Profiting from the Presidential Election

10/05/2012 6:00 am EST

Focus: POLITICS

John Netto

Author, The Global Macro Edge

The presidential election might turn on upcoming economic data, and John Netto explains how all of that could impact the investment markets.

Well, as we head into the end of 2012, all eyes are on the presidential election. What effect is that going to have on the investment community, and what are the opportunities there? My guest is John Netto and he is going to talk about that.

So, John, I know it's a broad question, but with the election coming up, what are you looking at in terms of where we can profit from that?

The election is a big issue-obviously the impact it might have on the fiscal cliff. But more than the general election for the president, what's going to happen with the Senate, what's going to happen with Congress? Will there be a supermajority in Congress, and as a result of that how would that impact things? Will Obama hold on?

One thing that a lot of people are not talking about, and something that I pay a lot of attention to in my trading, is how economic data is going to play out. The seasonal adjustments, being what they are, can play a huge role in terms of people's perception of what's taking place economically.

We saw a lot of poor economic data come in June and July, or at least in May and June, and as a result of that a lot of technical factors or seasonal factors have made the early July data, and August had to look a little bit better. I think that is going to be very rough, and looking at September and October...

The question that you have to ask yourself is, can Obama win reelection if the economy is faltering as he heads into November 6? So, we have three non-farm payroll numbers-September, October, and November-before the Tuesday elections in that November.

I believe that the way the economic data is setting up, the way the seasonal factors are setting up, is that we're going to get a lot of bad economic data, and right now with the race almost being neck-and-neck, I think Ohio, I think Florida can become extremely precarious positions for President Obama, and as a result Romney may win.

If that happen,s I'm not sure that it's a rally situation. I think the market's kind of factoring in right now an Obama reelection, an Obama victory. If Romney looks like he can pull ahead, I think the market's actually going to sell off as a result of that.

Alright, so if that's the case and I decide to go short in index or an inverse ETF, what on the long side do you think is the opportunity there if that does come true?

I think you want to be long ten-years. I want to be long fixed income. This is a 30-year market we've seen for fixed income. We can see yields back at 1.25%, 1.2% again.

You superimpose the uncertainty and the ambiguity over our US election along with what's taking place in Europe, and we're seeing a huge economic contraction in Europe. Despite some of the recent numbers appearing to be a little bit better, there is still real contraction taking place. The PMIs have been horrible.

I see more poor economic data coming up for the US in the fall. If Obama's reelection victory is threatened, we're looking at a lot of budget cuts that are not factored in right now that can seriously impact a lot of spending, a lot of companies' revenues as a result.

And how is it that you think that effect will have on the US dollar? What's going to happen there?

I think the dollar rallies with this, because obviously the thought of tighter fiscal constraints is going to mean there's less dollars out there, becoming more dollar bullish. The Fed, in terms of what they can do, they're going to be more or less handcuffed, especially if what I think takes place and they put in QE, a QE3 or some version thereof in September and October.

So if Romney wins and the Fed has exercised their options and Draghi and the ECB and other central banks have also gone out, there's not many bullets left. So you could put a market that can set up for a huge freefall in late fall.

Related Reading:

Steve Forbes' Election Outlook

Huntsman on the Fiscal Cliff and the Election

Draghi Loses Date with Destiny