Watching the Democratic National Convention has turned out to be even more surreal than watching the GOP convention.
What’s amusing is that the Democrats seemingly learned very little from the Republican primary race. Apparently, it still hasn’t occurred to anyone that you can’t call someone evil and dumb at the same time. If you’re dumb, you can’t be evil. It doesn’t work like that. Being evil is a conscious decision. One can’t be evil by accident. You can be dumb and dangerous - and in fact those two qualities often go together like peanut butter and jelly - but you can’t be dumb and evil.
So it makes no sense to suggest that Donald Trump is simultaneously a buffoon and consciously a threat to human decency. Either he is a buffoon, or he is intentionally tearing the fabric of American society apart. But it can’t be both. Buffoons don’t intentionally do anything.
The generalized failure to recognize this makes it impossible for anyone to counter Trump. If what you want is to derail his momentum without alienating his massive support base, then what you do is you explain why he’s a threat while simultaneously acknowledging that he probably doesn’t mean to be. That’s how you win. What you absolutely do not do is get into a mudslinging contest with a guy who has no qualms whatsoever about slinging mud. The only person on either side of the aisle who’s up to that challenge is Elizabeth Warren and guess what? She’s not running.
The point is, until someone decides to exercise some degree of common sense when it comes to campaigning against Trump, the bellicose billionaire’s odds of winning the White House are only going to rise. That, as we’ve been over before, is probably bad news for risk assets.
We feel compelled to remind you that that assessment isn’t a political statement. Rather, you have to look at valuations and complacency (as proxied by VIX) and ask yourself the following very simple question: “What is going to happen to a portfolio of stocks trading at 18X with a 12 handle VIX if we wake up on November 9 and Donald Trump has just won the White House?”
Our guess is: “nothing good.” And that’s not because everyone who owns risk assets thinks Donald Trump would be a bad President. It’s because no one has any idea what he would do as President. In fact, some of his policy proposals sound more liberal than conservative. The point is, a Donald Trump victory is the quintessential example of a tail event. He’s a veritable “black swan walking.” Who knows, he may turn out to be the best leader America has ever seen, but that is indeed the problem: “who knows.”
The market hates “who knows.”
With that in mind, let’s look at historical returns around elections. As Goldman notes, we’re typically range-bound...
(Chart: Goldman)
...with uncertainty rising markedly in the lead-up to the vote:
(Chart: Goldman)
See, this is another one of those common sense moments that you have to be able to recognize as an investor and trader.
We talked about this yesterday in the context of oil. You’re not an energy analyst. Neither are we. But if you’ve got gasoline stockpiles running way ahead of historical averages and you notice that the summer driving season hasn’t served to reduce those stockpiles, what do you think is going to happen to refiners’ demand for crude as the summer driving season comes to a close? Well obviously it’s going to collapse even more than it always does from July to October. Hence downward pressure on crude prices.
Same common sense type of deal with the chart shown above. You’ve got uncertainty sitting around average levels, it always goes higher from here in election years, and this election promises to be the most uncertain political event maybe ever.
So you know, maybe think long and hard about this:
4 Comments
Mark Davis
July 26, 2016Looking forward to the Trump Presidency.
Joe
July 27, 2016I'm not sure the Democrats are classifying Trump as stupid or evil. Dangerous, yes, and a buffoon, yes, and you agree that those two qualities are not inconsistent. I think Clinton has described him as dangerously thinskinned, an assessment that is certainly not self-contradictory.
Paul Hinkley
July 29, 2016Heisenberg explained that his "assessment isn’t a political statement". Theotrade is a trading and investing service, so please kindly keep your political statements to yourself, or at least make them relevant to trading and investing. You will benefit by keeping emotion out of your trading psychology. Thank you.
Douglas Teachout
August 1, 2016I will position myself in equities very carefully. More likely than not I will go to the sidelines and wait out the election process as we get closer. This is my personal risk tolerance. If anything I will establish a downside defensive position on the SPX in the form of a calendar spread, aka "volatility bomb." I appreciate volatility in a market for opening up opportunities such as iron condors, but the election process comes with too many unknowns driving that volatility (again, my personal preferences). It will be interesting to watch the more experienced traders wade through the process.