Fiscal MIA = More K

Elsewhere, President Trump citing fraudulent mail-in ballots once again reiterated his reluctance to relinquish the Presidential title.

Reporter: "Win, lose or draw in this election, will you commit here today for a peaceful transferal of power after the election?"

President Trump: "We're going to have to see what happens."

The President, raising the stakes on uncertainties surrounding the upcoming election and the legal challenges that may ensue, due to the high probability of a contested outcome. Conditions are ripe for a constitutional crisis of sorts and risk assets will struggle to price the eventual policy path under what could be an extended period of uncertainty.

However, the real question on everyone’s lips right now, whether the reversal of the explosive summer equity and precious metals rallies alongside a declining dollar, is a run of the mill correction or the beginnings of something more sinister. The answer likely lies somewhere in between with both economies and financial markets still in unchartered waters with the pandemic at the helm and unconventional policies in overdrive.

These are not normal times in financial markets, speculation has been rife. A retail trading bonanza has ensued after years of being pre-conditioned to buy the dip in a pavlovian response to the “Fed Put” and the ongoing destruction of savings. August was a blow off top extreme fuelled by extreme behaviour in short dated options. A gigantic gamma squeeze higher in thin summer liquidity. In many ways this corrective move is just an escape valve for the wealth of frothy price action and excessive multiple expansion we witnessed throughout August as the Nasdaq powered higher in a parabolic move.

Despite the 10% drawdown of recent highs, hedging activity has not picked up markedly.

Throughout history this has been a rare occurrence signalling perhaps an air of complacency remains.

However, in sympathy for complacency, the same underlying thesis remains intact that propelled risk assets off their March lows when the world was in the thick of the pandemic induced crisis. Central banks will not stop here and the determination of investors to hunt yield cannot be taken lightly.

Although, with the election uncertainties mounting, lagging fiscal and spectre of fresh lockdowns don’t expect a repeat of Augusts parabolic move higher. At this stage it is doubtful US markets can recapture highs prior to the election.

The Fed’s pain threshold may only be another 5% lower, the inexorable bubble being blown in risk assets leaves nowhere else to go. Fed programs have paused in recent weeks and there is capacity to add, with more tangible direction on QE a starting point following the lacklustre reaction in risk assets to the new AIT regime. Although, further actions undoubtedly representing the true definition of Albert Einstein's idiom on insanity.

"Insanity is doing the same thing over and over again and expecting different results.".

These are all temporary solutions exacerbating problems we cannot escape with present policy – like asset price inflation fuelling mounting social inequalities and wealth disparities, inter-generational inequalities, and the proliferation of zombie companies.

There is only so much monetary policy can do here and the US economy is in desperate need of more fiscal.