What Do You Really Think?

As we’ve gone through these ‘chapters’ I’ve avoided the elephant in the room. That elephant is Washington D.C. Almost as much drama as a 15 year old daughter. And yet we make new highs in equity indices like it’s all sunshine and roses. And the VIX?…Oh, the VIX. How low can you go?

I’ve been trying to figure it all out. This is not to pass judgement on anyone or anything. Just trying to figure out how the television, internet, and those remnants of days gone by, newspapers, are dominated by tweets, hearings, interviews and the like coming out of the Presidential administration with no large reaction in the markets. I think we can all agree that this does get in the way of doing business when it comes to Congress and the future of our country. Yet the markets all but ignore it.

There are reasons to be wary. Not because anything wrong has definitely happened. But remember, the price of securities is driven by perception. And the perception seems to be that there is this huge distraction sucking our attention away. The rhetoric is continuous. So how does this all get ignored? I’ve come up with a theory, and that is all it is. But if what we focus on when analyzing price is what is going to happen in the future, than it stands to reason that the overall market is driven by this focus on a broad basis.

So there are a couple of possibilities. One is that the storm will pass and soon the focus will go back to things that drive the country and in turn the market. That sooner than later, we will be talking only about infrastructure and tax cuts. And that is an optimistic thought that I think we’d all like to subscribe to. I know I would. Those are the things that truly interest me when it comes to analysis and making sense of the charts (The stories behind the pictures).

In addition to the VIX constantly going lower and the markets in turn going higher (doesn’t really matter which is the dog and which is the tail), gold is not in a huge rally. It’s in a small rally, we’ve made multi-week highs, but it certainly isn’t reflecting a large flight to quality, or flight to security. It’s actually in the middle of a multi-year range. Ten year notes? Rallying as well. This can be perceived as a small flight to quality like the gold market, or it can be looked at as a reflection that the economy may not have as much steam as we thought a couple of months ago.

Gold cropped w Fibs

I do think it’s positive the way the markets are shrugging off the drama. But I still find it to be a bit confusing. And this is what leads me to my theory. I’m interested in what others think. Remember, the markets move on crowd opinion and perception, and you’ve read here before that it’s always good to know what the competition is thinking. Sometimes these thoughts are somewhat subconscious, but that doesn’t detract from the influence on our investment and trading decisions. This is more about investment than trading, as trading is a short term perspective in my opinion, but investing is based on what’s going to happen over a longer horizon.

So what’s my explanation? Well, I don’t know that it’s an explanation as much as another possibility that I know has been brought up by a few and generally just fades into the background. Are the markets pricing in the expectation that before too long our president’s last name will be Pence? Boom. Said it. Not wishing it necessarily but putting it out there as a possible explanation of why there is not more of a reflection of the drama among our country’s leaders.

Let’s examine what’s going on in Washington compared to the most dramatic time in the presidency in my memory, as well as many others. Nixon. Watergate. There were of course more factors at the time than that. There was an oil crisis. Lines at the gas pumps. This truly interfered with our ability to function in our usual manner. And the markets reflected all of this. Investor confidence plummeted. The stock market went down from soon after Watergate news hit. Those results cannot only be attributed to waiting in line to fill the tank.

Today, we also have other factors at work. It’s becoming a scary world. Terrorist attacks make the news more and more often. Worse than figuring out if it was an odd or even day for gasoline. And the market goes up. And the VIX goes down. Confidence doesn’t seem to be an issue. Are we all just acting like kids? “La, la, la, I can’t hear you?” I don’t think so. I honestly believe that there is the possibility we’re pricing in a change in the White House before 2020 or 2024.

Donald Trump is a wild card. We’ve not seen a President like this. We’re accustomed to career politicians. And whether or not you agree with any single politician’s opinions on issues, let alone the major party agendas, they are predictable based on their history. Donald Trump is not predictable. This we can all agree on. But Mike Pence is. There is a certain calm in society when we debate only issues. Right/left, the lines are relatively well defined. And this leads to a bit of stability. Even in bear markets, we have a reasonable opinion of what will happen tomorrow based on our leadership. And if indeed we are pricing in a Pence presidency, that predictability, that stability, both return. Agree with him or not, none of his tweets would be fodder for the types of reactions on both sides of the isle that we have now, if he would tweet at all from the oval office.

I’m not here to advocate for this result. I already stated that I don’t want to judge or bring my opinion of the drama into it. I just want you to think about what’s truly behind your decisions, and those of all the other people faced with the same question…am I bullish or bearish and why. This is quite the rally we’re in. And despite the contrarians, there is an extreme erosion of a volatility index. So don’t completely discount the theory without contemplating it. Because if what others are thinking is indeed part of the decision process, some people are thinking the same way I am.

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