Election Volatility & Peter Thiel's SPAC -- The Capital Note

President Donald Trump attends a campaign kick-off rally in Orlando, Fla., June 18, 2019. (Carlo Allegri/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: election volatility, Peter Thiel launches a SPAC, and the Volfefe Index.

Election Volatility
Whatever the explanation for Donald Trump’s latest ill-considered comments about the election (which David Harsanyi discusses here, and Mario Loyola here) they will not have calmed nerves that we may well be on the edge of an election drama that will not end on November 3.

Making this even more likely is that a number of states are extending the deadline by which mail-in ballots can be counted.


Voters in a number of swing states this November will have more leeway in getting their mail ballots back in time to count, should rule changes announced in the past week hold up to legal challenges. But the changes could delay the reporting of election results and possibly set up court fights down the line…

The developments could mean more votes will count in the states that would have otherwise been disqualified, but it also could mean a longer wait before a definitive winner is announced in the closely contested battlegrounds. An NPR analysis of absentee ballot rejections during the presidential primaries this spring found that at least 65,000 ballots were rejected for arriving late.

“The broad upshot of this is that in Wisconsin, which is already a very closely watched state, we’re going to be watching it for about a week longer before the results can be known,” said Eddie Perez, an election administration expert with the OSET Institute…

In a new poll released Wednesday by Quinnipiac University, 63% of likely voters surveyed said they did not believe the country would know who the winning presidential candidate is on election night. Just 30% thought there would be a winner declared on Nov. 3.

As I noted in an article earlier this month and in various comments on the Capital Note before and since, markets have — by pricing in extra volatility not only over election day, but the days and weeks that follow — clearly signaled unease over the election process. The Supreme Court fight will only increase tensions further.

In this connection, it was interesting to read that Interactive Brokers will increase margin requirements by as much as 35 percent above normal in the period leading up to the election.

IBKR comments that “elevated implied option volatilities indicate that the markets will be confronting elevated volatility both before and after,” [my emphasis] the election. IBKR “shares that sentiment and believes it’s appropriate to start controlling leverage in a measured fashion in advance.”

The Financial Times:

Futures markets are pricing in large price swings in financial markets for late October and early November. Other brokers are also considering similar moves. Matt Brief, chief product officer at UK-based broker IG, said the company will decide “nearer the time” of the election on whether to raise the minimum amounts needed for financing trades.

A CNBC report picked up on a Goldman Sachs note to clients from last week:

“Option prices indicate expectations of an extended period of high volatility beginning around Election Day and lasting for months thereafter…Implied volatility jumps around Election Day, pricing an S&P 500 move of nearly 3%, and the term structure remains elevated well into early 2021.”

Well into early 2021.

Bloomberg goes into more depth on Goldman’s view:

Options on the S&P 500 pointed to a 2.8% move on Nov. 4, the day after the presidential vote, down from an implied 3.2% swing seen in August, according to the bank’s analysis. What’s also shifting is the curve in futures tied to the CBOE Volatility Index. Specifically, VIX’s November contracts, which refer to volatility during the month through Dec. 18, have jumped above October ones for the first time this year, a sign that traders are adding protections well beyond Election Day, said Goldman strategists led by Ben Snider.

“Option markets seem to have abandoned the view that volatility would rise strongly in the lead-up to the election, which had been priced in throughout much of 2020,” the strategists wrote in a note to clients. “Instead, currently markets are expecting volatility to jump at Election Day, and then remain high thereafter.”

The latest shift in volatility pricing reflects the potential for delays in counting ballots and for results to be disputed, according to Goldman. A key date during the process is Dec. 8, known as a “safe harbor” deadline for when states have to resolve any controversies related to the appointment of their electors to the Electoral College, and six days before electors cast final votes on Dec. 14 to determine the outcome

It’s hard to argue with the expectations of volatility. #understatement

— A.S.

Thiel’s SPAC
I suppose it was inevitable: Peter Thiel has launched a SPAC. Yesterday, the billionaire tech investor filed to publicly list shares of Bridgetown Holdings, a blank-check company incorporated in May with Hong Kong businessman Richard Li.

Bridgetown plans to merge with a tech company based in Southeast Asia on the premise that the region is poised for a period of strong growth. “We believe that Southeast Asia is entering a new era of economic growth, particularly in the new economy sectors, which we expect will result in attractive initial business combination opportunities for attractive risk-adjusted returns,” reads the prospectus.

The choice of target geography indicates that Thiel and his co-investors believe countries such as Vietnam, Indonesia, and Thailand will benefit from increasing tensions between China and its trading partners. The coronavirus pandemic has catalyzed a wave of initiatives by policymakers to move businesses out of China at a time when foreign-direct investment in the ASEAN countries was already booming.

The Bridgetown team, which also includes OpenAI CEO Sam Altman, is banking on increasing demand for digital services by Southeast Asian consumers. The prospectus expresses a specific focus on payments and other banking services.

For Thiel, the consummate contrarian, the choice to raise a SPAC is somewhat surprising. SPACs have become something of a meme this year, with Bill Ackman, Richard Branson, and countless others throwing their hats in the ring. As of July, SPAC issuance was up 145 percent on the year, according to Goldman Sachs Research.

— D.T.

Around the Web

The elusive V (continued)

The Financial Times:

The pace of new applications for US jobless aid ticked higher and hovered at historically elevated levels last week, in a sign of continued weakness in the labour market as it struggles to rebound from damage inflicted by the pandemic.

Initial jobless claims totalled 870,000 on a seasonally adjusted basis, compared with 866,000 a week earlier, according to figures published by the Department of Labor on Thursday. It was the fourth straight week that jobless claims had fallen below 1m, although economists had forecast claims to decline for a second consecutive week, to 840,000…

“The jobless claims data paint a picture of a labor market recovery that’s struggling to maintain momentum,” according to analysts at Oxford Economics.

But however grim things may be here, there’s always Argentina.


For the second day running the Argentine Peso was virtually worthless in neighboring Uruguay foreign exchange houses. On Tuesday the Argentine Peso was worth zero, and on Wednesday there was a modest ten Uruguayan cents offered for the battered Argentine currency.

Uruguay which has a free market for currencies, quotations in money exchange houses include obviously the US dollar, the Euro, and from the two largest South American economies, Argentina and Brazil, Peso and Real. In normal times, the two neighboring countries are Uruguay’s main trade partners behind China, and there is a fluid retail traffic, depending on basket produce prices, along both borders, a cyclical tolerated smuggling both ways, although now suspended because of the pandemic.

On Wednesday Uruguay’s leading bank, which belongs to the State, Banco Republica, was offering ten cents for each Argentine Peso, and selling for 55 cents.

Back in 2001, the volatile Argentine Peso was equivalent to 14 Uruguayan Pesos, but in 2002, it was down to 3 Pesos and in 2003 it climbed to 10 UY pesos. However since then it has been sliding, and with not many prospects of recovery since the gap between the official exchange of the Argentine Peso in Buenos Aires is in the range of 80 pesos, and the 160 in the black market. Most analysts agree that until this gap is brought to a reasonable level, and people can buy dollars, now mostly barred, the situation will persist.

Meanwhile most Uruguayans regret they can’t travel to Argentina for shopping, –given the pandemic restrictions and mandatory quarantine period–, because with dollars they can live as kings.

Back in the 1930s the great Jack Buchanan sang how everything stops for tea:

Oh, the fact’ries may be roaring with a boomalacka zoomalacka whee,
But there isn’t any roar when the clocks strike four.
Everything stops for tea.

Now it seems that when everything stops, tea.

The Wall Street Journal:

The world’s most popular beverage is becoming more expensive.

Remote working arrangements and other home routines established during the coronavirus pandemic have led more people to reach for cups of tea, which is consumed in larger amounts world-wide than any drink other than water. But supplies of tea leaves are tightening, due to bad weather in some producer countries, labor shortages, port closures and other logistical issues.

Prices of wholesale tea leaves have jumped 50% since March, when they tumbled to their lowest levels in more than a decade due to oversupply. At $3.16 a kilogram ($1.44 a pound) recently, they are at levels last seen in November 2017, according to World Bank data.

Some of the increase has started to lift store prices in the U.S. Prices of so-called liquid tea, which is typically sold as bottled concentrate, have on average increased 9.6% from a year earlier, while prices for packaged tea—sold in tea bags—have risen 1.7%, according to Nielsen, a market research firm. Prices of ready-to-drink tea, which comes already prepared in bottles, cans or packets, have been stable.

Time to buy some more PG Tips Gold, the best tea there is (unpaid endorsement).

Random Walk
The Volfefe Index.


Donald Trump’s election-related tweets are likely to drive a jump in volatility in the world’s biggest funding market, according to the JPMorgan Chase & Co. analysts who created the Volfefe Index.

Named after Trump’s inscrutable “covfefe” tweet from May 2017, the index attempts to gauge the impact of Trump’s tweeting on the U.S. Treasury market through interest rate derivatives known as swaptions. JPMorgan’s revised analysis shows that while the sensitivity of the market to the president’s tweets peaked in May, in the midst of the Covid-19 pandemic, the Trump’s Twitter activity still significantly influences expectations of volatility in this key market.

The overall volume of Trump’s Twitter activity continues to grow, with the president’s favored topics shifting as the year has unfolded. Tweets related to the pandemic and the Nov. 3 presidential election have surpassed those related to the trade war with China and other geopolitical themes, according to JPMorgan’s data. Tweets mentioning “ventilators” had the most impact on the market, a change from last year when words such as “China,” “billion” and “products” produced the biggest effects.

— A.S.

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