Economic Populism is an economic approach that prioritizes growth and income redistribution while downplaying the risks associated with inflation and deficit financing. This perspective is particularly relevant in today’s political climate, where leaders like Trump and Harris are poised to make significant fiscal decisions that could lead to risks in the bond markets due to potential fiscal dominance.

Economic Populism Trades: Capitalizing on Real Assets

In navigating this economic landscape, several trades stand out as advantageous under the economic populism framework. Here’s a quick look at these potential trades:

1. Short WNZ4
2. Short MOMO
3. Short SX5E
4. Short UXU4
5. Long XBTUSD
6. Long RTY
7. Long FXI
8. Long KRE
9. Long XAU/SPX

These trades reflect a strategic approach to harnessing the benefits of economic populism while hedging against potential downturns.

Insights from Financial Leaders

I find it valuable to focus on the unknowns and the insights shared by industry leaders. Two particularly interesting sources of thought are Ken Griffin and Ray Dalio.

Ken Griffin’s Perspective

1. The reduction in uncertainty is almost always a positive sign for asset prices.
2. We are currently at a peak of uncertainty, but post-election, we can expect a risk-on environment as a new regime takes shape.
3. This prevailing uncertainty will eventually dissipate.

Ray Dalio’s Warnings

1. Democracies face the risk of fragmented and antagonistic decision-making, which can lead to ineffectiveness and poor outcomes.
2. This ineffectiveness can pave the way for populist autocrats to rise, who promise to restore order and serve the interests of the masses.
3. A strong, capable leader is often sought in times of chaos to bring stability and improve conditions for citizens.

Market Trends and Predictions

Drawing from the insights of these financial leaders, it’s clear that the market is steering us toward what can be termed Trump Trades. Here’s a breakdown of the factors guiding this conclusion:

1. Technical Analysis (30%): We need to pay attention to key support levels in equity and fixed income, as they are at risk of breaking.
2. Flows (30%): Recent data indicates long-only clients net sold $10 billion in stocks last week, and macro leverage across assets is at year-to-date lows.
3. Positioning (20%): Market positioning is clear, and the outcome will be chased aggressively.
4. Valuation (10%): While equity appears expensive, fixed income is closer to fair value.
5. Sentiment (10%): The market has had a challenging year, leading to a lack of conviction among investors.

The Dawn of a New Supercycle?

We may be on the cusp of a new Supercycle, where the equity market emerges as the premier carry trade. Historical data showcases five notable post-war super cycles:

1. 1949-1968: SPX annual returns averaged 14% due to economic growth and lower geopolitical risks.
2. 1968-1982: The SPX saw annual returns of -4% amid high interest rates and labor unrest.
3. 1982-2000: A modern cycle with 16% average annual returns, characterized by lower volatility and a collapse in capital costs.
4. 2000-2009: SPX annual returns dropped to 9%, impacted by bubbles in tech, housing, and banking sectors.
5. 2009-2020: Another 16% annual return, fueled by zero interest rate policies, quantitative easing, and the tech sector’s dominance.

From 2000 to 2024, the SPX has averaged annual returns of 13%, with key themes including the resurgence of inflation, AI’s rise, and post-pandemic economic realities.

Factors Influencing the New Cycle

1. A new cycle is set to begin, influenced by expanding fiscal deficits.
2. To generate significant volatility, we would need the US30 yield above 5%, a decisive democratic sweep, or a contested election.
3. For risk management, consider shorting MOMO as a tail risk strategy, which can work well in the context of rotation from RTY to Nasdaq and amid concentration risks. Additionally, China remains a viable liquid idiosyncratic trade.

Navigating the Future

The probability matrix of reaction functions paints a complex picture of potential market outcomes based on varying electoral results. As we look ahead, understanding these dynamics will be crucial for navigating the evolving economic landscape.

As we prepare for the future, the interplay of economic populism, market positioning, and investor sentiment will shape our financial strategies and inform our decisions in this unpredictable environment.