US elections : clear and present danger

William de Vries is head of Core Fixed Income at Kempen Capital Management.

The latest US elections polls show that Donald Trump’s campaign clearly has positive momentum, quickly diminishing the gap between him and Hillary Clinton.

Deep in our heart we fear he is going to win the presidency, despite all our logic reasoning why he should not. It is all about emotions, not what he stands for, nor the prospect of a better government policy.

Trump will get the public vote, because people do not like Hillary, or because they do not like Obama, or Bill Clinton. Trump voters do not like Washington, birth control, weapon control, democrats, and certainly not liberals. Some of them hate Mexicans, black people and the Chinese in general.

If you add up all these negatively motivated people, it is a pretty large group, and they will go vote on the 8th of November. Meanwhile the democrats are in disarray, with Hillary Clinton not being able to create more enthusiasm amongst her voters. While they recognise the dangers of a Trump presidency, they seem less motivated to vote in November. Barack Obama clearly recognises this.

Last week, in an invigorating speech to the black caucus foundation he told his public to “go vote… do not insult the legacy of my presidency by not voting… All we have achieved in these years is at stake…” Strong words from the American president, whose approval rating is growing by the day. Too bad Hillary seems to have lost it.

And with Trump winning, uncertainty grows: amongst people, amongst investors. Maybe the recent events in North Carolina point at something we have not seen for a long time in the US.

Minority groups feel what is happening, and instead of going to the ballots they riot, not willing to accept that Trump “will turn back the time… and make America great again”.

Will we see more US cities declaring “states of emergency” and using curfews? Investors should be really wary of this. Central bank policy has been the dominating theme on the capital markets, pushing up equity valuations while keeping volatility low.

But now, one might expect that the US elections are becoming the dominant market theme.

As uncertainty causes higher volatility, equity markets will show larger downward corrections. And treasury markets might profit. In fact, one could argue that that the rally in bonds that started this week is not the result of a more dovish Fed.

Instead, it is the result of investors cutting back on their riskier positions as uncertainty in the US is growing. Wall Street fears Trump, but is buying more US treasuries indeed the less risky position?

After all, who was the candidate stating that defaulting on US treasuries is a possible solution for the debt problem? You find the answer below.

“Nobody knows debt better than me. I’ve made a fortune by using the debt. If things don’t work out, I renegotiate the debt. That’s a smart thing, not a stupid thing.” – Donald Trump, June 2016 

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