Tuesday, November 8, 2016

Overestimating Trump's Odds

It is easy to root for one side or the other.  If you are a Democrat, it is easy to be rooting for Clinton and be biased to the long side, expecting a Clinton win.  If you are a Republican, you will probably be rooting for Trump and be biased to the short side hoping for a big immediate payoff, like Brexit.

You have to trade the market as it is, without an irrational bias.  You cannot trade the market that you want and be successful.  If you want a bear market, or are hoping for a big drop, you can't just go in there and buy puts or short stocks in the hole hoping for a big payoff.   Hope is not an investment strategy.  I have been there before, long puts, thinking that the market is due for a correction, and then waiting and waiting, eventually giving up and covering for big losses.

 Objectively, if I didn't have any position on, I would hope for Trump to win.  Not because I like his views, but because he would bring more volatility to the market.  But I am long, and obviously hoping for Clinton to win.  Everything tells me that Trump's odds are inflated even at 20% chance of winning because of the polling data, how much media bashing he has taken, the fact that he is so disliked, the big mistakes that he has made over the course of the campaign.  He has gotten more disciplined lately but the damage was done with the hot mics and sexual harrassment accusations from all over, and rigged election talk, etc.  Trump was never popular to begin with, but he has offended too many people, showed his lack of political skills by going off on various targets, to his detriment.

The biggest, most underrated factor in this election is the extremely anti Trump media bias, which I don't think anyone could overcome.  Even the conservatives don't like him much, as he struggled to get endorsements.  It seems like at least 90% of the articles that I read in various online news sites is an article critical of Trump.  Although I am not a Trump fan, some of those articles seem to nitpick everything, and blow them out of proportion, making him look worse than he really is.  And he already looks pretty bad just by watching his speeches and debate performances.  This election has clearly become a Trump vs. non Trump race.  It is a referendum on Trump, not a race between candidates of two parties.  The media has clearly done their best to make Trump look as toxic as possible.  You cannot underestimate the power of the media to shape the minds of people and create a new subjective reality that affects their actions and opinions.

Anything can happen, but the odds of a Trump win are probably closer to 5% than 20%.  And the market seemed to be pricing in a 50/50 shot for Trump last week when the fear was at its highest and the FBI investigation on Clinton was still going.

I've seen many mentions of Brexit when traders talk about this election, but those Brexit odds were always much closer than Clinton-Trump odds.  In fact, it seemed liked traders were ignoring the polls that did show Brexit leading for a period of time, as if it was a temporary fluke.  That hasn't happened with Trump even when he got that last minute gift from the FBI.

Throw out the Brexit playbook, the trading ahead of the election has clearly brought in more fear than pre-Brexit, just by looking at CNBC and the put/call ratios.  That gives it a much higher likelihood that the market is well hedged for the event and holding too much cash, which they will probably deploy if Clinton wins.

1 comment:

MM111 said...

Just like Brexit, of course he was going to win.