Goodbye Goldilocks

Goodbye Goldilocks

The prospect of Republicans holding the Senate and proceeding to block Democratic spending proposals was one "panic catalyst" that prompted a multi-session unwind of reflation trades, Nomura's Charlie McElligott said Thursday. The stalled bear steepener is one good example of markets having become suddenly more dubious on the chances of a pro-cyclical, post-election reality. Clearly, new lockdowns in Europe's largest economies and plunging crude prices don't help. Wednesday was a bit messy, wi
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7 thoughts on “Goodbye Goldilocks

  1. It blows my mind that the public seems to think that Republicans are stronger on the economy and defense than Democrats as a general rule. If you look at history since the turn of the 20th century it is completely the opposite.

  2. It seems obvious to me what Dems are for and Pubs are against. McConnell’s Senate is against any stimulative spending and for tax cuts that leave most American’s out. Biden/Harris want to spend trillions to stimulate our economy, create jobs, and improve our infrastructure…..promising not to raise taxes on anyone making under $400,000. Pubs want to see fewer people with health insurance and Dems want
    everyone to have access to health care. Pubs want a good education to be available to people who can afford it……Dems want a good education available to whoever wants it. Pubs are perfectly happy seeing people with full time jobs living in poverty…….Dems think anyone who works full time should make a living wage. Pubs are willing to run trillions in deficits to support tax cuts…….but are unwilling to run deficits for anything else……..Dems think tax cuts and spending should help people who actually need help. Etc.

  3. Risk is elevated, the critical events coming up are binary, and there is some “unknowable” risk related to contested election etc.

    The probability of approved vaccines in the next couple months is fairly high (60-70%), the probablity of a Biden victory is reasonably high (75%-ish, based on poll-based and betting-based forecasts) and the probability of the GOP losing the Senate is better than even (60%-ish, based on poll-based and betting-based forecasts). The last two are not independent events from each other; the probability of the full Blue Wave (Biden + Dem Senate) is I’d guess around 65%? The first event is independent of the last two.

    0.65 x 0.65 = 43% probability of the bullish outcome (vaccine soon – Blue Wave). Max bullish for short term stock market reaction (not considering ideology or long term here).

    0.35 x 0.65 = 23% probability of a middle outcome (no vaccine soon, Blue Wave). No vaccine help near term, but trillions in fiscal stimulus.

    Same 23% probability of a middle outcome (vaccine soon, no Blue Wave). Vaccine help, but no big fiscal stimulus (Biden wins) or modest fiscal stimulus (Trump wins).

    12% probability of a max bearish outcome (no vaccine soon, no Blue Wave).

    What do you think the market has baked in at today’s level? That’s my dilemma.

  4. We should keep in mind that it may take some time to determine who will control the Senate. As in the Presidential race, vote counting may be slow this year. Even after we know who will be President, there may be Senate races that are close or contested for some time. Then, we have the special case of Georgia. State law requires a runoff on January 5 if no candidate gets 50% of the vote. Georgia has 2 Senate races. Both are close, and one or both may result in a runoff. So even with a clear Biden victory, we may have no idea how big a stimulus package could get by the Senate until some time in January.

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