Stock markets .. an unknown fate

The chances are increasing that the US presidential election, scheduled for November 3, will turn into chaos.

There is a set of scenarios posed to those working in the financial markets that could not have been thought of before.

Bloomberg News asked these scenarios in the form of questions, including what if President Donald Trump lost the election and refused to recognize the result? And what if Democratic challenger Joe Biden loses and refuses to acknowledge the result? What if Trump wins the majority in the electoral college and loses the popular vote, opening the door to a wave of popular protests that the country has not seen before? According to Jared Dillian, economic analyst and author of "Street Freak: Money and Madness in Lehman Brothers," which won the 2011 Newsweek Book Award, these scenarios are not the only ones on the table.

Dillian added that he is inclined to the scenario associated with counting the votes that will be made through the mail, which may set a record this time due to the coronavirus pandemic. Democrats in general tend to vote by mail during the pandemic, while Republicans tend to vote at the polls. Therefore, Trump may lead to Biden with the start of the counting of votes, then begin to retreat with the arrival of the next ballot papers in the mail and counted. Therefore, we can imagine what the political climate would look like under such a scenario.

Dillian says he is not talking about who wins the elections, because financial markets are now focusing more on the nature of the election process than on the outcome.

The problem with voting by mail, from his point of view, is not in the possibility of fraud, but rather in the long time that it will take for the process of counting and collecting these votes.

The world will make fun of the United States when it comes on November 3 and passes without announcing the name of the winning president, whose announcement may be delayed by several weeks.

Dillian said in an analysis published by Bloomberg, "We learned that investors took precautions before the elections in order to protect their investment portfolio from any rapid decline." This step usually takes the form of buying "placing options" on a broad market index, but also these measures can include strategies. Hedge more complex.

It is noteworthy that "options placement" contracts allow the investor or investment fund to bet on the future of a company or an index, as the contract allows its owner to sell the company's shares at a specific price before a specific date, regardless of the share price in the market.

Hedges have become common, which has led to a significant increase in the levels of implied market volatility. Bloomberg News reported that it is taking place

Considering the current US presidential election the highest risk event for financial markets in history in light of the usual way of betting on

Twists and turns. Unusual, however, is that volatility increases with stock prices, which is rare. Hedging against elections is only partly responsible

On this phenomenon.

And history says that when the volume of money market trading is extremely large, it is unlikely that things will go well. Imagine if every investment fund bought "put options" contracts on a broad market index, before the elections.

If the stock prices fall after the elections as expected, the funds will sell their options as a precaution, as the contracts will have increased in terms of

Value, but the decision by funds to abandon hedging purchases will cause the stock market to rally further. This means that if everyone expects lower prices, it is difficult for the market to retreat in a sustainable way, and this will lead to the kind of contradictions that we see recently, where a negative event occurs and at the same time the markets rise.

It can be said that investment hedge funds and stock market practitioners are not currently hedging against an undesirable outcome for them.

For the elections, that is, the victory of the Democratic candidate, Joe Biden, who is ahead of Trump in most major opinion polls, and pledges to increase taxes, which is bad for the economy and markets, but they are hedging for what is more dangerous, which is the collapse of the entire electoral process and the country's entry into a constitutional crisis. What if the Constitutional Court intervened to settle the dispute over the election results, as happened in 2000? In that period, the stock market was already at the height of the crisis of the bursting of the technology stocks bubble, but the uncertainty surrounding the election results formed strong and continuous pressure on stocks throughout the last quarter of that year.

Finally, economic analyst Dillian says that investors have spent most of the months of this year trying to find out how the stock market is this good while the economic conditions are very bad. One can imagine the extent of contradiction and antagonism investors will face during the last two months of this year after the elections.