It’s been a long time since I have been on the wrong side of a limit down move. I think the last time was after the terrible tsunami when Japanese Prime Minister Naoto Kan held a press conference to calm the Japanese people. Unfortunately he came out wearing a nuclear hazard jump suit and the next thing I knew, the Nikkei futures were locked limit down.
Although I don’t write much about my day to day zipping in and out of the markets (I prefer to focus more on longer term themes that I leave on for more than a few hours), I am making an exception today. Last night as the markets begun to realize the pollsters had once again underestimated the public’s level of pissed off’ness, the stock market got clubbed like a baby seal. The fact that Trump might well win the election scared traders manning the overnight shift on the turrets. As panic set in, the S&P puked 50 handles, then 60, 70, 80, 90 and finally went limit down 106 points at midnight.
I can’t remember where I started buying. I know it was early, and I haven’t been that embarrassed by a premature performance in 30 years. By midnight when the S&P futures went locked limit down, I was offside. Big time. That piece of trading is nothing to be proud about and some yahoo trying to bottom tick the spooz is nothing that insightful.
Here is the part I want to focus on. The knee jerk reaction from this risk off behaviour was for traders to bid up the long bond. Stocks are puking, better buy some fixed income. After all, it’s worked for ages.
But why were stocks limit down? Because Donald Trump was about to become the next President of the United States. Yet the Donald is the most bond unfriendly President you could ever dream up. He has a plan to spend a trillion dollars with no increase in tax rates. In fact, he wants to also lower taxes. He has openly talked about renegotiating the debt, and although he now understands this is non-starter, it gives a general sense of his attitude towards bond owners. Donald Trump made his fortune by taking advantage of easy credit and aggressively dealing (screwing) bond holders. He campaigned (and was a large part elected) on a protectionist platform that will be inflationary. I could go on, but you get the drift - Donald Trump is a bond owner’s worst nightmare.
So even though I was offside and hurting badly from my poorly timed stock purchases, I felt bonds were incorrectly rising on the knee jerk typical reaction. With a pit in my stomach, I loaded up the futures ticket and sold the long bond. I shorted it with both fists.
Proving you are better off being born lucky than smart, I managed to time this trade better than my stock purchases, and a couple of hours later, the pressure was off. Stocks had managed to crawl off the limit down level, but more importantly, bonds finally reached the same conclusion as I had. The whole curve sold off hard, with the long end leading the way down.
I am writing this on two hours of sleep and I feel more tired than Trump’s 10 year old son standing beside his father at the 3am victory speech.
I will discuss this further in coming days, but this election marks the beginning of a giant bear market in bonds. The old notion of hiding in fixed income as a safety outlet during risk asset sell offs needs to be shelved. It will only get you in trouble.
Thanks for reading,