It was quiet in the markets in late August. Too quiet, perhaps. The Vix equity volatility gauge held around 13, not far above lows last seen in 2007; US Treasury yields moved in the tightest range in a decade; and the main foreign exchange currency pairs seemed to be locked in place.
Polls indicating that Donald Trump is unlikely to pose a serious threat to the election of Hillary Clinton as the next US president helped to extend this eerie calm.
Trump’s economic positions are no more closely tethered to the consensus among industry experts than his immigration or foreign policy pitches, which helps to explain the complacency. Massive tax cuts, lighter regulation and renegotiation or abandonment of trade agreements with other countries are the main planks of his policy, with limited detail beyond trademark Trump assertions that success is assured and the US will be great again.
This has led Republican establishment economists with experience in previous administrations to withhold support from Trump, in much the same way as foreign policy experts who worked for Republican presidents including Ronald Reagan and George W Bush publicly declined to commit to their nominee.
Trump does have financial industry supporters, however. Some are fringe figures, such as Anthony Scaramucci, founder of SkyBridge Capital and hedge fund industry hanger-on, who looks and acts like he won a reality show competition called Investor Apprentice, as hosted by Trump in his previous incarnation as a TV personality.
The extraordinarily low level of campaign contributions for Trump from employees of Wall Street banks indicates that grumbling about the increased regulation of the Obama era has not pushed bankers to embrace an ill-defined commitment to ease that burden
Other Trump backers are the real deal. Wilbur Ross, the distressed debt and restructuring expert, activist investor Carl Icahn and John Paulson, the hedge fund manager who made his name shorting mortgage backed securities before the 2008 financial crisis, are among the most prominent Trump supporters.
Ross gave an insight into why Trump is popular with a certain type of contrarian investor in an opinion article in the Financial Times.
Ross endorsed Trump’s view of what ails the global economy, albeit in different language from the candidate. He diagnosed structural disequilibrium caused by chronic trade imbalances resulting from manipulated currencies, mercantilist practices and poorly-negotiated trade deals.
Trump typically expresses this view in a pithier manner: “The Chinese are killing us!” but no doubt welcomes the backing of Ross, who has become a policy adviser.
The real appeal for a billionaire (and one who can demonstrate his net worth at that) like Ross was indicated at the end of his opinion article when he welcomed a proposed cut in US corporate tax from its current 35% level.
“Mr Trump’s proposed 15% rate promises a 30% higher earnings return than at present, and would thereby greatly improve the attractiveness of domestic investment,” Ross wrote, with the air of a man who would greatly appreciate a lower tax rate on his own investments, domestic and otherwise.
Senior bankers who run regulated public companies with tens or hundreds of thousands of employees generally do not feel they can openly weigh in with their own views of appropriate tax levels.
But the extraordinarily low level of campaign contributions for Trump from employees of Wall Street banks indicates that grumbling about the increased regulation of the Obama era has not pushed bankers to embrace an ill-defined commitment to ease that burden.
Unlike the contrarian investors who would welcome some creative disruption to market certainties, most bankers seem to fear the turmoil that could well follow an election victory for Trump.
That does not mean they should abandon creativity when it comes to recommending ways to trade a Trump triumph.
Buying gold is an obvious hedge against potential disruption to markets, and one that worked well, both before and after, the Brexit vote in the UK in June.
Other deals could be tied to the implications of a Trump victory for international relations and prospects for emerging markets. Any US-initiated trade disputes would be likely to hurt smaller countries before they became a drag on global economic growth, so a move to short currencies like the Korean Won, or buy default swap protection on Korea could be a viable hedge against a Trumpocalypse.
As with any over-the-counter derivatives trade, the latter deal would carry an element of counterparty risk, of course. An era of Trumpian presidential bellicosity, even if it was mainly verbal, would work against the interests of the big US banks that are beneficiaries of cross-border deal-making and hedging, and function as leading derivatives counterparties.
Shorting the biggest US banks might accordingly be a trade that would work in a Trump presidency, though it is not one the dealers could be expected to recommend themselves.
Even if the opinion polls are correct and a Trump presidency is avoided, there are risks for Wall Street from a Clinton administration.
When Hillary Clinton was fending off the Democratic primary nomination challenge from Bernie Sanders, she shifted to the left on issues that included financial market policy. And unlike Donald Trump, Clinton is likely to feel an obligation to at least demonstrate some effort to fulfil her campaign commitments. She has proposed pushing some trends in banking regulation further in the direction they are already heading, which might pass Congress if one or both of the Senate and House of Representatives move to Democratic control as she wins the White House.
Clinton has called for a new risk fee for large institutions, bonus clawbacks from senior bankers in the event of losses and extension of the Volcker Rule to prevent bank investment in hedge funds of any form.
She also pledged to impose a tax on high-frequency trading and tackle the financial dangers of the shadow banking system with greater transparency for hedge funds and other non-bank lenders and investors.
Clinton and Trump are in unusual agreement on one potentially big step for financial markets – the removal of the carried interest tax loophole that helped to fuel the modern private equity industry and its appetite for debt-fuelled buyouts. The ability to take payments from buyouts at a low tax rate helped to build the fortunes of investors such as Wilbur Ross, so support for Trump from Ross and his ilk is presumably based on the assumption that overall tax rates would be cut so far that the carried interest loophole would almost become redundant.
The likelier outcome of a Clinton presidency would remove this bonus for members of the 0.1% investing club, while also putting a crimp in the flow of new buyout deals for Wall Street bankers.
Investment bankers may be hoping that she will revert to the pattern of the first Clinton presidency, when pro-business policies helped to fuel a long market rally.