Bet it all on the black swan.

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Trump Doomsayers Miss a Money-Making Opportunity

Tyler Cowen is a Bloomberg View columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “Average Is Over: Powering America Beyond the Age of the Great Stagnation.”
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When Donald Trump was elected president, some prominent economists predicted disaster for the stock market. It did seem headed that way at first, but then the market turned up. The S&P 500 rose 9.5 percent last year, and so far in 2017 has done fine. Over the last year, measures of volatility were largely normal.

Given that reality, are Trump doomsayers obliged either to stick with that prediction and short the market or to tone down their rhetoric? There is a disconnect between speech and behavior, unless, unbeknownst to me, America’s intellectual and media mandarins have been busy liquidating their long positions and buying puts over the past two months.

I’ve pointed out this tension on Twitter, and in response I’ve heard that going short is hard, the exact nature of the forthcoming disaster is hard to forecast, and markets didn’t predict previous political mistakes, such as Brexit or allowing the Sept. 11 attacks.

I’m not convinced. If we’re really headed off the cliff, selling all equities has to be better than doing nothing. Buying nonleveraged puts would be a possible Step 2, and most of the people in my Twitter feed have the smarts to figure out the mechanics. If it’s geopolitical and indeed market volatility you expect, deal in VIX options instead; VIX measures of volatility are lower than a few years ago, giving you a juicy target if you are sure volatility will rise. I get that this is somewhat hard, but if you’re right about Trump you can make a fantastic rate of return by acting on your worries. If you’re capable of getting an MBA at a good school, this learning should not be off-limits to you.

It is true that stock markets don’t typically predict “black swan”-style political catastrophes, but that is like saying sports betting markets don’t usually predict upsets. The point remains that upsets are not the norm, and if markets don’t predict them probably you should not expect them. But if you do nonetheless, go ahead and bet (or invest) accordingly.

What about the notion that market timing is a bad idea for amateurs, and how would you know when to come back into the market with your funds? That’s a fair worry, but not if you think the U.S. is headed for fascist catastrophe or rule by a KGB cabal.

Another set of responses point out that high stock prices are largely due to Trump’s plans to cut corporate tax rates. That’s quite possibly true, but if a tax cut is the most consequential influence on the value of America’s productive capital over the next four or eight years, that scenario doesn’t sound so apocalyptic, even if some social problems become worse.

What about the notion that the more extreme Trump critics are, dare I say, self-deceiving hypocrites? Maybe a few of them are, but I know some of these critics personally, and I think they are as honest and sincere as anyone else. Besides, this still doesn’t explain why they refuse to be millionaire self-deceiving hypocrites.

The most likely explanation of the disparity between rhetoric and investing behavior is that many people, especially academics and commentators, simply are not used to making huge changes in their market position based on political events. Such adjustments would require a big shift in mental and emotional emphasis, which isn’t easy --- many people have a hard time switching careers or fields, even if it would improve their life prospects. In other words, often we live as bifurcated selves, with the beliefs side ruled by the normal level of intellectual honesty and the action side ruled by inertia.

That possibility, however, has an interesting implication. Even many of the moderate critics have suggested that Trump will challenge democratic institutions and norms, and we will need to make special efforts to oppose these provocations. I hear plenty of talk about the necessity for “vigilance” and “mobilization.”

But now I’m really worried. If it is so hard for us to switch mental modes for great personal financial gain, imagine how hard it is going to be to switch mental modes to engage in significant protest, whatever form that might have to take. Such a fundamental oppositional stance typically involves personal costs, not fantastic profits, and would require significant habit changes, as few of us are professional protesters.

So if people have bifurcated mental modes, and their behavior is ruled so often by inertia, opposing the worst aspects of a Trump administration is going to be all the harder for most of us.

Which is all the more reason to short the market.

  1. If you’re wondering about me, as a Trump critic I have toned down my rhetoric, become more optimistic (while still seeing significant risks), am less long the market than I otherwise would be, and realized that because I have academic tenure I can assume above-average long position risks. In the meantime, my New Year’s resolution is to bring my actions and beliefs into further accord.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Tyler Cowen at tcowen2@bloomberg.net

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