Super Cities №239—The Market for Presidential Volatility

Brendan Hart

Markets hate unpredictable volatility. Donald J. Trump is extremely volatile. By the laws of deductive reasoning, markets hate, well, you get the point.

Historically, markets price known risks and unexpected risks, such as terrorist attacks or natural disasters, in a continuous loop.

Now, though, the market must price-in the uncertain, volatile president of the United States. Or, more specifically, what that man does on social media every morning.

Since becoming president, Donald J. Trump has used Twitter to launch one of his 10,000 unorganized thoughts into the world.

Most of Trump’s early morning tweets are plain bizarre. Some are conspiracy theories. All represent a victimized man and, through him, a victimized nation.

But, recently, as the economy slows, Trump's tweets have focused on trade, the federal reserve, and other market-moving topics. Investors may not care about Sleepy Eyes Chuck Todd, but they sure take notice when Trump escalates trade wars or takes aim at the Fed chairman.

So JP Morgan recently introduced the Volfefe Index, which measures the impact of presidential tweets on interest rate volatility. The president as investing risk.

Mega-banks do not launch new indices casually. To justify the outlay, investors must recognize new variables or new risks. In this case, JP Morgan believes Trump’s daily rants have a statistically significant impact on Treasury yields and, to make matters worse, the number of "market-moving" tweets has increased dramatically over the past few months.

In plain speak, he's getting more volatile, and his volatility is increasingly risky.

When he entered the oval office for the first time, the forty-fifth president received a massive gift in the form of a booming economy. The economy has continued to grow, albeit at a slightly weaker rate, since his election.

But past is not prologue. There are worrying signs on the economic and political horizons.

Business investments are slowing. The trade war with China is escalating. North Korea is lobbing missiles. Iran is back in the nuclear game. America doesn't have a plan for infrastructure, innovation, or investments. Our wholesale political dysfunction compound these challenges.

From technology to politics, the world is in the middle of a big, fundamental shift. A turbulent world would normally demand steady leadership.

But the man in the big chair is anything but steady. With a volatile man in a chaotic world, markets are attempting to price a perfect storm.

Some people will make a pretty penny by hedging against the next presidential tweet, but everyone will be worse off.

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