The Election Day nightmare scenario that markets fear the most is actually the most likely possibility. Contrary to the perception of Trump voters, the nightmare scenario is not Secretary Clinton winning the presidency and contrary to the perception of Clinton voters, the nightmare scenario is not Mr. Trump winning the presidency. The nightmare scenario is that neither candidate will come up with a decisive win to slay the other.
Consider this. This is the first time in modern history where one candidate for the major party has flat out refused the idea of conceding the race. This is the first time in history where one candidate has claimed that the whole election is “rigged,” openly undermining the very foundations of U.S. democracy. Fully half the population agrees with him and is motivated to change the system by any means necessary.
Now add one more factor: The 2000 election and the Gore v. Bush U.S. Supreme Court ruling, which many legal scholars believe was the single worst judgment since the Dred Scott decision. In the year 2000, Mr. Gore meekly walked off the political stage in order to save U.S. democracy.
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Expect no such repeat from the Clinton camp. Mr. Trump may have been the first to militarize politics in the United States, but Mrs. Clinton and her supporters are now just as willing to fight. At this point, both sides are so radicalized that anything but victory will be met with resistance both legal and maybe even physical.
So even a simple 270 vote majority in the Electoral College (and there are about half dozen ways how such a narrow result could be the outcome this year) will not be enough. Both sides will instantly challenge the results. And with the Supreme Court now standing at an even eight justices, SCOTUS may not provide any lasting resolution to the case.
Over the past century, the one unifying theme of the U.S. democracy has been the peaceful transition of power. Mr. Gore did it in 2000 with President Bush and Mr. Nixon did it in 1960 in a very tight and controversial race with President Kennedy.
No such common agreement appears to exist today. If nothing else, the 2016 election has shown that every acceptable norm of civil behavior has been abandoned amid partisan rancor. Whether we like to admit it or not, the country is fighting a silent Civil War and the anger is unlikely to subside unless one side racks up an overwhelming victory.
Amid such an undertow of turmoil, the markets are blissfully complacent. With final polls giving Mrs. Clinton a 2%-4% lead, risk assets have rallied, the dollar has been bid and equities put in their best rally in weeks yesterday. There is no doubt that investors prefer Mrs. Clinton — who is viewed as the candidate of continuity — to Mr. Trump – who is seen as a wildcard both politically and financially.
A Trump win will likely tank stocks, the U.S. dollar, the Mexican peso and the Canadian dollar. Over the past few days, both the Swiss officials and the Japanese, perhaps sensing the oncoming calamity, have announced that they will unequivocally intervene in the markets to keep the franc and the yen from appreciating too fast in case investors flock to those two popular safe harbor assets.
But I think all the pre-game maneuvering ignores the much bigger risk to investor assets and to the global economy in general. Markets hate uncertainty and so do businesses. If we find ourselves in the midst of a vicious protracted, political war of attrition by the end of the day, with neither side willing to concede and with the very fate of the Republic in doubt, investors will sell first and ask questions later.
Currencies, as always, will be the first to react to such developments. Long before the NYSE and NASDAQ officials even consider the opening of equity markets, the currency markets will trade at full strength and will absorb the implications of such a scenario. Despite the best efforts of the Swiss National Bank and the Bank of Japan, if we do find ourselves in a Constitutional crisis on November 9, the FX markets will overwhelm the officials as dollar dumping will be the one and only trade.
Oh, and one last thing.
If November 8 brings no clear resolution, it won’t matter if you voted blue or red. The only thing that will matter is if you hold yellow in your portfolio.