Sunday Thoughts
Uncertainty. We deal with it every single day. Some jobs deal with certainty, where deviations from 100% feel like a mistake or failure. In investing, uncertainty is the default position. It’s omnipresent, and hence, it is our job to interpret and benefit from it. I find it amazing how many Bloomberg pundits and articles point to uncertainty as a reason to be cautious. The upcoming election is a case in point. Of course, it is highly uncertain, but is this a worse setup than we had in 2016? I would disagree. Back then, the unthinkable wasn’t even considered in financial circles, and no stress test scenarios were being drawn up for Trump’s unlikely win. I had positioned for him to win, yet pretty much all my trades didn’t work out the way I thought they would.
We have a bit more than two weeks to run, and I am reading through research reports predicting quite sizeable market moves on the day. Bonds: +/- 40 bps, USD: +/- 5%, Stocks +/- 10%. That’s crazy. I would bet handsomely against this predicted volatility. I think there will be a tremendous opportunity after the election. I opined on it in Friday’s Charts.
As we run into November 5th, I have asked Macro D to write about possible scenarios and outcomes. He is writing a 3-part series, one of which will be posted during the week. I am really looking forward to it. This year has been a bit of a surprise for election results, as we had to deal with swings in expectations in France, Mexico, Japan, Germany and Austria, just to name a few.
One trade I am eyeing up is EUR/MXN, which has cheapened considerably over the past few months. In fact, it is pretty close to levels seen in the aftermath of the 2016 election. Both currencies will likely suffer from a Trump win as tariffs would likely be a drag on growth. The longer-term chart below shows that we are close to the middle of the big Bollinger bandwidth.
As a longer-term macro trade, is this worth considering even if Trump wins and more uncertainty gets priced in? The lines below show the spot rate in orange and the forward in green. The purple line shows the carry where we are collecting 8% a year to hold the trade. I would think this to be a pretty good risk/reward into 2025, possibly even from better levels if Trump wins.
The asset allocation model presented last week was fully invested into the SPX for last week and did not hold bonds. Thank you for all your kind comments & questions. You will find the model output for the coming week further below.
Let’s now see what Macro D’s latest thoughts are before we scan the upcoming weekly calendar for the most important macro events. We then check the 10 most relevant charts for the upcoming trading week before analyzing the allocation model’s latest output.
Let’s go!