Vote with your heart, trade with your mind.
Good morning and welcome back to the future. I sat down to scribe my morning vibe and penned a dinger of column. Before I knew it, I trashed the zesty 'fest and wanted to take the morning walk in a different direction. It's not often that you arrive at historical inflection points and somehow I wasn't quite doing it justice. It's not so much about the immediate price action--although we'll certainly talk to that--it's about the ramifications of our collective judgment and the years we face ahead.
I wouldn't wish the last five years on my worst enemy. Financial implosions and terrorist explosions were the lowlights of what was a terrible time for the human race. The world seemed friendlier before that, almost pleasant by default and full of beautiful bounties. Our boundaries were tested, both domestically and internally, as we found within us the fortitude to respond. With pain came perspective, and with it a wisdom to frame the future we together face.
I've been known to be bearish and I'm quite conscious of that fact. Perhaps I've let my past shape my judgment at times, a sin in trading but a reality to man. My concerns manifest during times of choice as we're conditioned as humans to shape with the tools we've acquired. It would be inconsistent for me to hide my eyes, even if they're sometimes tainted and often far-sighted. And from what I can see, clarity is something that will remain elusive regardless of how quickly we crown a King.
While each candidate will surely lead us down a different path, the ultimate economic destination is constant. Our past largesse and current obligations have left us in a hole that dwarfs either candidate's ability to dig. The bullish scenario, from where I sit, is elasticity--as long as the ability to borrow expands and the time horizon of our debt elongates, equities can continue to romance.
It's not unlike the dollar spigot that flushed away our past concerns although few realize that our basis of investment has diluted 30% since 2002. Indeed, the smarter sages I talk with are uniform in their belief that our government must inflate away our debt via imported inflation. Both dynamics can occur coincidently but it can't continue indefinitely. Sooner or later, the stress will tax the system and fatigue will set in.
I've had numerous conversations with Brian Reynolds over the years about this very dynamic. I remember sitting in Elio's on the upper east side in early 2003 as he discussed the mountain of debt that was "rolling out." He opined that we had bought ourselves a window and offered that a sharp rally was likely in the cards. I bit my lip at the time as I thought he was being seduced by the upside sirens. Sure 'nuff, the steam was let out of the financial mechanism and investors collectively breathed a sigh of relief. I'm not sure how much is left in Hoofy's lungs, mind you, but I'm conscious that the Fed is standing by with a respirator in hand.
The immediate future is a function of emotions, expectations and conventional wisdom. The universal belief that a sharp, hard lift awaits any clarity has picked up further sponsorship. The path of least resistance is higher, it appears, and it is now considered reckless to take the other side of that bet. I will offer that one-sided boats have a proclivity to capsize (remember the early October "breakout"?) and I've been trading with a spate of "underneath" puts on my book. The idea that this election will be contested is a statistical improbability but that may not be the panacea that some are hoping for.
Gaming the outcome and the attendant reaction is guesswork on the part of investors. With that said, the idea that a Bush win would lead to a "pop and drop" while a Kerry victory induces a "drop and pop" is something that has been dancing through my head this morning. I share that with a grain of salt as I'm not necessarily "setting up" that way (yet). I do, however, plan to trade the tape as my eyes see fit and define my risk on every position. The next few days (weeks, months) promise to be chock full of nuts and I don't plan to join them in a rubber room.
It's easy to confuse our world with the world, particularly when we're immersed in the flickering ticks each day. And while I have a less than pleasant vision of where this country is heading, I have learned that the purpose of the journey is the journey itself. In short time, we'll know who will be representing us and we'll have to stand beside him or stand aside. Half the nation is bound to be unhappy but the rebuilding process must take place brick by brick, person by person and Minyan by Minyan.
All we can do is what we can do, my friends, and it all starts with a single step.
Good luck today.
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