The End of The Beginning: Global Economy

Whatever you feel about Trump, whatever your stand, grant Trump one of the great gangsta moves of American political history.

But I don't want to discuss Trump, per se, nor how close the United States came to a disaster.

I want to discuss the photographer behind the image, Evan Vucci, & what investors can learn from him.

It was his past experiences that had prepared him for this moment. As he has since told multiple news outlets:

'It wasn't the first time I was in that situation. So I was able to keep my head, I was able to think. I was able to compose pictures. I think all of us were there and we just stayed in the moment, stayed on the story. In my head, I just kept saying to myself, "slow down, slow down. Compose, compose"'.

Most of all:

'I started thinking, OK, what’s going to happen next? Where is he going to go? Where do I need to be? Where do I need to stand? What is going to happen? The job is all about anticipation'.

And so is ours.

As I often remind my clients, and they in turn remind me the primary challenge for investors in a confused, noisy, too often hyperventilating world is to remain calm, focussed, confident, energised, knowledgeable, anticipatory and always in control.

Not enough time to read, not enough time to think probably means you’re too often on the backfoot.

And if you are too often on the backfoot, you’re probably going to underperform.

My job has always been to help time constrained investors narrow the range of uncertainty for investment decisions that must be made: then, where necessary, and where appropriate, tell them what to do.

It was and remains a Sisyphean task of constant reading, learning, consultation, collaboration, questioning, re-testing and confirmation..

..a never ending effort to be less wrong.

And anytime I am tempted to think I have rolled that Sisyphean stone to the top of the hill of understanding, it rolls back down again.

As you try to process, try to understand recent events channel Evan Vucci: he remained calm, focussed, confident, energised, knowledgeable, anticipatory and always in control.

And a result, he captured an image for the ages.

Be like Evan.

JA

In the January 15th, 2010 edition of Notes from a Small Island I used London’s Millennium Bridge to help my investor clients visualise the obvious, growing (de)fault lines within EMU.

The Millennium Bridge was opened by Her Late Majesty The Queen on June 10th, 2000, and it was soon apparent there was a problem with the bridge’s engineering.

Arup - the engineers - conducted a programme of research: this research indicated that the swaying of the new bridge was generated by the sideways loads pedestrians generated when walking.

Chance correlation of our footsteps when we walk in a crowd generated slight sideways movements of the bridge. It then became more comfortable for people to walk in synchronisation with the bridge movement.

This instinctive behaviour ensures the sideways forces we exert match the resonant frequency of the bridge and are timed to increase with the motion of the bridge.

As the magnitude of the motion increases, the total sideways forces increases and we become more correlated: Arup named this process synchronous lateral excitation.

Arup’s research programme showed the effect is sudden, not gradual.

It does not show as small movements with a few people, gradually building up as people are added.

Instead, it takes a critical number of people for a bridge to sway - to succumb to synchronous lateral excitation.

Until that critical number is reached, there is no evidence of the effect.

So what?

Trump is the personification of synchronous lateral excitation: he is a multi-dimensional gamma agent, and he’s just getting started.

Happily, some investors were well prepared for this; many, it seems, are not.

The essence of modern financial markets is the assumption that realised volatility and realised, cross-asset correlation are forecastable, predictable, and generally low and stable.

On the back of that assumption enormous, high-velocity, heretofore immensely successful risk engines and portfolios have been built: but what happens when the largest driver of markets (e.g. tariffs, defence spending) becomes something that most market participants have no experience of?

To state what should now be obvious: of course, US stocks are lower and credit spreads are a bit wider - but there is no sign of panic. Nobody is tripping over themselves to own wings or tail options in US equities.

Nor are they falling over themselves to buy credit protection, although - this ought be obvious too - the inability of the dollar to bounce during this turbulence is causing a lot of large pools of global capital to examine their FX hedging policy.

The absence of panic in markets tells us the working assumption is that realised volatility and cross-asset regimes will remain predictably low and stable.

Perhaps they will remain so: however, no matter what the administration claims, I have been reminding my clients for a while now that consumption taxes, such as tariffs, either reduce real income through inflation (which is the exact opposite of what Trump seems to want for American workers) - or reduce corporate profits via higher inputs costs.

Amidst all the bravado (c.f. Lutnick on everything), the essence of MAGA is a transfer of real income from white collar and professional workers to blue collar workers.

For society, a good thing.

For US corporate profits, not so much.

Somewhat higher realised volatility and somewhat higher higher cross-asset correlations aside, I wonder whether the reason US equity markets are struggling is because we are slowly reverting from a momentum-driven voting machine to an earnings driven weighing machine?

Some would argue the slow reversion to Graham’s weighing machine is overdue: it is not the end of the world, but for the unprepared investor, it may feel like it.

Our primary objective during this transition is unchanged: to remain calm, confident, energised, focussed, knowledgeable, anticipatory and always in control.

JA

Mapping reality since 1992. Advising the world’s most powerful pools of capital since 1999. Discover why they trust him: https://www.aitkenadvisors.com/contact