Harsh Republican Restrictionism Loses Bigly in the Midterms

President Donald Trump deliberately made this election about the alleged threat of immigration rather than his real accomplishments on the economy, ICE Protestwhich, apparently, were just “boring” to him. He tried to sow fear and panic in the wee hours of the election about the migrant caravan—going so far as to call this the “election of the caravan.” He claimed that the caravan was composed of criminals, and included Middle Eastern terrorists. He deployed 15,000 military troops on the Southern border, threatening to shoot them if they threw stones. He promised to scrap birthright citizenship by executive order. This was so over-the-top that House Speaker Paul Ryan called him and begged him to cool it and talk up the economy instead. To no avail. Trump responded by tweeting that Ryan “knew nothing about” birthright citizenship. Ryan called again and begged again and was ignored again.

So how did hardline Republicans who followed Trump’s rather than Ryan’s strategy do?

Not well, to put it mildly.

Iowa’s Rep. Steve King, who out-Trumped Trump, won his re-election bid but just by a squeaker. FiveThirtyEight had put the odds of King, a shameless racist, keeping his seat at 80 percent for the simple reason that his district is overwhelmingly white and hardline Republican. He made headlines some months ago when he tweeted his support for far-right Dutch candidate Geert Wilders noting that Wilders was right in keeping out non-white immigrants because “you cannot rebuild your civilization with other people’s babies.” King endorsed white nationalist Faith Goldy for mayor of Toronto and gave an interview to Unzensuriert, a publication associated with Austria’s Freedom Party, which was founded by a former Nazi SS officer and is now led by Heinz-Christian Strache, who was active in neo-Nazi circles as a youth. He had previously commented that undocumented Mexicans have “calves the size of cantaloupes because they’re hauling 75 pounds of marijuana across the desert.”

In the last few weeks, a la Trump, he’d taken to banning news outfits like the Des Moines Register and The Weekly Standard from his events because he didn’t like their coverage.

All of this took toll on his final tally. In the past he’d won this district by double digits. This time? Less than three points!

His other ultra-restrictionist colleagues weren’t so lucky.

The four most anti-immigration hardliners were: Kris Kobach (Kansas governorship), Corey Stewart (Virginia governorship), Dave Brat (U.S. House from Virginia) and Lou Barletta (U.S. Senate from Pennsylvania).

Stewart and Barletta never really had a shot. But Kobach and Brat’s seats were winnable by the GOP had it fielded the right candidates in these largely conservative districts. Instead, they lost.

Kobach, the Kansas secretary of state, readers will recall, was the author of Arizona’s notorious “Your Papers Please” law. Subsequently, as Matt Welch wrote, he tried to make a career out of chasing the non-existent problem of illegal immigrant voter fraud, even heading Trump’s voter fraud commission before it was disbanded because of Kobach’s rank incompetence.

Slate points out, he spent years promoting Crosscheck, a program that ostensibly detected double voting but actually had an error rate of 99.5 percent. He pushed a law that compelled Kansans to provide proof of citizenship in order to register to vote, then defended it himself at trial—at which point it became clear that he had zero understanding of the basic rules of civil procedure. A federal judge repeatedly reprimanded him during the hearings, then ruled against him and held him in contempt of court. Although a lawyer, he was ordered to take six hours of remedial legal classes. Kobach also built a lucrative legal practice talking cities into passing ordinances that punished landlords and employers who did business with undocumented immigrants, only to then lose in court when the laws were inevitably challenged.

All of his added up to a 4.5 points loss for him. (His career might be dead unless Trump, as per rumor, nominates him to replace Jeff Sessions as Attorney General. That, if nothing else, would make for joyous confirmation theater as Democrats publicize his record of mischief.)

Brat lost by a smaller 1.5 point margin. But the outcome was still stunning given that only four short years ago, Brat, a professor and a political neophyte, ousted House Majority Leader Eric Cantor in an upset victory largely by berating Cantor’s support for comprehensive immigration reform. In this round, not only did Trump endorse him but Steve Bannon traveled to Virginia to stump for him. His opponent, Abigail Spanberger, however, made Brat’s hardline position a major campaign issue, mobilizing suburban women against him in an open repudiation of his and Trump’s anti-immigration agenda.

One last thing, some Republicans are suggesting that Trump’s harsh immigration policies and rhetoric delivered for Ron DeSantis in the Florida gubernatorial race. DeSantis’ opponent was Andrew Gillum, an arch progressive lefty, whose nomination everyone initially believed meant a sure-shot victory for DeSantis. After all, Republicans have won the governor’s race in this state for the past 20 years. But DeSantis eked out a mere 0.7 point victory. Why? Because DeSantis’ alignment with the president in a heavily Latino district was major liability. Had he not gone full-blown Trumpist and refused to distance himself from the president’s excrescences on the caravan and birthright citizenship, there is a very good chance that he would have won by a far wider margin. Ditto for the Ted Cruz-Beto O’ Rourke Texas senatorial race that Cruz won by a mere 1.5 points!

It is hard to see these results as anything other than a repudiation of Trump’s hardline immigration nonsense. As Cato Institute’s David Bier notes, the House is now the most pro-immigration it has been since at least the 19th century. The last time the Democrats controlled the House, they couldn’t even get a majority of the House to support a very restrictive version of the Dream Act. This time, House Democrats are unified on providing a pathway to citizenship for Dreamers, legalization of long-time illegal residents, and doubling legal immigration, while permitting only moderate enforcement measures to be attached. There are no anti-immigration Democrats in the House now. In addition, a contingent of pro-immigration Republicans survived, and they would likely join any effort to improve the legal system.

So the question now is if Trump will get the message and start working with Democrats on sensible immigration reform sans his poison pills like demanding a 40 percent cut in legal immigration in exchange for legalization of Dreamers. Or keep doubling down on a bad bet and do to the Republican Party what he did to his casinos: Bankrupt it with his ill-advised gamble.

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Fake Trump Supporter Scams Conservatives Out Of $150,000 On GoFundMe After Being “Disowned”

A twitter grifter claiming to be a black Trump supporter has scammed conservatives out of $150,000, after claiming she was disowned by her parents for “coming out” as black Trump supporter, reports NYmag

Over the past few months, the conservative sections of social media have become fixated on the #WalkAway campaign, urging Democrats and minorities to take off their blinders and join the Republican party. Late last month, it seemed that the Republican party had added a black college student named Quran to its ranks. –NYmag

The woman, a Howard University student named Quran, tweeted: “I will not hide any longer,, the left has made us feel as if us black republicans should hide!! but not anymore!! #BlacksForTrump #WalkAway #maga” on October 27. 

Quran then tweeted: “thank you all so much for your overwhelming support. After seeing this tweet my parents cut me off and refuse to pay my university tuition. So if you can find it in your hearts to help this young, black republican pay for school it would be appreciated,” which included a link to a now-inactive GoFundMe campaign.

She then posted – and was called out on – a fake text exchange with her “mother,” after which she came clean, tweeting “hot take: stealing from republicans isn’t bad because republicans arent ppl,” followed by “Trump is a racist, homophobic, transphobic, bigot AND YOU THINK MY BLACK ASS WOULD SUPPORT THAT ROTTING CARROT??”  

@chckpeas also posted what appears to be an order for a $1250.00 iPhone XS Max:

Quran even received support from some on the left – one of whom said she would send her money “just for doing this.” 

All in all, Quran was rumored to have raised $150,000 through the GoFundMe campaign – though she told NYmag that her take was much lower. 

Unfortunately, I have to be the buzzkill and report that the rumors of Quran’s take are highly exaggerated. Over the phone on Saturday, Quran admitted that she didn’t raise much of anything, and that she’d refunded what she had received. “That’s between me and the IRS,” she said coyly when I asked how much she’d gotten. –NYmag

“I just honestly didn’t want to take their money. Yeah, I can’t pay for school but I don’t want Republican money to pay for it,” she told NYmag, adding “I just want everyone to think I’m the finesse queen, which I am.”

It’s also possible of course that she lied to NYmag‘s Brian Feldman. Perhaps sensing prison time in her future, she said on Tuesday that she will return the money, tweeting “returning 150k… do y’all think I’m stupid??” 

According to Feldman, Quran says her only regret is that “she wishes a better photo of her had gone viral.”

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Bond Traders Shocked By Dismal 30Y Auction As Direct Bidder Collapse Continues

When discussing yesterday’s stellar 10Y auction, we said that we expect today’s sale of $19 billion in 30Y paper to show the same collapse in Direct bidder demand observed that has been observed for the past 2 weeks. Well, that’s precisely what happened. However, it was much more than just that in what was a truly dismal auction.

Starting at the top, the yield on today’s 30Y auction was 3.418%, the highest since April 2014, which tailed the When Issued 3.395% by 2.3bps, the biggest delta in years and a major surprise for the market which did not expect such a poor topline demand heading into today’s auction. The bid to cover was also dreadful, printing at just 2.058, not only far below last month’s 2.419% and the six auction average 2.36%, but also the lowest since February 2009.

Meanwhile, it was the internals where the big “surprise” was to be found once again, as the ongoing Direct bidder collapse emerged again, with Directs taking down just 2.9% of the auction, far below last month’s 12.8%, and the lowest since Sept. 2009. The Treasury has yet to provide some argument or justification for the ongoing boycott by this aspect of the buyside. Offsetting the plunge in Directs was a relatively strong Indirect bid, if at 59.1% it was also the lowest since March 2018. Rounding off the demand were Dealers, who took down 38.1% of the auction, the highest since August 2015.

Overall, this was the ugliest 30Y auction in years – perhaps a function of growing concerns about America’s double deficits and continued spending – and the response in the bond market was instant, with the 30Y yield jumping by 2bps in the secondary market and pushing the entire curve notably wider as shocked bond traders did a double take at today’s results.

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Kass: A Divided Nation We Stand

Via RealInvestmentAdvice.com,

“As societies grow decadent, the language grows decadent, too. Words are used to disguise, not to illuminate, action: you liberate a city by destroying it, Words are to confuse, so at election time people will solemnly vote against their interests.” – Gore Vidal

Thus far, the stock market’s immediate response to the split decision last night is upbeat – with S&P futures +26 handles at 5:25 a.m. For now this is affirmation of the notion that gridlock is market friendly – but that can change on short notice!

Adjusted for the futures rise, the S&P Index is now slightly above my projected 3-6 month range.

With risk v. reward now stretched, I am shorting S&P futures at an equivalent of $287.20 in the premarket.

* Conventional and consensus wisdom – regarding the election outcome – was confirmed last night

* The end of one man’s rule (Trump), without any restraint, is now over

* Democratic marquee candidates disappointed and the Republicans were rewarded with a larger than expected Senate majority

* The Democratic House win comes with powerful committee ownership – for the first time in two years the Administration will now have a check against their agenda

* Even more volatility and uncertainty lies ahead

* I am now (opportunistically and in premarket trading) adding to my short book

Some Brief Observations:

1) The ugliness of the political scene over the last two years is likely to get more ugly. Though Trump will likely be emboldened – there is now a fundamental difference and divide from the recent past (“checks and balances”). The President no longer has a subservient (Republican) House to deal with anymore – the new (Democratic) House is in marked opposition to his agenda. The President will continue to argue that he is at the epicenter of power (see his tweet of a few minutes ago, below) – he no longer is.

Donald J. Trump @realDonaldTrump

.@DavidAsmanfox “How do the Democrats respond to this? Think of how his position with Republicans improves-all the candidates who won tonight. They realize how important he is because of what he did in campaigning for them. They owe him their political career.” Thanks, I agree!

Donald J. Trump @realDonaldTrump

Those that worked with me in this incredible Midterm Election, embracing certain policies and principles, did very well. Those that did not, say goodbye! Yesterday was such a very Big Win, and all under the pressure of a Nasty and Hostile Media! 

2) As we move towards 2020, the U.S. political scene is headed for a period of elevated animus (even more than we have seen in the past few months) between the Democratic and Republican parties. Whether it’s the affirmation/restoration of voting rights, gerrymandering, infrastructure, the border wall (and other immigration moves), healthcare, etc. – rhetoric will grow even more heated.

3) There will be more finger pointing and infighting between the Administration and the traditional Republican leadership (“Paul Ryan branch of Congress”) over the next few weeks.

4) There will likely be a host of White House Cabinet firings over the next few weeks. Some that are staying will be getting “lawyered up.”

5) In the lame duck session there will be plenty of fighting over the border wall and other Trump initiatives – it will get messy.

6) I suspect little administratively will be achieved over the next 12-18 months – as the end of one man’s rule (The President) is over.

7) The President now faces a hostile judicial and intelligence committees which will have subpoena power over the President.

8) While some industries like the financial sector seem, in theory, to be vulnerable to new committee leadership – I am uncertain as to whether any meaningful changes will be introduced.

9) The legitimacy of the Mueller investigation – a constant thorn in the President’s side – will likely be reinforced by the Democrats. (The political and other consequences are yet unknown).

10) The cast of Democratic Presidential hopefuls probably got even longer as a result of last night’s elections. Harris, Booker, Warren, Sanders and Biden – the preliminary early line favorites – will have a lot of company on the dais.

Bottom Line

After last night’s election, the political sands are likely shifting.

While I have a view of the market’s vulnerability from current levels based on economic, interest rate, etc. influences it is unclear (at least to me) how last night’s election split-decision results will impact the markets over the near term – despite the initial positive reaction overnight.

Gun to my head, I would say the probability that the early and favorable market response to last night’s split-decision will be short lived.

I believe, as in September, 2018, an overshoot to my expected trading range remains possible – I plan to short that overshoot, if it extends further.

While the only certainty is the lack of certainty, the period of a new regime of heightened volatility should continue and is likely to be a steady state through 2019.

In summary, more volatility and uncertainty lies ahead.

The markets will get harder, not easier, to navigate over the next six to 12 months.

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New California Gov. Gavin Newsom Has Been ‘Vocally Anti-Gun Every Chance He Gets’: New at Reason

California Gov. Jerry Brown, a Democrat, isn’t exactly known as a staunch defender of the rights of Golden State voters to legally keep and bear arms.

But fellow Democrat Gavin Newsom—who won the governor’s race last night against Republican John Cox—is probably worse. Newsom has “been vocally anti-gun every chance he gets,” says Brandon Combs, president of the Sacramento-based Firearms Policy Coalition (FPC).

Once Newsom takes office, defenders of the Second Amendment may come to miss the state’s outgoing chief executive, writes Declan McCullagh for Reason.

View this article.

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“You Are A Rude, Terrible Person”: Trump Unloads On CNN’s Jim Acosta During Tense Press Briefing

President Trump and CNN’s Jim Acosta got into a verbal altercation during a contentious press briefing Wednesday. 

While asking Trump about a northbound migrant caravan making its way to the southern US border, Acosta challenged Trump’s characterization of the group as an “invasion.” 

Acosta asked “Why did you characterize it as such?” to which Trump replied “because I consider it an invasion. You and I have a difference of opinion.” 

Do you think that you demonized immigrants?” Acosta shot back. 

“Not at all, no – not at all,” Trump replied. “I want them to come into the country, but they have to come in legally. You know, they have to come in Jim through a process. And I want people to come in, and we need the people.”

Acosta then questioned Trump on an midterm advertisement showing “migrants climbing over walls and so-on,” to which Trump fired back: “They weren’t actors.” 

After more barbs were exchanged between the two, Trump said: “Honestly, I think you should let me run the country, you run CNN, and if you did it well, your ratings would be much better.” 

Acosta then refused to sit down, leading to a standoff in which a White House aide tried to take his microphone.

Trump then dressed down Acosta: 

“You know, CNN should be ashamed of itself having you working for them. You are a rude, terrible person. You shouldn’t be working for CNN.” 

Watch: 

Watch more here: 

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An Alabama County Votes to End Sheriff Abuse of Jail Food Funds

|||LUCY NICHOLSON/REUTERS/NewscomAn Alabama sheriff’s decision to build a beach house with funds intended for inmates’ food exposed a controversial loophole in jail funding. On Tuesday, voters in another Alabama county passed an amendment to reform the practice.

In March, a report indicated Etowah County Sheriff Todd Entrekin purchased a $740,000 beach house in Orange Beach. The beach house included four bedrooms, an in-ground pool, and canal access in a ritzy part of town. Both the beach house and a handful of other properties owned by Entrekin and his wife began to raise questions about finances, considering Entrekin only makes a five-figure annual salary. As it turns out, Entrekin pocketed $750,000 allocated by the government to feed inmates in the Etowah County Jail over three years. Not only is Entrekin entrusted with the money by law, but such a decision to keep the “excess funds” has been widely accepted as legal for decades.

Just an hour away in Cullman County, Sheriff Matt Gentry decried the practice as ruining the reputation of Alabama sheriffs. He instead touted support for the Sheriff’s Food Bill, or Local Amendment 1. The amendment sought to add a constitutional protection to make the use of the funds more transparent. Under the amendment, the money would be placed in a public account and all excess funds would go toward law enforcement operations like deputy equipment. The account would also be subject to an audit by the state every two years.

On Tuesday, Cullman voters overwhelmingly passed Local Amendment 1 with a little over 87 percent of the vote.

Though counties like Cullman are making a concious effort to close the loophole, and Entrekin has since lost his bid for reelection, there is still a statewide problem. Several sheriffs have taken advantage of the public funds while similarly maintaining that they are covered under state law. Gov. Kay Ivey (R) took a small step to change the way sheriffs receive public money for inmates’ food. Rather than depositing the funds into personal accounts, Ivey directed the state comptroller’s office to deposit the funds into official county accounts. Unfortunately, Ivey is limited in making a directive that would prevent sheriffs like Entrekin from using public funds for personal use. Such a change in legislation would need to be carried out by the state legislature.

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Washington State Carbon Tax Initiative Loses

CarbonTaxChuongyDreamstimeVoters in Washington State have soundly rejected—54 to 46 percent—the Carbon Emissions Fee and Revenue Allocation Initiative, a.k.a. Initiative 1631. Championed by a coalition of environmentalist and otherwise progressive activists to address the problem of man-made global warming, the initiative would have imposed a $15 per ton fee on emissions of carbon dioxide starting in 2020, increasing by $2 per ton until 2035. The levy would have raised more than $2 billion in its first five years. The monies collected would have been distributed by a board of political appointees to fund renewable energy, public transit, and various conservation projects.

Initiative 1631 did garner a higher percentage of the votes than the 2016 carbon-tax-and-rebate 732 Initiative, which was defeated 59 to 41 percent. Many of the activists who supported the 2018 carbon tax inititiative were opposed to the 2016 carbon tax proposal. Why the difference? After all, both initiatives aimed at reducing the emissions of carbon dioxide that are contributing to man-made global warming.

The answer: Unlike Initiative 1631, Initiative 732 was designed to neither increase nor decrease state revenues. That meant that there was no kitty of new tax money available for the politically favored groups to shower on their pet projects. Instead, Initiative 732 would have lowered the state sales tax from 6.5 to 5.5 percent, increased the Working Families Tax Credit for low-income families, and reduced the business and occupation tax rate from 0.484 to 0.001 percent.

A carbon tax by itself would encourage folks to move toward buying and using lower-carbon energy technologies and services without the need for government agencies to “invest” tax dollars in politically favored green projects. When you tally up the reasons that 1631 failed, consider the possibility that many voters recognized that it would hike their utility and gasoline bills to fill a green pork barrel.

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Ranked-Choice Voting in Maine May Affect House Race Results

Undecided voterMaine’s new method of voting for Congressional candidates may well change the outcome of the race to represent the state’s Second District.

Right now, with 78 percent of the vote cast, incumbent Republican Rep. Bruce Poliquin has a tiny lead over Democrat Jared Golden, 46.2 percent to 45.7 percent. The problem for Poliquin, though, is that he doesn’t have more than 50 percent of the vote, and with Maine’s new ranked-choice voting system, that means he cannot yet be declared the winner.

There are two other independent candidates in the race, Tiffany Bond and William Hoar, and between the two of them they’ve got 8.1 percent of the vote. The independent votes are keeping either the Democrat or Republican from getting a majority win.

Under Maine’s ranked-choice system, assuming the rest of the votes don’t give either of the front-runners a majority victory, there’s going to be an instant runoff. But voters will not have to return to the polls. When they voted Tuesday, they were asked to rank each of these candidates in order of preference (they didn’t have to if they didn’t want to; they could just choose one or rank just the ones they support). What will happen next is that the candidate with the fewest votes will be dropped from the race. Right now, that’s Hoar. The ballots will then be recounted. For the 6,000 people who selected Hoar as their first choice, Maine will now count their second-ranked candidate as their choice for the House. And so a four-person race become a three-person race.

That still might not be enough to put either Poliquin or Golden above 50 percent. In fact, it seems very likely—Hoar is getting just 2.4 percent of the vote at the moment. So then, assuming Bond is still in third, she’ll be dropped from the race and we’ll go through another round of vote tallying. For anybody who voted for Bond, the person they ranked next will be their vote. Then with just two people left in the race, obviously one of them will have to hit the 50 percent threshold. In the end, even though Poliquin is ahead this first round, he could end up losing to Golden if more of Bond’s and Hoar’s voters ranked Golden higher.

This system has been put into play by Maine voters via ballot initiative partly as a way of encouraging voter participation and third-party candidate participation and to encourage Democratic and Republican Party candidates to consider more than just partisan turnout. Some cities have ranked-choice voting for local elections. Maine is the first to attempt it for wider races. The intent is to make it so that people don’t feel as though they’re “throwing their vote away” by choosing a third-party or independent candidate. They can still then select a more mainstream candidate as their second choice.

It’s certainly not perfect though. For any voters who selected only Hoar and declined to rank the others, their ballots will be “exhausted,” fundamentally meaning that it’s the same as voting for a fringe candidate in a winner-takes-all race. But that would have happened anyway in the more typical voting system.

The big test will be if the switch to ranked-choice voting brings out more voters and if those voters are happier with the outcome, even if their first choice didn’t win. It may be tough to determine if ranked-choice changed turnout this election because it appears midterm participation is up across the country this year compared to previous elections. Maine’s secretary of state predicted record turnout for this year’s midterms.

Yesterday’s ranked-choice voting only applied to U.S. Senate and House races (independent progressive incumbent Sen. Angus King easily won majority vote against libertarian-leaning Republican Eric Brakey and Democrat Zak Ringelstein). Voters in Maine actually want ranked-choice voting to apply to state government races as well, but the state’s constitution clearly states that only a plurality is needed to win state-level elections. It will have to be amended to fully implement the will of the voters. Currently gubernatorial front-runner Democrat Janet Mills is above the 50 percent threshold and if the numbers stand, she’d win without the ranked-choice system playing a role, even if it had applied to the governor’s race.

As we watch Maine’s experiment in ranked-choice voting play out, voters in Fargo, North Dakota, have decided to support a new and different way of handling local elections. By a vote of 64 percent, citizens in Fargo have decided to adopt approval voting for city elections.

For approval voting ballots, citizens are asked to mark each candidate they approve of, not just one. In a city council race with five candidates, for example, a voter could support just one of them, or several of them, or even all of them. When the ballots are tallied, the candidate with the most approval votes wins.

This is another mechanism that makes it possible to vote for third-party or independent candidates without the problem of throwing votes away. It’s supported by The Center for Election Science, who put out a release last night cheering on the voters.

“Fargo voters have chosen a practical solution to the plights that come with our terrible choose-one voting method,” Center Director Aaron Hamlin said. “They are armed against vote splitting and spoilers. And they’ve equipped themselves with a tool to elect strong candidates, encourage diverse ideas in campaigns, and permit support for favorite candidates without worry about viability.”

Fargo will be the first city in the United States to introduce approval voting and it will affect the next race for city commissioner in 2020.

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JPM’s Kolanovic: “A Split Congress Is The Best Outcome For Markets”

One week ago, amid a duel of forecasts between Morgan Stanley “rolling bear markets” thesis, JPMorgan’s head quant Marko Kolanovic tripled down on his bullish outlook, when he cautioned that “many investors are positioned for a ‘rolling bear market’ and are exposed to the risk of a ‘rolling short squeeze’ into year-end.”

He also predicted that after the US market sell-off and slowdown in China, “progress on the trade war is more, rather than less, likely.” And echoing the sentiment presented by Nomura’s Charlie McElligott, who earlier today anticipated today’s market melt up as levered funds chase indices into year end, Kolanovic said that with global Hedge Funds down ~4.5% and the market up ~2% YTD, missing the past week’s ~5% rally would have made a big difference, especially as their shorts moved more than longs.

In retrospect, and 6% higher from the October 30 lows, Kolanovic was right, and after solid gains over the past several days, the JPM strategist says that “the question is what should investors do next?”

Perhaps not surprisingly, Kolanovic remains bullish and thinks that the market will move higher into the year-end, as “investors may have to participate on the upside (appropriate exposures may be high-beta indices such as Russell 2000 and MSCI Emerging Markets)” especially in the context of McElligott’s source of “short gamma” which is pushing the market ever higher the more stocks rise. Furthermore, Kolanovic notes several factors that improved since last week “that keep our upside view intact.” He lists the following:

  • November is shaping up to be the strongest buyback month on record (based MTD activity observed by the JPM desk).
  • Short convexity of market makers is rapidly declining and may turn long. This should be positive as it will bring back intraday reversion as opposed to momentum. This reduces realized volatility, and many investors will misconstrue this as a return of the ‘buy the dip’ environment.
  • Realized volatility is expected to decline. Systematic investors (such as vol targeters) will start rebuilding positions into year-end. This may not be a main driver, but could add ~$1bn of inflows per trading day into year-end.
  • Implied volatility has declined, with the VIX term structure reverting to contango. For some strategies this is a positive signal.
  • Next week, 1M price momentum will turn positive for most equity indices globally (1M ‘anniversary’ of the crash), and may lead to CTA inflows or short covering.
  • Elections have passed, and it removed the tail risks of a blue wave (impeachment, repeal of tax reform, etc.). This should be positive for sentiment.
  • Split congresses have historically been positive for the market, and this time it reduces the probability of the most negative trade war outcomes.
  • The US earnings season turned out to be one of the strongest in a decade: 98th percentile on bottom line, 97th percentile on top line, above average on guidance/revisions

Kolanovic then rounds out his note with some observations on the US midterm elections, stating his “out of consensus” belief that a split Congress “is the best outcome for US and global equity markets.” Specifically, policies of the US administration in 2017 were strongly pro-business (we pointed that out in 2016). However, in 2018, policies of the US administration were strongly anti-business.

Kolanovic also counters conventional thinking by saying that if we had a “red wave,” the administration might have seen it as an endorsement of the trade war, and attempt to mitigate the breakdown in global trade with more US fiscal expansion (e.g., 10% middle-income tax break, etc.).

As the President cannot count on Congress or the Fed for more easing, he will need to do what is in his power to keep the economy rolling – drop the damaging trade war and turn it into a winning deal.

Finally, the JPM strategist coments on the October sell-off whichhe dubs as “one of the more curious events in US financial history.” This is how he frames last month’s freak market rout: 

In 2015, we were saying that systematic investing and electronic liquidity provision can yield any price outcome regardless of fundamentals. The worst 1-month sell-off since Lehman this October reminded us of this again.

While the fuel for the sell-off was systematic flows, low liquidity and HF deleveraging, the catalyst was politics. It was essentially a miscalculation and a conflict between the US Administration and Fed going into important midterm elections. Shortly before the sell-off, we wrote about Equity markets being very uneasy with the increasingly hawkish rhetoric from the Fed. At the same time, we pointed out that Trump may be miscalculating on trade and the US market was not pricing the negative EPS impact of a trade war. The reasons for the Fed ramping up hawkish rhetoric going into one of the most important midterm elections in US history will continue to be questioned by market practitioners. There was a global trade war scheduled to start, signs of stress from US housing to emerging markets, an ongoing crisis in the Eurozone (Italy), and finally the worst 1-month sell-off since Lehman (recall that historically rhetoric eased/turned dovish for much smaller reasons such as the last French elections).

Going into the election, the US administration perhaps miscalculated that the NAFTA deal would be enough to prop up market sentiment, and that the Fed would provide dovish ‘cover’ for the trade war. In the context of rallying the Republican base on immigration and trade (rather than winning independents and moderates), trade rhetoric escalated going into election (e.g., the ‘Super Micro’ affair). A dovish Fed would have propped up markets and underwritten the trade war policy going into election, but the hawkish Fed ended up triggering the market crash.

His conclusion is that the “catalysts for the October crash were miscalculations on both sides, and we hope lessons will be learned.” Whether he is right will largely depend on Trump’s actions going forward: whether he takes a conciliatory stance having lost the House, or if – as some such as Goldman have suggested – Trump will double down on his trade war rhetoric and efforts, and pushes even harder on his core policies which would lead to another round of market instability.

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