Why aren’t you busy selling short?

by on January 12, 2017 at 12:54 am in Current Affairs, Economics | Permalink

That is the topic of my latest Bloomberg column, I know that so many of you are full of excuses.  Here is one part of the column:

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.

I do give an answer at the end, and it is all the more worrying.

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.

By now I’ve queried quite a few people, and I’ve yet to hear of anyone being short.  You might argue that stock markets don’t reflect social welfare, which is fair enough.  But then what market prices would you propose we look at?  Consumer durables for instance are doing fine.  Or is there no market discipline on your view at all?

1 Mark Thorson January 12, 2017 at 1:03 am

If you’re short, you are at infinite risk. If you buy puts, you have at most a 9-month time horizon. If the Trump crash takes 12 months to appear, you’re screwed. You could buy puts and keep rolling over into new ones, but that’s expensive. Betting on a trend that hasn’t started to appear is very risky. Even if you get the trend right, you can get screwed on timing. Granville was right — the market only reverses when the last guy changes his mind.

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2 rluser January 12, 2017 at 1:13 am

Decent point on the short, but you can get less long — not terribly rewarding. I don’t understand your 9-month claim at all. SPX LEAPS for Dec ’19 are available (among others).

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3 Mark Thorson January 12, 2017 at 1:26 am

I haven’t traded options in a long long time. If there’s something longer term, that’s even a worse sucker bet than back when I was buying them. The only person I ever knew who had a winning option strategy was my dad. He’d buy stocks he wanted to own as a long term hold, then write short-term out-of-the-money call options on them. Those rarely got exercised, so it was like free money. The only times he ever got screwed with this strategy was when the stock got called away, and he went back into the market to replace the stock. That’s almost always a bad move. When a stock is called away, it’s usually a short-term movement due to news or something. It’s temporary, and if you just have the patience to wait it out, the stock will come down and you’ll be able to buy it back at a lower price.

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4 sean January 12, 2017 at 12:36 pm

Or a very strong trend in the stock. Take NVDA this year or the tech boom. Your giving away the true upside of your position. Call markets are efficient enough that the income is risky. Banks would be another area this year where if you had sold calls you collected dollars on 10-20 dollar moves.

Tax issues would be another problem of forcing you to pay taxes yearly on the call gains and potential at bad times for long-term stock positions.

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5 Shane M January 12, 2017 at 1:26 am

Agree regarding purchasing puts. I can’t bring myself to pay the premium to purchase a wasting asset. I guess if I had guts I’d sell covered calls. Might be a good approach if one felt strongly that upside to current holdings was limited.

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6 Dan Lavatan-Jeltz January 12, 2017 at 1:54 am

I make a lot on options for M&A activity, HTCH, CVT, MHGC, IM, and of course EMC all had near infinite returns in the last year. I’ve issued covered calls for all my long positions and expect them to be called away on the 20th. One problem is if you were to short the underlying is you need to pay interest and would need long positions to generate house surplus and put your capital to work, interest rate risk hurts bond prospects. I have to wait for the short put positions to expire worthless to avoid the bid ask spread, which is always much more than the stock is actually worth.

We know earnings, dividends, and PE ratios will be nonexistent, but will people be smart enough not to throw their money away? I’m not sure but I would love to take some long term put positions, that are short the market over the next few months. I just need them to be sure things, maybe in companies that will go insolvent. I would never go long VIX, one sure thing is it will go to zero no matter what volatility does.

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7 Doug January 12, 2017 at 6:06 am

“If you’re short, you are at infinite risk.”

Well, only in the sense that quantum mechanics says you’re at risk of evaporating and re-materializing on Mars.

A weekly re-balanced short position has virtually no additional risk over a long position. The maximum that broad-based stock-indices have ever risen over a 5 day period is well less than 20%, let alone 100%. It’s true that a short position, if held without rebalance for an arbitrary amount of time can lose over 100%. But why would you do that? Even if you’re too lazy to re-balance yourself, just buy a short ETF, like SH. In which case your total loss is actually explicitly capped.

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8 Rich Berger January 12, 2017 at 11:38 am

It’s one thing for the IYI to virtue-signal his anti-Trump conformity online. It’s quite another to risk your capital and I don’t think it will end well. Knock yourselves out.

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9 Rich Berger January 12, 2017 at 11:50 am
10 Floccina January 12, 2017 at 12:42 pm

You could buy this: PowerShares S&P 500 BuyWrite ETF (PBP)

I have been buy PID PowerShares Intl Div Achiev ETF and Vanguard Intl Div Apprec Idx ETF lately rather than US stocks, but not because of Trump but because of valuations.

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11 JWatts January 12, 2017 at 2:36 pm

“If you’re short, you are at infinite risk. If you buy puts, you have at most a 9-month time horizon. If the Trump crash takes 12 months to appear, you’re screwed. ”

Just sell your stocks and put it in the bank. Trump won’t be President longer than 8 years. So, buy back in year 9.

That’s not terribly complicated.

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12 Shane M January 12, 2017 at 1:16 am

I’ve only shorted a few times in my life, and it’s both a) psychologically very difficult and b) difficult to time even if you are ultimately right.

Michael Burry was able to sustain losing money for (I think) 18+gut-wrenching months, with his investors suing him and with serious concerns if he could survive to see his investment thesis on the subprime bust play out. He closed his fund after the ordeal.

btw, I have not particular opinion on the current US stock market other than it is historically expensive relative to alternatives.

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13 anon January 12, 2017 at 6:00 am

I think the interesting arc of the essay is that Tyler does acknowledge sticky patterns of behavior, and how they shape both behavior and beliefs.

Tyler doesn’t short because he doesn’t short. Is he more optimistic as a result? To square the books?

Gilbert claims that Tyler would return to his native level of optimism after becoming paraplegic, so compared to that, what is this?

http://nymag.com/scienceofus/2016/01/classic-study-on-happiness-and-the-lottery.html

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14 Pat January 12, 2017 at 1:18 am
15 Hemon January 12, 2017 at 1:18 am

I’d be more than happy to short an index of the welfare of the bottom 90% of the population (or any index that is strongly correlated with it) if you can direct toward one. That’s because my beliefs are that the effect of a trump presidency on this variable are non ambiguous. When it comes to the stock market, that’s not the case as my belief on the effect of a Trump presidency are a non-ambiguous decrease in long term growth associated with a non-ambiguous increase in the share of capital income in GDP and a possible short-term increase in growth, together bringing an ambiguous net impact on stock market cap that could last a while (in the long term we are all dead).

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16 Lord Action January 12, 2017 at 9:26 am

Consider the S&P 600 index of small caps. It’s likely more closely tied to the welfare of bottom-90 people and the non-coast population than more broad indices and large cap indices stuffed with multinationals.

http://www.spindices.com/indices/equity/sp-600

Plus, it’s been on a tear since the election, so you can directly argue with the market about whether Trump is good for the common man.

Any domestic small or mid cap index will do.

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17 Floccina January 12, 2017 at 12:51 pm

Do many of the top 10% shop at walmart or eat a mcdonalds? There have to be some companies that sell goods or services mostly to the 90% that you can short.

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18 phr3d January 12, 2017 at 5:38 pm

As a one-percenter, I eat at McDonalds, shop at Walmart, and drive a $14,000 Nissan. I’d bet the boundaries are much less pronounced than some would expect. It would be much safer to go long luxury brands, which are likely not consumed by the 90%.

Moreover, guessing the beneficiaries of suffering among then 90% is tough. Perhaps Chipotle loses to the benefit of McDonalds, and Safeway loses to the benefit of Walmart?

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19 John January 12, 2017 at 5:00 pm

I’m thinking the same thing. Let’s say Trump does corporate tax reform and pushes the average paid corporate tax rate from 28% to 15%. With a simple BOE calculation, that represents a 18% rally ((1-.15)/(1-.28)) in the stock market viz-a-viz Nov 8 2016, since corporate earnings would increase precisely equal to the value of the taxes they no longer pay. Shorting the overall stock market seems silly, especially if the effects of Trump’s wackier proposals won’t be felt for years into the future.

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20 stephan January 12, 2017 at 1:18 am

I think by now we know that trying to time the market is a fool’s game, witness the dismal performance of hedge funds in the last 5 years ( 1.7% annualized over the past 5 years vs the S&P 11% annualized). Yes there will be recessions and black swan events here and there, but unless it’s as bad as the Vrdedefort asteroid, we’ll recover. How many recessions or black swan events the US economy has not recovered from in its history ? exactly zero.

Play the US, with long term passive index investing. Impressive returns + dividends for nearly zero work.

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21 zeitgeisty January 12, 2017 at 1:34 am

I would say that now is a good time to rebalance and leave it at that.

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22 Thin-Skinned Masta-Beta January 12, 2017 at 1:35 am

Mr. Cowen has a fine colleague at Bloomberg VIew he might talk to. Has Barry Ritholtz done a “Conversations with…” yet?

Last year before Brexit, for giggles I started playing with options for the first time. Bought puts right before the Brexit poll and then sold those and bought calls a few days after the poll. My first experience was too successful for my feeble constitution and my own good. The relatively small wager I paid off what I normally earn working in two years.

The consequences were pretty bad. Imagine the first time you put a coin in a slot machine and it pays out thousands? You think you’re golden and it’s easy money. Needless to say a few weeks later my Brexit profits were gone and I’ve sworn off the speculation.

But like with junkies, the temptation is still there…

Maybe I’ll sell some covered calls…. I think the market euphoria might be a bit excessively exuberant at the moment.

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23 Ray Lopez January 12, 2017 at 10:52 am

“Needless to say a few weeks later my Brexit profits were gone” – Hay-Zeus man, you lost two year’s salary in a few weeks of fun? Even if you’re on minimum wage, that’s impressively foolish.

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24 Rich Berger January 12, 2017 at 11:34 am

I read Practical Speculation by Victor Niederhoffer a few years back and realized that I did not have the temperament to be a speculator.

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25 derek January 12, 2017 at 1:47 am

Maybe it is all just fuss and bother. Maybe the Great Stagnation is simply a factor of vigorous regulation dampening innovation.

In the 90’s BC had an NDP government and the economy grew at half the rate of the rest of the country. Investment simply wasn’t happening; people were sitting on their hands. Once they were gone, it all came back. I can see that happening in the US.

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26 Anonymous January 12, 2017 at 2:01 am

…..”.I have toned down my rhetoric.”

Can’t recall any writing or post where the rhetoric needed toning down.

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27 Nicholas Marsh January 12, 2017 at 2:19 am

Lore in my family, from people who bought and sold with others’ money, is that someone should never speculate with money that they can’t afford to lose.

The private assets that Tyler Cowen’s friends hold are probably there to fund their retirement or university fees for their children. Money that they can’t afford to lose and so sensible not to use for speculation.

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28 Mark Thorson January 12, 2017 at 2:41 am

Tyler’s essay is that there are certain people who seem to think that a Trump administration will be a disaster is a SURE THING. If it’s really a SURE THING, why would you not put all your money on what may be a once-in-a-lifetime opportunity to invest in a SURE THING? Or maybe you’ve just been saying a Trump administraion will be a disaster for mood affiliation with your set, and you don’t really have a clue what it will be like. Maybe it will be great. Really, really GREAT. BIGLY. HUUGE. Put your money on the other side of that, if you really believe it. You coward.

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29 Factory January 12, 2017 at 5:14 pm

You might be sure that the Trump admin might be a disaster, but can you be sure that the instrument you are using is directly correlated to that? Unless you are already working with the market, you prolly don’t. Or even worse, you think you do, but you actually don’t.

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30 prior_test2 January 12, 2017 at 2:44 am

‘The private assets that Tyler Cowen’s friends’

I think you have a remarkably low opinion of his ‘friends’ and their assets. I would name one concrete example, but that name always seems to only be read by a select few.

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31 Nicholas Marsh January 12, 2017 at 6:01 am

Fair enough, I was thinking about US college professors like Tyler Cowen. All the ones I know struggle to cover the costs of a house, retirement fund and college fund. But of course he may have friends who are a lot richer.

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32 Andre January 12, 2017 at 2:31 am

Is the president self dealing money to his kids short term bad for the markets? Is a massive tax cut for the wealthy short term bad for the markets? Do people think they are smart enough to predict what he will do when Trump probably doesn’t know? There isn’t a clear bet to make, so why should everyone be short the stock market?

Is there an obvious way to make money off of people getting kicked off of their health care? Short some particular rural hospital groups maybe?

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33 Mark Thorson January 12, 2017 at 2:46 am

Go long on Herbalife.

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34 James OB January 12, 2017 at 2:35 am

I’m (increasingly) long Bitcoin… does that count? 😉

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35 Mark Thorson January 12, 2017 at 2:48 am

You need to diversify. Dehydrated food, water purification equipment, and Smith & Wesson.

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36 Alex January 12, 2017 at 4:57 am

Hope you didn’t strengthen your long-lyness in the last days as BTC is taking quite some hits.

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37 prior_test2 January 12, 2017 at 2:42 am

This is not investment advice, but selling media companies critical of Trump short might be profitable. After all, soon to be president Trump is less restrained in public than Nixon when it comes to calling out enemies to suffer official ‘consequences’ – ‘I think it’s a disgrace that information that was false and fake and never happened got released to the public. As far as Buzzfeed, which is a failing pile of garbage, writing it, I think they’re going to suffer the consequences. They already are.’ https://www.washingtonpost.com/news/the-fix/wp/2017/01/11/trump-press-conference-annotating-what-the-president-elect-said-on-russia-the-economy-and-more/

Especially considering how we already live in an age where a billionaire with a vendetta funds a lawsuit to destroy a media company, the idea of a billionaire president on a vendetta shows just how lucky it is that America now has its first CEO president, a man who apparently feels above the rule of law – so much like Nixon did.

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38 Alex January 12, 2017 at 5:06 am

During Trump’s press conference yesterday, one sentence of his sent lockheed martin down 2%.

Not sure though if this is actually a sign of confidence-improvement. The stock almost rebounded intraday. Compared to Grexit, Brexit and 11-9 there’s a case for a shallowing of the populism induced end-of-world volatility. Right?

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39 Yancey Ward January 12, 2017 at 3:09 am

Or go long barbed wire, Uzis, jackboots, and tattoo ink.

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40 mulp January 12, 2017 at 3:45 am

Well, I’m invested in the cheap long short: cash and treasuries. And have been.

I thought there was a bubble in the 90s, in the 00s, but didn’t liquidate what stock funds i had either time because it kept going up. In 2008, I had to rollover my 401K which had become a 201K. Once in the IRA, it kept falling, then started rising for no reason. And has kept rising even as corporations are driven by higher share prices to slash gdp growth by slashing demand by slashing labor costs.

Public policy is based on the stupid idea of creating growth by cutting total aggregate labor costs by slashing investment in capital assets of all sorts because it seems conservatives really believe workers are not consumers and consumers are not workers.

Growth is coming from debt funded welfare consumption. When cuts in food stamps results in Walmart issuing guidance of lower revenue and profits, you should know the economy is driven by massive government debt that funds, not investment, but consumption.

When government debt goes to maybe 20% of top earners who buy shares of stock that are also being bought back by the corporations that issued them before 1980, the market is in a bubble. At some point, boomers will start selling stock faster than millennials can buy it, the stock market will fall, unless Social Security support more retirees than workers paying in. Social Security converted to private IRAs does not magically convert less money paid into the system than is paid out into a constantly increasing pool of money.

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41 Alex January 12, 2017 at 1:35 pm

Interesting. So you say in the long term, one should protect against a flood of boomers selling their stocks. Including the boomers. But how?

Without having the numbers for other countries at hand, Germany might be a good estimate of what a PE ratio looks like if stocks aren’t part of the boomer retirement-plan. In Germany the average bluechip’s PE is usually right under 15, whereas Swiss or US retirees that usually include stocks in their retirement plan get ‘their’ bluechips for a PE around 25.

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42 poorlando January 12, 2017 at 2:29 pm

With inflation expectations higher and rising interest rates, your buying power if not your capital will decrease if you are in cash and treasuries.

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43 Gary Leff January 12, 2017 at 4:08 am

My beliefs about the value of US stocks and the timing of any movements are insufficiently specified to make for an especially profitable trading strategy.. I happen to think that stocks are historically expensive, Trump notwithstanding, but will they move sideways for awhile or even nudge up before correcting? Or move sideways for a long time until earnings catch up with valuations rather than correcting? Believing “stocks are expensive” doesn’t imply “shorting stocks is profitable.”

What’s good for stocks in the short- and medium- term aren’t necessarily the same as what’s good for America. Will Trump manage a trillion dollar infrastructure project, transferring wealth from the median taxpayer to the median investor? You can believe that’s bad for the country and good for stock prices in the near-term.

Betting on individual stocks is hard, Trump is just as likely to shower tax benefits, contracts, or subsidies on a company as punish them. And it’s difficult to front-run his twitter account.

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44 Ritwik Priya January 12, 2017 at 4:28 am

Who is the intended audience for this? How do you know they aren’t indeed selling short, or that they have relinquished financial decisions to agents who may think/ have incentives to behave differently?

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45 Don't get it January 12, 2017 at 4:33 am

I’m not American, so let me get this straight. The new US President elect has promised big tax cuts for the rich but is obviously incompetent, that’s the general consensus, right? So isn’t the likely effect from that a rise in sock market prices now as people expect the rich to park a portion of what they used to pay in taxes in the market followed by poorer performance later as economic mismanagement gradually takes its toll and tax cuts are not likely to be repeated or become reversed as under Reagan?

I mean, the new President is like Silvio Berlusconi, right? And not the Joker who just wants to watch the world burn?

A Berlusconi means more people where I am will be learning Chinese rather than American in the future, but it doesn’t mean holding onto shares in Caterpillar or Tesla at the moment is a bad idea. So I don’t see a reason to necessarily sell US stocks now.

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46 Axa January 12, 2017 at 4:36 am

Tyler is just trolling. It’s easy to laugh at people going short cause of Trump because in the way Tyler frames it looks stupid. But, can Tyler joke about people selling some equities and keep the cash for a while?

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47 anon January 12, 2017 at 6:20 am

No, it is an interesting soliloquy on “should I remain true to the EMH, or should I admit that the Behavioralists are onto something?”

As I say, it doesn’t quite embrace the BE though, and might even use emotion (optimism) to return to the EMH fold. A bit perverse, that.

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48 Nattering Nabob January 12, 2017 at 4:59 am

Tyler is just trolling.

When is this ever not true? Music posts, maybe?

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49 yo January 12, 2017 at 5:11 am

Isn’t “Sell in May…” the old saying? Why not wait until May and then wait for the put options to fire?

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50 anon January 12, 2017 at 6:02 am

As a complete aside, response to the Trump presidency is a little like the man who has fallen from a fine window:

Fine so far ..

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51 Andrew January 12, 2017 at 6:25 am

OK, I’ll go

First point, selling short is betting 4 things, not 1: (1) that you’ve correctly read the impact of Trump’s agenda (2) that others haven’t (that it’s not priced in) (3) that Trump successfully executes his agenda (4) that the agenda causes a downward price shift, not just a slowing of growth (if the market’s up 2% instead of 5% because of Trump, that’s bad but short sellers still lose). You could be really scared politically by #1, while still being unsure about #3 and totally ignorant of #2 and #4. That describes me. I suspect it also describes Tyler. This is how amateurs lose money to professional traders – they know what’s priced in, we don’t.

Further, I do not necessarily expect Trump’s policies to be negative for equity valuations in the near term. Many corporate tax cuts, when enacted, will boost the near term earnings expectations of most firms (even if it is bad policy over the medium term). Anti-trade action is the place he’s most (economically) heterdox, and the impact of that is more likely to put a slight headwind on growth over a long time frame than cause a short term downward dislocation, as we saw with Brexit.

You could probably pick out specific trade-dependent stocks that might suffer, but search costs there are real (do you really know how much importing Disney does on an accounting basis?) and my first point still applies.

His foreign policy heterodoxy probably does raise the odds of an extreme tail event like a nuclear attack, which is terrifying and horrible, but it’s not clear the impact that would have on the equity markets either – e.g. they’d probably close for several days at a minimum, and then there’d be some “broken windows” type surge in infrastructure spending as we rebuilt….

Equity markets are very different from well being of people.

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52 Andrew January 12, 2017 at 8:13 am

As a follow up, here’s some data on equity market performance during what I think you could reasonably call the worst case scenario, Germany from 1933-1944:

https://www.quora.com/How-did-Germanys-stock-market-perform-during-the-rise-of-the-Third-Reich-Did-it-give-out-warning-signs-of-what-was-to-come

Equity markets do not conform to good outcomes for people.

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53 Ray Lopez January 12, 2017 at 10:55 am

I think Jeremy Siegel in “Stocks for the Long Run” pointed out even Japan and Germany’s stock markets worked out, if you bought after WWII (even if you had bought before WWI). But that’s assuming you have a 80-100 year long horizon.

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54 Axa January 12, 2017 at 9:08 am

Thanks for your analytical take. Successful shorting is complicate.

Tyler used it as a rhetorical figure for a “put your money where your mouth is” kind of piece. But, the Tyler’s simplistic view of shorting make his piece fall apart.

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55 Maya Angelou January 12, 2017 at 1:32 pm

If you think a nuclear attack would be good for stock prices then you are out of your mind. If someone told me there would be a nuclear attack in a week I would 100% have a massive short position

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56 Shane M January 12, 2017 at 1:34 pm

If Cliff Asness is reading he can correct me 😉 , but I think he’d say (or has argued) that if you’re bearish probably the best quant evidence leads you to just reduce exposure marginally at the fringes of your portfolio. No big binary swings. Maybe get a little more conservative or a little more aggressive.

The premise of the post seems to be that non-experts in the market should make drastic investment calls with their savings. Most of us are not sufficiently competent or attuned. As revealed in Market Wizards, even well known traders who study these things for a living often blow up their accounts several times before they figure it out (if then)

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57 poorlando January 12, 2017 at 2:39 pm

I don’t think professional traders have some sort of special insight into the future or what is priced in to stock prices. What sets them apart from amateurs is their ability to manage risks in their positions. Professional traders are wrong all the time and yet they still make money on net. Professionals learn how to limit losses to live to trade another day. Amateurs will let their bad trades bring them to ruin.

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58 Joe B January 12, 2017 at 6:54 am

I know two friends who basically got out of the stock market right before the election. One because he thought Trump would win and tank the market. The other because he thought Clinton would win and tank the market.

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59 SC January 12, 2017 at 7:09 am

Mr. Cowen, this is a lovely column and pitch perfect in sentiment. One alternate explanation counter to your point is that we do tend to be much more loss-minimizing than expectation-maximizing, so maybe if/when it hits the fan, mobilization won’t be so hard as you suggest. But I love the message here.

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60 rayward January 12, 2017 at 7:20 am

Well, the wise investor would have shorted pharmaceutical stocks before yesterday’s news conference. Here’s an interesting dialogue, Peter Thiel playing Peter Sellers playing Chauncey Gardiner: https://www.nytimes.com/2017/01/11/fashion/peter-thiel-donald-trump-silicon-valley-technology-gawker.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=second-column-region&region=top-news&WT.nav=top-news&_r=0 I recall Cowen’s dialogue with Mr. Thiel, at one point Cowen mentioning Gnosticism and the two of them looking at one another, knowingly, and smiling. Is Chauncey Gardiner’s gibberish wisdom for those who know, is Peter Thiel’s gibberish wisdom for those who know, is Donald Trump’s gibberish wisdom for those who know? The similarities between many of Cowen’s blog entries and Thiel’s version of wisdom reflected in the dialogue cited is inescapable. Are Cowen and Thiel one person or two? [No, I’m not being either critical or sarcastic. What is wisdom? What is knowledge? What is real?]

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61 Robert January 12, 2017 at 7:48 am

It could be just that the assessment is wrong and overstated. Prices are relative. Would there be much difference between another administration? Are you balancing enough of the possible positives?

Are you short, Tyler? If not, why? Also, if not, then surely there are more like you, taking the other side of the bet from doomsayers, balancing the market price at the current equilibrium.

Not a great article.

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62 Matthew Young January 12, 2017 at 7:56 am

Watched pot effect.
There remains a good possibility we might just skate through it, or even the possibility of fixing some major defect.

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63 AlanG January 12, 2017 at 8:59 am

I’m very optimistic particularly after the press conference where Mr. Trump highlighted the 96 million people that are hungering for jobs and “that’s the real number” Under the border tariff there will be a massive investment in America and all these job seekers will have high wage jobs and spark a round of demand that has never been seen in this country before. This will be really great, really terrific and the greatest prospective jobs President in our country’s history will leave his mark.

Or maybe he won’t.

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64 celestus January 12, 2017 at 9:47 am

So far this year I’ve been traveling too much to devote enough attention to it, but at some point in the near future I’ll do the same thing I did last year, buy a few stocks but definitely have a short position in some others and in the overall market. Don’t know if that counts.

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65 The Other Jim January 12, 2017 at 9:48 am

People are not short for the same reason they have not moved to Canada.

They are nothing more than whining crybabies upset about losing the profoundly historic 2016 election.

(As well as about losing the imaginary status they thought they had.)

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66 AL January 12, 2017 at 10:15 am

If you had shorted the German markets when the Nazis took over, you would have been ruined–even though, over the long run, you would have ultimately been spectacularly right.

What are you really arguing here, Tyler?

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67 Joël January 12, 2017 at 11:22 am

The German Stock Market was basically wiped out 10 years after the coming of the Nazis to power. It is not so long-term.
The stock market index rose from 6.43 in 1932 to 27.75 in 1943 but then trading was almost essentially suspended, and when it reopened in 1947, the index was 0.76. Thus, if you were a foreign investor with a medium-term horizon, you could make a lot of money betting against the German stock market. Similarly, people who think that Trump will cause an economic meltdown could make a lot of money if they are right.

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68 Rick Hyatt January 12, 2017 at 12:34 pm

The Nazis routinely nationalized and confiscated wealth in seizures, forced sales, and simple theft and fraud, and many of those companies in that index simply did not survive. How does one make money shorting? Can you give any examples of who actually did make 10x+ off shorting Nazi Germany as you claim was possible?

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69 AL January 12, 2017 at 12:44 pm

When the market booms–and you are short–you get killed. It’s that simple. If it goes down again, even collapses, it doesn’t matter. You were right, but you’re still ruined.

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70 Maya Angelou January 12, 2017 at 1:35 pm

So is the position of most progressives that Trump may very well be great for the economy for the next 10 years?

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71 FYI January 12, 2017 at 10:20 am

I find it funny how so many people got offended by this post! Calling people stupid or hypocrite is still a sure way to upset them. I think Tyler’s points are very simple and very true. He is not talking about average Joe’s shorting the market. He’s talking about highly above average individuals doing so. These kind of people short the market all the time. Why are they not doing it now? Why is the market actually going up? Is the market going up compatible with the idea that Trump will “destroy America”?

I really enjoyed the article.

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72 Noah Yetter January 12, 2017 at 10:26 am

You can’t short the apocalypse, too much counterparty risk.

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73 Seth January 12, 2017 at 10:34 am

The problem is that the sort of catastrophic events that might tank the market would likely also do worse than simply tank the market and would likely negate any gains from shorting the market. For example, suppose Trump begins unconstitutionally arresting the heads of pharmaceutical companies because of their price gauging. This will almost certainly tank their stock prices. But if one were to profit off this by shorting pharma companies, it puts one at risk of also being subject to the same extrajudicial abuses. Or, more generally, if there is a market collapse, the odds of Trump using governmental powers to target anyone who profits off the collapse are non-negligible, again negating the potential upside. And of course the most extreme catastrophes, such as the end of liberal democracy, nuclear war, etc, would also render gains from shorting the market worthless.

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74 psmith January 12, 2017 at 11:48 am

The market can stay irrational longer than you can stay solvent, as they say.

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75 jseliger January 12, 2017 at 12:59 pm

An excellent post, but I’d observe too the usual caveat: markets can remain irrational longer than you (or I, anyway) can remain solvent. I am worried about the usual suite of bad things but don’t know the timing of them.

For one salient example, a lot of housing prices, especially in major coastal cities, started to seem out-of-whack to me in early 2015. As I write this today they are still out-of-whack. They could stay out-of-whack for a very long time.

IIRC, Megan McArdle started observing that there was a housing bubble in the 2003 – 4 neighborhood. But that bubble didn’t burst in earnest until ~2009. Had she shorted in 2003 she likely would’ve been massacred.

At the end of the day, though, you are right and my money isn’t where my mouth is.

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76 JWatts January 12, 2017 at 2:47 pm

“An excellent post, but I’d observe too the usual caveat: markets can remain irrational longer than you (or I, anyway) can remain solvent. I am worried about the usual suite of bad things but don’t know the timing of them.”

If you are confident that Trump will be a net negative then: Sell your stocks, hold the money for 8 years, buy in year 9. Your solvency isn’t going to be effected.

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77 Factory January 12, 2017 at 5:32 pm

Unless he oversees a large amount of inflation, then this strategy will be a loser. Trump might be a disaster, but the exact type of disaster will determine what your trading strategy should be.

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78 JWatts January 12, 2017 at 6:07 pm

“Trump might be a disaster…”

There’s your problem. If you are true believer then you know Trump is going to be a disaster. Plenty of people are claiming that Trump will be a disaster, but those same people aren’t drastically changing their stock holdings. So, the revealed preference is that they don’t truly think Trump will be significantly different for the stock market than Obama.

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79 Eric January 12, 2017 at 1:15 pm

You do not short the market because those existing companies are best placed to rent seek and enjoy the benefits of protection. The interest of corporate equities or debt doesn’t necessarily gauge economic growth, for they are bolstered by erected barriers to new entrants.

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80 dvk January 12, 2017 at 1:32 pm

It’s tough to short stocks when the bond market looks so overpriced. We’ve seen huge flows out of bonds (and some of that $$ has gone into the stock market) since the election. US Dollar strength and expectations of future inflation risk is butting up against the last remnants of stimulative Fed rates. I’m not short, but I’m down to a lower equity percentage than I have been in my adult lifetime — and 0% fixed income. Cash is pretty non-productive. There is a capital bubble such that all financial assets seem pretty richly priced. I like the dividend rate and growth rate and inflation protection of stocks, but I think the risk of PE ratio compression offsets the upside and makes it tough to feel bullish. As inflation rises, the discount rate rises and the PE ratio should fall. The sensitivity is especially high because the rates are so low. PE should be equal to the earnings divided by (discount rate minus growth rate), that’s why. Personally I hate buying VIX options because of the “roll”). Roll refers to the falling option premium as time passes. I prefer to sell calls over buying puts for that reason.

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81 Roger Barris January 12, 2017 at 1:48 pm

The short is very easy to implement. Short S&P 500 futures. Keep rolling them until the world detonates, if that is your view. There are no mechanical impediments to shorting for those who think that Trump will be a disaster, just a lack of cojones.

As for the reasons why Trump haters don’t short the market, Bryan Caplan’s analysis in The Myth of the Rational Voter supplies the obvious answer. Because of the zero probability of affecting a voting outcome, people are free to indulge their political and economic biases at zero expected cost. However, introduce some cost (or risk), and suddenly things change — having money at risk tends to focus the mind. This is basically the same explanation for why people can be consistently irrational in their voting activities, but consistently rational in their personal economic decisions (about consumption, etc.). With no cost to being politically irrational, they can choose to “consume” the psychic benefits of their irrational belief preferences.

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82 lemmy caution January 13, 2017 at 10:38 am

The stock market could easily raise if more money goes to the people that buy stocks:

https://www.stlouisfed.org/on-the-economy/2016/may/does-stock-market-impact-income-inequality

Trump is going to be bad but it may not hurt the stock market

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83 Ricardo January 12, 2017 at 5:04 pm

Is this post relevant?

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84 brad January 12, 2017 at 6:10 pm

I have June expiring puts on SPY. I will roll them if nothing happens by May or so.

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85 peter smith January 15, 2017 at 12:28 pm

5) Would have been a great, and counter-cultural, article in 2013. That was when hype was genuine, and appliance type production for the home was seriously suggested. That was the year Stratasys acquired MakerBot, and Bre Pettis made the rounds saying silly things.

I was anti-home-3d in 2013, because the “home production” of cheap plastic crap really didn’t make sense. In 2016 this criticism is too late, because the hype to criticize is long gone. Deceased. Dead parrot.

Now, if you want to write a good story, describing the arc of 3d, you should talk about what happened between 2013 and now, the pull-back at MakerBot and the restructuring, the shift in focus from “every home” to people who self-identify as “makers” and “hobbyists.” Then, I think you see some new growth, and some positive developments. The first and foremost is that 3d printers of this type have gotten very cheap. Entry price is around $400 now. People are using them to interesting, rewarding, obscure, and nerdy projects.

The second thing though is that the maker/hobby market is about continual process improvement, and there are many people who do want to get to “home appliance” someday. They might. If you are not a maker or a hobbyist you can wait, if you don’t want to wait, you can pick up a printer.

http://www.3dprintmanual.com/best-cheap-3d-printers/

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