Publisher, The Lead-Lag Report
Senior Managing Editor’s Note: Last week, Charles sat down with Freeport Society friend and editor of The Lead-Lag Report Michael Gayed to discuss the extreme volatility that exploded through the markets on Monday, August 5. The insights they shared were not only interesting, but invaluable… particularly because they considered what’s likely to come next and how to protect and grow your investment portfolio accordingly.
This is an area of great interest to Michael because of his unmatched intermarket analysis skills. And it’s a topic he has a lot to enlighten us on.
That’s why, today, we’re sharing an essay from Michael, in which he explains what political impact last week’s volatility could have.
To read The Lead-Lag Report and more from Michael, you’ll find everything here.
- Teresa B.
It’s been a wild 10 days in markets… and for me personally.
Since August 2023, I’ve been pounding the table about the risk that Japan poses to the global financial system. The monetary cycle mismatch between Japan and every other country – everyone was raising rates except Japan – was too good for investors to pass up. They ramped up their leverage by borrowing capital from the Land of the Rising Sun at minimal to no interest expense.
They used that cheap capital to buy any manner of investments, from T-bills to Nvidia (NVDA) stock and everything in between. This made them vulnerable to the whims of Japan’s central bank. As soon as word got out that Japan was raising interest rates to counter spreading inflation, the yen began to appreciate… and the jig was up!
Unfortunately, a look at the markets today and it’s like nothing happened last week. Certainly no lessons were learned.
But that doesn’t mean the ramifications of this reverse carry trade are over. In fact, and to make this crystal clear, I don’t believe this is over. Not by a long shot.
I’ve said all along that I think the reverse carry trade will spark the long awaited credit event.
Now I also think that it may have handed Donald Trump the presidential election.
I’m neither pro Trump nor pro Kamala Harris. Both are flawed candidates. Both will exacerbate the national debt during their tenure. And both will wrongly take credit for an economy that has nothing to do with the president and everything to do with cycles.
Regardless, the market fear of August 5 may yet prove to be the boost Trump needed.
Let’s play it out…
Ask and You’ll Get an Answer
Let’s say credit spreads blow out again in September, pulling stocks significantly lower. A dislocation like that would send risk assets into a tailspin, and will all have begun with Japan… again
Which presidential candidate do you think would benefit from that?
Yesterday, I asked in a poll on X (formerly Twitter), and the results are pretty overwhelming.
This is a good example of how global market turmoil can have a significant impact on who leads this country.
We can debate from here until tomorrow tax policy, Fed mistakes, whether we have a recession, etc. But under this scenario, it’s Japan’s ultra-loose monetary policy and rate-hike cycle that reverberates into whom voters choose.
It’s the volatility and knock-on effects of deleveraging that would alter the course of American politics.
I can also easily see a scenario play out whereby Trump becomes even more focused on isolating the U.S. economy from foreign shocks through broader deglobalization policies. After all, if Japan’s markets so strongly affect ours, then it’s the perfect narrative to support more onshoring and attempt to further isolate the U.S. from other countries and their financial systems.
Yes, I realize I’m speculating. But doing so allows us to position our investments, portfolios, and strategies accordingly. And with our choice of president being Trump or Harris, preparing for a Trump win will stand us in good stead unless Harris pulls off a miracle.
And a miracle it would have to be. If Japan does spark a global credit event, Harris’s campaign will hit a stock market wall of red.
Don’t say I didn’t warn you.