that it’s possible markets could be comforted at least a bit by Trump’s own experience with the virus and the read-through for the evolution of the pathogen.

“A 74 year old, obese POTUS spending just two days in the hospital after his COVID run-in, speaks to the potential of [the] ‘lower viral load / more transmissible but not as deadly’ theme which some doctors and studies have proposed in recent months”, he said.

He’s not obese, ok? He’s “slightly overweight”. Just ask Dr. Conley.