Making Hay Monday - Special Edition

Rising Odds of a November Red Wave?

“The near assassination of Donald Trump could be a moment that catalyzes more hatred and an even worse cycle of violence. If that is how it goes, God help us. Or it could be a redemptive moment that leads to introspection and political debate that is fierce but not cast as Armageddon. The country was spared the worst on Saturday and this is a chance to pull out of a partisan death spiral. That is the leadership Americans are desperate to see.” -The Wall Street Journal, Op-Ed

Associated Press

On Saturday at approximately 6:11 p.m., EDT, the United States of America literally dodged a bullet. If that sounds sensational, consider what was likely to happen had the projectile been a mere inch or two to the right. Apparently, a miraculously timed head turn is all that saved our country from an event that could have ignited an outbreak of violent conflict between American citizens unseen in 160 years. Tragically, at least one innocent bystander was not as fortunate. 

As they used to say when I was growing up, we are interrupting our regularly scheduled program — in this case, publication — to discuss the investment implications of this narrowly avoided cataclysm. First off, I will reiterate that I have long had serious misgiving about Donald Trump’s former and, potentially, future presidency. Most readers are aware I was a strong supporter of No Labels’ attempt to put forward a bipartisan “Unity Ticket”. My deep apprehensions about a rematch of two controversial and divisive personalities have, I think, been thoroughly justified. 

The June 28th debate starkly revealed both President Biden’s on-going mental decline — which would be a concern for the CEO of a Fortune 500 company, much less president of the United States — and former President Trump’s loose relationship with truthfulness. For many, it’s an almost impossible choice between the lesser of two evils… or, at least, it was.

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In my mind, Donald Trump’s almost inexplicable survival changes the narrative in a major way. Further, it has significant investment implications. In that regard, it’s not actually the presidential election outcome probability that has meaningfully shifted, in my admittedly non-expert political view. In the aftermath of President Biden’s debate debacle, the betting lines — historically, more accurate than polls — were already decidedly skewed in Mr. Trump’s favor. 

RealClearPolitics

In the wake of the attempted assassination, the odds in his favor have moved up, but not dramatically. At around 65% it’s unlikely they’ll trend much higher, given the inherent uncertainties in determining probabilities almost four months out. Rather, it is the “down ticket” — i.e., House and Senate races — impact that has likely swung far more in the GOP’s favor. For the first time, Donald Trump may have some serious coattails for Republicans to ride. And this is where I suspect the financial markets may be in for a surprise.

There was already a decent possibility of a red wave come November, with the House becoming more crimson and the Senate flipping over to the GOP. Now, it’s reasonable to conclude that this has become the probable scenario. The contrast between the image of Donald Trump rising up from behind the podium and defiantly raising his fist — ear partially shot off, blood streaming — with that of President Biden haltingly entering Air Force One Saturday night was beyond vivid. In my opinion, the Trump visual is one for the ages, and is likely to pull millions of undecided voters into his camp — and that of the GOP. 

David Sacks

As my close friend Louis Gave wrote today, when the former Brazilian president was wounded in a knife attack it created a powerful surge of support for him. This is highly likely to happen in the U.S., as well. American voters are well aware of the propaganda campaign that has been waged against Donald Trump by the far left. Consequently, in the wake of his near murder, they are likely much more sympathetic to a man who previously has had the knack for alienating all but his most devoted supporters

Obviously, there will be a number of twists and turns between now and November, but it’s hard to believe those will carry anything close to the impact of the attempted assassination of Donald Trump and, particularly, his reaction to his very near-death-experience. 

The bizarre fact that the shooter was a mere 130 yards away will pour gasoline on the smoldering fires of distrust on the right and, increasingly, the center of the voting public. The reality that there wasn’t a single Secret Service agent on that nearby roof, which has astounded former senior members of this elite unit, is akin to dumping napalm on the charred landscape of our faith in the federal government and its agencies. The Republicans in Congress are sure to pounce on this, as well as reports that the head of the Secret Service turned down requests for more security by the Trump team.

This barely averted disaster, which thankfully only claimed one innocent life (truly remarkable, considering how many shots were fired into the densely packed crowd) is likely to be viewed by the majority of Americans as another indication of our descent into national chaos. On the other hand, it offers former president Trump the chance to appeal to a broader swath of the American public than he has in the past by convincingly calling for national healing and unity. (Please note the words “the chance”.)

Someone approaching 80 years of age, who can behave as Donald Trump did when his head was nearly blown off, is almost certain to be highly appealing to independent voters during times like these. Love him or loathe him — and I know Haymaker readers are comprised of those who have both feelings toward Donald Trump — sometimes in the same person, you have to give the guy credit for guts and poise. That was a true profile in courage that, candidly, I didn’t think he possessed.

If I’m right that most voters will be willing to overlook his myriad flaws because they realize the country needs a strong leader, when each day seems to bring a new crisis, and hand him a landslide win, there is a high probability the Senate and House end up in Republican control. That might be viewed as a positive by many investors, though I realize it’s also appalling to millions of Americans and not just on the left. However, I’m going to make the case that such a red wave, if it does hit our shores, poses serious risks, especially for the bond market. And if bonds get hit hard enough, the stock market will have a difficult time escaping collateral damage. Ironically, a weakening economy may well elevate these dangers to the Treasury market. 

Please allow me to explain.

For the last month or so, we’ve been pointing out the three “Rs”, as in: Recession Risks Rising. An increasing number of bright people I follow, the majority of whom were not previously recession worrywarts, are expressing their concerns. Yet, Wall Street at large remains solidly sold on the soft- or no-landing thesis. That’s why a recession happening now would be so destabilizing. 

If one does strike, bonds are likely to experience what Jeff Gundlach refers to as a “Pavlovian Rally”, as I’ve previously relayed. Presently, the recent stream of poor economic data, some of it shockingly so, has already triggered a bond market bounce (yields falling and prices rising). Should the economy continue to weaken, as I think is probable (not certain), and if come January the Republicans are in full control, the urge to “save the day” will be almost irresistible. This is nearly certain to be the case with Donald Trump who has repeatedly shown his preference for easy money policies even during good times. (There are press reports swirling around this week’s Republican National Convention suggesting a new Trump administration may attempt to replace Jay Powell with a more pliable Fed chairman.)

As I’ve written and said on countless occasions, one of my uber concerns is what happens to the $2 trillion federal deficit when the U.S. enters the next recession. We may soon find out. If a Trump-led GOP, which should now coalesce around him as it never has before, has no checks against, say, massive tax cuts to fight an economic downturn, the red ink might swell to Covid-like dimensions. It’s possible it could be even greater. If so, the current disinflation trend in many goods and services — though, certainly not all — might reverse almost overnight. 

Beyond the upside risks to inflation, and the downside risks to the bond market, it may be worthwhile to consider other winners and losers from a potential Red Wave. Commodities would seem to be a logical beneficiary of loose fiscal and monetary policies. You may have noticed they’ve been perking up even despite a fed funds rate north of 5%. The combination of even bigger deficits and a Fed easing cycle should be nirvana for real assets. Energy equities in general and oil services stocks specifically might experience a particularly pronounced lift.

Defense spending is likely to surge even more than it already has. Our plan for today was to run a series of charts on stocks registering impressive breakouts above multi-year resistance. One of those is a leading U.S. defense contractor. We intend to run those next week, barring some other shocking event.

On the other hand, technology stocks with nosebleed valuations may be vulnerable. Mr. Trump has clearly had a most adversarial relationship with the leading tech companies, particularly those with an inclination towards censoring him. 

The U.S. dollar is also probably in jeopardy. There’s little doubt “The Donald” would like to see it much, much lower than where it presently trades versus other currencies. This is particularly true versus the Japanese yen. 

A closing comment is that if some degree of sanity doesn’t return soon to American politics, we may be approaching the sell-by date for what we’ve been calling The Great Disconnect. That refers to the extraordinary — we’d argue, unprecedented — divergence between euphoric financial markets and a nation teetering on the edge of social chaos. Donald Trump’s brush with an assassin’s bullet has the potential to move us away from the brink… or push us into the abyss. Let’s hope and pray this turns out to be the healing event America so desperately needs.

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