Doug Noland: Critical Juncture

I have never been more concerned. Having watched “money” and Credit run increasingly amuck over recent decades, I have long harbored fears of an inescapable future of calamitous financial, economic, social, political and geopolitical instability. That future is now unfolding.

I posited that the U.S. election was the single largest event in terms of market hedging – much of it through derivatives. Moreover, this most hedged event was occurring in a most speculative market environment, having followed an unprecedented $3.0 TN expansion of Federal Reserve “money.” Odds were high this was not going to go smoothly. In the event of an outcome hostile to the markets, sinking securities prices had the potential to spur massive self-reinforcing derivatives-related selling. But if an adverse outcome didn’t materialize, the unwind of hedges could spur markets higher while stoking speculative excess.

Was the U.S. election outcome really so overwhelmingly positive for securities of all stripes everywhere? I would argue it was yet another example of an overreaction from dysfunctional markets – an upside dislocation in highly synchronized markets dominated by derivatives and speculative trading. From my analytical perspective, it was further corroboration of the late-stage global Bubble thesis. Markets have grown incapable of adjusting to developments in an orderly and reasonable manner.


We’ve grown accustomed to the “new normal”: Stock market ebullience even as the country suffers through a distressing confluence of hardships. The S&P500 surged 7.3% this week, the strongest weekly advance since April. Though the 2000 recount and supreme court decision were not without drama and enmity, when has our country struggled through such a distressing election season?

As Democrats headed into the election with commanding leads in most polls, a malleable bullish narrative shifted to a “Blue Wave” (and resulting massive stimulus) being great for stocks. With Joe Biden the apparent President-elect and Republicans poised to hold the Senate, the narrative has switched to “divided government is beautiful for the equities market”.

The prospect of a divided Washington would seem to take some pressure off the vulnerable Treasury market – and, through lower Treasury yields, corporate Credit more generally. And I appreciate that divided government has in the past worked to the advantage of the bull market status quo. But are we to believe in today’s crisis backdrop an irreconcilably split and hostile Washington will somehow function to the benefit of the markets and our nation?

I have never been more concerned. Having watched “money” and Credit run increasingly amuck over recent decades, I have long harbored fears of an inescapable future of calamitous financial, economic, social, political and geopolitical instability. That future is now unfolding.

I posited that the U.S. election was the single largest event in terms of market hedging – much of it through derivatives. Moreover, this most hedged event was occurring in a most speculative market environment, having followed an unprecedented $3.0 TN expansion of Federal Reserve “money.” Odds were high this was not going to go smoothly. In the event of an outcome hostile to the markets, sinking securities prices had the potential to spur massive self-reinforcing derivatives-related selling. But if an adverse outcome didn’t materialize, the unwind of hedges could spur markets higher while stoking speculative excess.

The Nasdaq100 (NDX) surged 9.4% this week. More than a third of NDX stocks posted double-digit gains for the week. Facebook jumped 11.5%, Tesla 10.8%, Microsoft 10.5%, Apple 9.2%, and Google 8.7%. Qualcomm surged 17.6% and Nvidia jumped 16.2%. Options trading – institutional and retail – has been booming, with the big tech stocks as favorite targets. This key aspect of the raging speculative Bubble this week worked to propel huge price spikes.

Ten-year Treasury yields sank 13.5 bps in Wednesday (post-election) trading, a huge move that pushed yields down to 0.765%. Sure, the Republican hold on the Senate would reduce the likelihood of massive (possibly $3 TN plus) fiscal stimulus programs. Yet short covering and the unwind of hedges clearly played an instrumental role in the Treasury price spike. Treasury yields were back up to 0.82% by Friday, ending the week down a not earth-shattering 5.5 bps.

Perhaps the week’s most intriguing (consequential?) moves were in the currencies. The U.S. dollar index declined marginally Wednesday in the face of surging equities, Treasuries and corporate debt prices. But the dollar was slammed 1.1% Thursday and then added to losses on Friday – with the dollar index ending the week down a notable 1.9%. Wild currency volatility does not bode well for general financial market stability. Gold jumped $73 this week to $1,951, with Silver surging 8.5% to $25.66.

Post-election unwind of shorts and hedges coupled with the sinking dollar incited panic buying throughout the emerging markets. The iShares Emerging Markets (EEM) ETF (with a 120 million shares short position) surged 7.2% this week, trading to the high since April 2018. Major indices were up 11.0% in Poland, 6.9% in Russia, 7.2% in Turkey, 6.9% in Chile, 5.8% in India, 4.2% in Mexico, and 7.4% in Brazil.

In EM currencies, the Brazilian real jumped 6.8%, the Czech koruna 4.6%, the Polish zloty 4.3%, Hungarian forint 4.2%, South African rand 4.1%, Colombian peso 4.0%, Indonesian rupiah 2.9%, Mexican peso 2.8%, Russian ruble 2.7% and Chilean peso 2.7%. Ten-year dollar bond yields collapsed 60 bps in Ukraine, 33 bps in Turkey, 25 bps in Mexico and 22 bps in Indonesia. Local currency yields sank 43 bps in South Africa, 36 bps in Russia, 25 bps in Peru, and 22 bps in Hungary.

The Euro Stoxx 50 equities index jumped 8.3% this week. Germany’s DAX and France’s CAC40 equities indices both surged 8.0%, with major indices up 9.7% in Italy, 6.5% in Spain and 6.0% in the UK. Stocks were up 4.3% in Japan (Nikkei 29-year high), 6.7% in Hong Kong, 4.4% in Australia and 4.5% in Canada.

Was the U.S. election outcome really so overwhelmingly positive for securities of all stripes everywhere? I would argue it was yet another example of an overreaction from dysfunctional markets – an upside dislocation in highly synchronized markets dominated by derivatives and speculative trading. From my analytical perspective, it was further corroboration of the late-stage global Bubble thesis. Markets have grown incapable of adjusting to developments in an orderly and reasonable manner.

President Trump has called into question the integrity of the entire U.S. election. The nation now faces the ugly prospect of a contested election. The President had intimated that such an outcome was possible. I was hoping he would surprise us all by demonstrating restraint. I’m still hopeful that he can be convinced not to put the country through such an ordeal – especially at a Critical Juncture.

Covid is just a flu. No, Covid is historic with myriad far-reaching ramifications. It is leaving deep scars. The death count has surpassed 235,000. It has left millions without jobs. The virus has illuminated inequality in newfound ways – certainly including a booming stock market in the face of acute economic and social hardship. It has left society only more insecure, anxious and on edge. It altered the character of what was already a pivotal election.

The pandemic spurred a shift to mail-in ballots – which changed the nature and timing of the vote count. This has opened up the opportunity to delegitimize an election despite record participation. And losing faith in the election process – in the core of our democracy – is but one more of our nation’s sacred institutions today placed squarely in harm’s way.

It is deeply disappointing to witness an election where seemingly everyone comes out of the process only further disillusioned. The election was not perfect. How could it be, with record participation during a pandemic? There are issues to be investigated and adjudicated. But this is not the time to exploit peoples’ frustration and exasperation. Social strife is at the cusp of boiling over. It was shocking and disheartening to hear the President call the election a fraud. It’s appalling that popular talk show hosts incorporate disinformation and sophisticated propaganda methods to incite outrage. This is getting too close to openly inciting violence in the streets.

Has it really come to this? An election loss unleashing a scorched earth strategy. There’s too much at stake during this critical period for efforts to delegitimatize the election and the new administration.

I’ll still assume that the national interest prevails over individual and partisan ambitions. Politicians and the media surely recognize our nation has become a tinderbox. They have a moral responsibility to deescalate the situation. A smooth and peaceful transition of power has never been more crucial.

I have been waiting anxiously for the election to be completed so attention could be focused on the spiraling out of control pandemic. We’re in a crisis – and the “gridlock is great for stocks” narrative lacks credibility. What is in store for the final 11 weeks of the Trump presidency? Hopefully his administration will work closely with Biden’s transition team on a host of issues – with vice president Pence redoubling the Coronavirus task force’s focus on a national Covid strategy.

Friday’s new infections surpassed 125,000. Cases are surging in an increasing number of states. Hospitalizations are rising rapidly nationally, with an expanding number of communities facing healthcare crises. And, increasingly, state and local officials are under pressure to adopt measures to try to control the outbreak. Let’s put politics aside and focus on getting this pandemic under some semblance of control.

“In America, we hold strong views. We have strong disagreements – and that’s OK. Strong disagreements are inevitable in a democracy. Strong disagreements are healthy. They are a sign of a vigorous debate – of deeply held views. We have to remember, the purpose of our politics isn’t total unrelenting, unending warfare. No. The purpose of our politics – the work of the nation – isn’t to fan the flames of conflict but to solve problems; to guarantee justice; to give everybody a fair shot; to improve the lives of our people. We may be opponents, but we are not enemies. We’re Americans. No matter who you voted for, I’m certain of one thing: the vast majority of the 150 million Americans that voted – they want to get the vitriol out of our politics. We’re certainly not going to agree on a lot of the issues, but at least we can agree to be civil to one another. We have to put the anger and the demonization behind us. It’s time for us to come together as a nation and to heal. It’s not going to be easy. We have to try. My responsibility as President will be to represent the whole nation. And I want you to know, that I’ll work as hard for those that voted against me as those who voted for me. That’s the job. That’s the job. It’s called the duty of care – for all Americans. We have serious problems to deal with: Covid, the economy to racial justice and climate change. We don’t have any more time to waste on partisan warfare. And more than that, we have such an incredible opportunity to build the future we want for our kids and our grandkids. I’ve said many, many times: I’ve never been more optimistic about the future of this nation. There is no reason we can’t own the 21st century. We just need to remember who we are: This is the United States of America. There’s never been anything, anything we’ve been unable to do – unable to accomplish when we’ve done it together.” Joe Biden, November 6, 2020.

This is a Critical Juncture in our nation’s history. Let’s agree to disagree on many issues. Let’s be civil. We desperately need more listening and less villainization. Can we not be more tolerant? As a nation, we need to bring the temperature down. We should hold those inciting anger and violence accountable. We desperately need to begin the process of unifying our great nation as we confront more challenging times ahead. I very much appreciate Mr. Biden’s tone. Let’s give him a chance.

Original Post 7 November 2020


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Categories: Doug Noland, Perspectives