TailRisk

What Risk? Full US Election Black Swan Breakdown

in Economy by

Markets are pricing virtually zero risk from the US presidential election. That’s rather peculiar considering it is almost without question the most divisive not to mention bizarre campaign in modern history.

Neither candidate is popular. Neither candidate has proposed much that promises to shrink the deficit. Both candidates look set to accelerate the global shift towards dis-integration and curtailed trade at a time when trade is already in the doldrums. And one candidate is the very definition of “black swan.”

Be that as it may, the VIX is languishing in the low teens, stocks are near all-time highs, and don’t even ask about credit spreads:

Compression

Can you say “compression?”

Be that as it may, the election most certainly represents a significant tail risk for markets and it’s our pleasure to bring you the full breakdown via Citi:

TailRisk

(Chart: Citi)

Don’t you love how “runaway Federal budget deficits and unmanageable debt” are listed for both candidates. On the bright side, as long as Kuroda and Draghi stay negative, they’ll probably be a bid for the long bond. That is of course unless FX hedging becomes too expensive even for the 30Y.

Hedging

(Chart: Deutsche Bank)

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