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DID JAPAN JUST HAND DONALD TRUMP THE WIN?

Michael Gayed


Publisher, The Lead-Lag Report

August 14, 2024



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.


WRITTEN BY MICHAEL GAYED

August 14, 2024
Learn more

Michael A. Gayed is the Publisher of The Lead-Lag Report, a market research
service that provides risk signals, high yield ideas, macro observations, and
more. He's the author of five award-winning research papers on market anomalies
and investing, and Portfolio Manager of the ATAC Fund Family. Michael was an
active contributor to MarketWatch for a number of years and has been interviewed
on CNBC, Bloomberg, and Fox Business, as well as the Wall Street Journal
Live for his unique approach to interpreting market movements.

Michael earned his Bachelor’s of Science degree with a double major in Finance &
Management at NYU Stern School of Business. Michael became a CFA Charterholder
in 2008.

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