GeoMacro

We maintain 37% odds of a major recessionary oil shock, 51% odds of minor shocks, and 12% odds of no shocks.

One of the best things about working at the world’s largest – and oldest! – market research firm is that the “vault” contains research on almost any conceivable topic. As such, I pen this short missive to flag to the GeoMacro clients three reports on the risk of tech regulation – relevant in the context of the October 8 US Department of Justice statement that it may look to force Google to divest parts of its business.

The month of October ahead of a US general election tends to be a volatile month with negative outcome for equities. As such, it is prudent to remain on the sidelines until after the election.

The US election underscores three long-term trends of Generational Change, Peak Polarization, and Limited Big Government. Investors should expect more volatility around the election and should assess the results before adding more risk. While we predicted the October surprise from the Middle East, more surprises are coming before the final vote is cast.

Western policymakers are pursuing three capital “T” Truths: China is evil, climate change is a major risk, and Russia is… also evil. Pursuing all three priorities at the same time presents a version of the classic “impossible trinity.”

October seasonality tends to be negative for stocks in an election year. That is the only thing that has stayed our hand from shifting out of our tactical underweight on US equities, initiated – poorly – in July. But the big macro news from September has not been bearish. The Fed has signaled jumbo cuts. Within seven weeks, the US central bank intends to cut by 100bps! Meanwhile, China appears to have reached a “policy bottom,” with its September 26 Politburo meeting signaling an extraordinary rhetorical shift towards fiscal policy. As such, we are starting to sniff out global reflation, akin to the 2015-2016 mid-cycle slowdown. The labor market data still worries us. It is clearly deteriorating, on paper. Is it because of an imminent recession or “normalization?” It is difficult to say. We are open minded. Finally, the Middle East tensions are again on the horizon. If Iran stays its hand against Saudi energy facilities – which we expect it to continue to do – the Iran-Israel conflict is a sideshow. Nonetheless, with global reflation afoot, we went long oil last week, on September 26. As such, geopolitics is a neat tailwind to that call.

Iran has launched a salvo of ballistic missiles towards Israel on October 1 in retaliation for Israeli ground invasion against Lebanon. Thus far, the attack looks to be a bit different from the attack in April, with ballistic missiles making up the bulk of the reported projectiles. This means that the emphasis on drones, which were highly unsuccessful, has been replaced with an emphasis on missiles.

Our quant model shows Democrats winning the election at a 56% probability, with 303 electoral college votes. But swing state economies are slowing and Democrats’ odds in Michigan fell. Trump can win with Georgia, Michigan, plus one other state. Neither the Fed nor China’s stimulus should reduce one’s odds of a Republican upset.

Markets are rallying on Fed rate cuts and China stimulus but there will also be October surprises ahead of the US election, which Trump could still win. Russia’s conflict with the West is escalating and the Middle East is destabilizing further. Investors should favor US bonds but they should add some risk in emerging markets in response to China’s policy turn.

Chinese stimulus measures announced on September 24 found few structural optimists in the global macro community, us at BCA Research included. This is for good reason. China is mired in secular stagnation that cannot be unstuck by monetary policy alone.