Forget the Election, Near Future May Come Down to Stimulus

Most traders are focused on the election and potential volatility around it, but there could be massive volatility in the next year. A secular shift into value/commodities could be underway or a shock downturn in the markets if credit don't improve or government deficits don't offset the lack of private borrowing.

A few of the funds, stocks, and currnecies that could be impacted by the election are below. Long-term, the election will be a footnote for most assets. The U.S. dollar is headed in the same direction either way. USG's fiscal deficit is headed in the same direction. However, the risk of another dollar "bull" rally is higher with Trump because of his trade and economic policies. If Republicans hold the Senate, Biden's spending plans will be limited. If Democrats take the Congress, they will eliminate the filibuster, lowering the risk of defection on spending and other bills. That's the most bearish scenario for the dollar.

The dollar looks bearish. As covered in recent posts, it broke its very long-term trendline. The past two breaks met sustained selling for 18 to 24 months. A rebound to 96 would invalidate the analog. A rebound would not invalidate a bear market, but as long as it could sustain a rally, the terminus of such a move could have a wide range of possibilities. A break of 88 on the downside would be the point at which I'd through caution to the wind when it comes to weak dollar trades. For short-term trades, the most volaitle outcome would probably be Trump win expressin in KRW and CNY.

Solar, marijuana and guns are all at interesting junctures because while they have rallied strongly (perhaps the Biden bet), they could be in techncial breakdowns if a Trump win reversed even a little of the recent gains. I added a new marijuana ETF, symbol MSOS, that covers the U.S. market. That is the best bet for those bullish on cannabis legalization at the state or federal level. Also added natural gas and fracking ETFs. There are much bigger issues at play with these sectors including high debt levels, but natural gas looks like it might have bottomed. Perhaps a Trump win would be the spark that ignites the sector.

Commodities and infrastructure also look bullish here. I'm using a bunch of ag ETFs inatead of futures because they are confirming or look set to confirm bullish developments on the futures charts. Copper and copper miners have both taken bullish turns. I threw in Nigeria because I think it is the best example of a resource-exporting frontier market. It looks similar to some of those ag charts.

Cryptocurrencies are showing bullish patters. Bitcoin needs to crack $13,800, call it $14,000, to hit that red box at $17,000 by year end.

I remain long-term bullish in gold miners. I have sold my TLT puts and bought some SIL puts to hedge. Long commodities, crypto, value and inflation looks much more attractive than long technology and major indexes. The Dow, S&P 500 and Nasadaq peaked in September. Only the Russell 2000 has moved higher and it still has bearish potential. The seeds for a post-election correction led by technology are there, particularly with a Trump win. Longer-term, the weight of evidence is moving in favor of a secular shift in markets and inflation.

That said, take a look at Nigeria around 2016, a similar pattern followed by a breakout that failed at the calendar turned to 2018. Every central bank intervention before has produced brief spikes in commodities, emerging markets and inflation expectations. Every spike was followed by new lows as structural deflation in the eurodollar market reemerged. Putting it together, commodities and value look good in the next 6 to 18 months with risk of a post-election correction. Reassess moving forward based on major fundamentals such as DXY, copper price, etc.

Far more important than the election is the real economy. Total Loans and Leases at commercial banks (TOTLL) have reversed most of their covid gains. Year on year growth is back to 2018 levels, consistent with the stagnating post-2008 economy. Government stimlus must remain high if private borrowing doesn't pick up. If borrowing doesn't pick up or stimulus doesn't offset weak private borrowing, all these bullish charts are going to sour fast in 2021.

The 30-year mortgage keeps falling despite a rebound in long-term government bond yields. This should bottom and turn higher if there's a general bullish resolution after the election or major stimulus.

The clearest asset to me remains gold and maybe Bitcion because the central bank and government will act if the economy sinks. Gold can climb even if monetary intervention fails. At some point in that scenario, gold and even gold mining shares will stop falling with other assets because investors will realize the government's interventions are failing. They will start pricing in more and larger interventions into the gold price. This will be expressed in the gold/copper ratio making a bullish breakout. Right now it looks like it wants to trend back into the pattern...