Senator Vol Wins

Senator Vol Wins
November 4, 2014
David R. Kotok




The winner of today’s election is volatility. In fact, “Senator Vol” had already won four months ago.

Some quick bullets to consider:

• US stock markets tend to rise after midterm elections. We expect new highs in stock prices in the United States and an upward trend for months to come.

• Monetary policy of central banks operates on a different timetable than midterm elections do. The Fed’s policy is at neutral with rolling maturities of existing central bank holdings. The European Central Bank is trying to figure out how to do more QE. Japan is now on steroids.

• The Japanese stock market is on fire. Remember, there is high correlation among most global stock markets due to “spillover” effects. There has been a particularly high correlation between the Japan and US markets the last few years. And Japan’s market has a bullish seasonal bias between now and March. Note that Japan is (and has been) the largest weight (currency-hedged) in Cumberland’s International ETF strategy.

• Watch the US lame-duck session for winners and losers. Especially watch the details of any “tax extender” bill. And watch the sectors if Republicans take control of the Senate. The stock market goes up regardless of who wins the Senate majority, but the sectors may change.

• Also watch Europe. They have elections coming, as do we. (We start the next US presidential election season in earnest tonight.) In Germany, the debate over policy is intense. Note the German 10-year benchmark sovereign bond is yielding around 0.8%. After the US Treasury 10-year note, the “bund” is the most important bond reference in the world. US at 2.2% yield, Germany at 0.8% yield! The overwhelming majority of the world’s currency reserves are denominated in US dollars and euros. The weighted average of the world’s reserve bond holdings is close to 1% yield. The weighted average of the world’s short-term reserve interest rates is near zero.

• Another election on the horizon is the Swiss referendum on gold reserves. Switzerland maintains a floor peg of the Swiss franc to the euro (1.2 to 1). It will continue to do that regardless of the gold referendum outcome on November 30. The Swiss may buy more gold if the referendum passes and they are required to raise their gold holdings to 20%. Or they may spin out a sovereign wealth fund and thereby shrink the central bank balance sheet in order to reach the 20% limit without unleashing the force of their gold purchases onto the market. No matter the outcome of the gold vote, the euro is likely to weaken; the Swiss franc will follow; and both central banks will be easing and adding more stimulus.

• Elections are important. We are not the only ones having them. A US-centric view misses outside influences.

Meanwhile, our US ETF accounts remain fully invested.


David R. Kotok, Chairman and Chief Investment Officer

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