The Donald

Basement Macro isn’t a platform to engage in political jousting. I’m interested in finding opportunities for investment/trading profits, pure and simple! So put your political persuasions aside and let’s try to make some money! As I have consistently opined – whether you love him or hate him, Donald Trump isn’t going anywhere! In fact, I still believe he’ll beat out Clinton – with wins in Ohio and in Pennsylvania, to take the Presidency. So what impact would a President Trump have on our financial markets and how can we profit from them? Unfortunately, at the moment, traditional policy analysis/macro modeling has a bit less utility given the ambiguity and volatility of Mr. Trump’s proposed policies. Fortunately, most markets have underestimated Trump’s expected success (see below) – Rubio was trading at 62% in February! Are you kidding me? In response, market participants have dramatically adjusted positioning and finally woken-up to reality. This prior mispricing should make trend-spotting in various markets a bit more salient given the recency of the snap re-pricing of Trump’s “Nominee Risk.”

Iowa Electronic Markets (IEM) is a group of real-money futures markets operated by the University of Iowa Tippie College of Business. The IEM futures markets operate as not-for-profit exchanges, but traders are free to buy and sell futures contracts based on a variety of political and economic events, akin to trading e-minis on CME or brent futures on ICE – with the major exception being a $500 investment cap. Nonetheless, these markets have been shown to provide accurate and independent assessments of event probabilities.

Screen Shot 2016-05-11 at 5.10.30 PM

I envision “Nominee Risk” as quantifiable in two ways. First, as the front-runner’s lowest probability of winning coinciding with the runner-up’s final failed probability surge. This assesses the degree to which markets could “get it wrong.” Second, the number of days between this failed surge and the first day of the convention. This metric quantifies the markets’ unanimity. Annotated graphs of prior Republican and Democratic conventions since 2000, are included below. Based on the data since 2000, markets appear to have dramatically underestimated Trump. Markets took 52% longer with 34% less certainty to “acknowledge” the inevitability of Trump becoming the GOP nominee. As such, convention would suggest that stocks too were late in discounting Trump as a serious presidential contender and there’s still time to catch changes in financial flows.

Screen Shot 2016-05-11 at 3.49.54 PMScreen Shot 2016-05-11 at 3.19.44 PMScreen Shot 2016-05-11 at 3.20.22 PMScreen Shot 2016-05-11 at 3.20.38 PMScreen Shot 2016-05-11 at 3.20.58 PMScreen Shot 2016-05-11 at 3.21.24 PM Screen Shot 2016-05-11 at 3.21.13 PM

So where should we expect funds to flow into? To find the answer, I analyzed Trump’s IEM data, regressed against 181 DJ industry/sector indices looking for anomalous relationships. The results were surprisingly quite strong.Screen Shot 2016-05-11 at 5.22.22 PM

Quite a few commodity related indices showed strong correlations with high statistical significance. However, these should be ignored due to the dramatic rise of broad-based commodity prices over the same horizon. Ignoring commodities, the following indices had very high correlations – between 65-70%, with r-squared values greater than 40%.

  • Travel and Transport
  • Food
  • Autos
  • Specialty Finance
  • REITs

It’s worth pointing out that the travel, hotels and mortgage REITs industries are all well aligned with the majority of Mr. Trump’s personal business interests. With 10 year yields essentially unchanged over the analysis period, any positive or negative impact on the attractiveness of REITs due to a shift in prevailing interest rates is controlled for, suggesting something else is responsible for the increased demand.Screen Shot 2016-05-11 at 6.16.56 PM

Moreover, 11 of the 14 highest correlations in the probit-adjusted regression were also REIT-related. According to this analysis, investors are wise to invest alongside of Mr. Trump, as he ascends to become the GOP nominee.Screen Shot 2016-05-11 at 6.32.43 PM

Another way to uncover potential relationships between various assets and Trump’s ascendency is to analyze shifts in index price trends around key time periods. Trump’s IEM data shows a double bottom on 4/5 and 4/11. These dates were used as starting points to calculate each index’s simple return, through 5/10/2016 as well as, its current deviation from its 20 day (20MA) and 50 day (50MA) moving-averages. Series with the largest absolute returns as well as the largest absolute deviations are likely to harbor some underlying relationship with the probability of Trump becoming the GOP nominee. I hope to complete this analysis in the coming days.

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