A market hedge for those worried neither Trump nor Harris will do anything about the growing fiscal deficit

For many Americans, the presidential election feels like the most consequential they can remember. In an environment where politicians appear willing to say almost anything, however inflammatory, and dissect and overblow any remark, however innocent, the most remarkable commonality this election season is the avoidance, by both sides, of one of the most significant economic issues of our lifetimes: the U.S. fiscal debt and deficits at historic levels unseen since World War II. We’ll discuss a market hedge using options that centers around this concern. According to the Tax Foundation, Former President Donald Trump’s tax plan is anticipated to reduce Federal tax revenue by $3 trillion over 10 years — albeit with an estimated 0.8% boost to GDP and an increase in long-run full-time employment jobs of 597,000. By contrast, Vice President Kamala Harris’s tax plan is expected to increase tax revenues by $1.7 trillion over 10 years, but at a cost of negative 2% to long-run GDP and 786,000 jobs. The problem, though, is that Harris’ proposals also include increases in spending. The Wharton School of the University of Pennsylvania estimates that, including her spending proposals, the primary deficits would increase by $1.2 trillion, and accounting for adverse economic feedback effects, primary deficits increase to $2 trillion. Naturally, different organizations’ models do not tie out precisely on the anticipated impacts, but a common theme develops. Higher deficits and higher debts, just with different paths to get there. One candidate proposes cutting taxes to improve economic activity but increase deficits, and the other proposes raising taxes and increasing spending by even more and growing deficits. As I write this, the United States’ national debt is just under $35.84 trillion. By the time you read this —about a day later — it will be $6 billion higher. If that sounds painful, and it is, I haven’t even addressed the nation’s unfunded liabilities — the amount that represents the liabilities associated with entitlements such as social security ($27.35 trillion) and Medicare ($42 trillion) or the fact that many are hoping for even more such as universal health care (Kamala Harris and Bernie Sanders co-sponsored a Medicare for All bill back in 2019), which several think tanks reviewed and estimated would cost between $28 and $32 trillion over a decade, or the Green New Deal whose costs were of a similar order of magnitude. The hedge What are the implications of all this for an investor? The good news is that the United States, unlike countries like those in southern Europe that had debt crises several years ago, has debt that is denominated in dollars, and the dollar is a global reserve currency. Therefore, the United States is not at risk of defaulting — we can always “print” more dollars to repay our debts, but at a high level, this is not entirely cost-free. If the deficit keeps increasing faster than our economy grows, so will the debt, inflation, and interest rates. If longer-term interest rates rise, then longer-term bonds, including U.S. Treasuries, will decline. We saw how pronounced the impact could be as long-term rates rose in 2022. TLT, the 20+ year US Treasury bond ETF , fell, peak to trough, by more than 50%. It is likely the recognition by investors that neither presidential candidate has meaningfully addressed the deficits or debt, that U.S. Treasuries have fallen quite sharply in the past six weeks. TLT 3M mountain iShares 20+ Year Treasury Bond ETF (TLT), 3 months It’s unlikely that next week’s winner will give the electorate a reality check once they receive the concession from their opponent. Consequently, I expect that weakness in long-term U.S. Treasuries will persist. My concerns aren’t unique. Three-month options premiums on TLT have increased by about 40% since their late May lows. Between the higher prices for downside put options and the 8%-9% decline TLT has seen in only the past 6 weeks, my recommendation for pressing bearish bets is a put spread. For example, the January 92/86 put spread costs ~$1.97, just over 2% of today’s closing price: Sell TLT Jan. 17 $86 put Buy TLT Jan. 17 $92 put One final counterpoint: U.S. Treasuries are traditionally considered a “haven.” They rise in response to risk-off events. So if the economy should weaken materially, or one of the conflicts globally should suddenly conflagrate, U.S. Treasuries would likely rally in response. For this reason, a put spread is lower risk than simply shorting TLT. 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