How much damage will the “Trump tantrum” do to markets?

The Vix has been getting a lot of press recently.

The Vix is known as Wall Street’s “fear gauge”. The idea is that when it’s low, traders and markets are very relaxed. What it tells us in practice is a little less clear.

But the upshot of this glut of articles on the topic has pretty much boiled down to: “It’s quiet. Too damn quiet”.

Well, not any more.

It’s oh so quiet

The Vix – the Volatility Index – is often described as Wall Street’s “fear index”.

Put very simply (in fact, probably overly simply), the Vix gives you an idea of how cheap or expensive it is to buy insurance (“put” or “call” options that give you the right, but not the obligation, to buy or sell the market at a given price) against big market moves.

Markets being markets, you can also bet directly on the Vix. Exchange-traded instruments that enable investors to bet on the Vix continuing to fall have become very popular, for example.

But for all the attention it’s been getting, it’s not actually clear how much use the Vix can be to ordinary investors. Yes, it’s been at or near record lows for a long time now. But that doesn’t tell you a lot in itself.

I mean, when the Vix is low, you know it’s going to go higher at some point. But the mere fact of it being low does not mean that it’s going to go higher tomorrow. So it’s not much use for market timing – for predicting the future.

And you don’t even need it to tell you how markets are feeling now. If I’d asked you if markets seemed surprisingly calm over the past weeks – you know, given all the political turmoil and whatnot – I don’t think you’d have needed to look at a chart of the Vix in order to reply: “yes, they do a bit”.

If you need to see how calm the market is – just look at the market. If it’s not going up and down a lot – well, that means it’s calm.

What’s probably been a better indicator – certainly of timing – is the growing number of pieces popping up in the press, remarking on how calm the market is. When everyone is talking about it, that’s often a good sign that something’s going to pop up to ruin the peace and quiet.

And now something has finally ruffled the feathers of this particularly docile market – the potential impeachment of US president Donald Trump.

The market realises that Trump probably isn’t cut out for this

Everyone who was worried about the Vix being really low can now relax. It jumped sharply yesterday – its biggest leap since before the US election.

Meanwhile, the US stockmarket fell by nearly 2% and gold surged, pretty much erasing all of the losses it’s seen over the past couple of weeks.

What’s going on? Let’s call it the “Trump tantrum”.

The more I see of the US president, the harder it becomes to put his actions down to some sort of Moriarty-esque masterplan. He just seems like someone who is used to being able to get what he wants through bullying, brash charm, or simply walking away and pretending he never wanted it in the first place.

Now he’s in an environment where ultimatums very rarely work, you almost never get what you want, and a shoddy compromise is a good day at the office. Welcome to politics, Mr Trump.

The other problem is that he also seems to be a bad leader. He must have done something right (even if he inherited a lot of his money, he at least hasn’t lost it all), but he certainly doesn’t seem to be the kind of guy you’d want to work for. He’s mercurial, constantly undermining his staff, and his ability to take responsibility for his actions appears to be non-existent.

Here’s a line from a speech he gave to cadets at the US Coast Guard academy yesterday: “Look at the way I’ve been treated lately, especially by the media. No politician in history – and I say this with great charity – has been treated worse or more unfairly.” That’s not inspiring.

I’m not trying to do Trump down – I really don’t feel strongly about US politics (whereas I could rant for hours about the UK). Instinctively, I dislike him because he’s a bully, but I’ve tried to give him the benefit of the doubt. But he simply doesn’t seem to be up to the job.

Anyway. My views don’t matter. But I express them because it looks as though the market is starting to have a similar epiphany, and “this Russia business” looks like it could be the last straw.

Hunker down for the disillusionment trade

Long story short: allegations about inappropriate contact with Russia have dogged the Trump administration since before it came into power. And Trump just can’t stop digging.

He fired James Comey, the head of the FBI over the “Russia thing”. Then it turns out that Comey had written a memo in February about a meeting in which Trump had tried to pressure him to drop a probe into the “Russia thing”. And on top of that, Trump then apparently divulges top secret information to the Russian ambassador in a meeting at the White House, without getting clearance first.

Now an independent outsider – ex-FBI director Robert Mueller – has been appointed to head the investigation into Trump’s Russia connections.

Will Trump end up being impeached? It’s possible, but in a way, it’s irrelevant. The real worry for the market is this: it’s been hoping for a big spending splurge from Trump since November last year. He was the president who was going to “get things done”.

But with all of this going on, even if he doesn’t get impeached, it’s hard to see much getting done at all. As one analyst put it earlier this week: “If special prosecutors are hired or there is more talk about obstruction of justice being an impeachable offence, one can kiss the tax plan, health care plan, and fiscal stimulus plan goodbye for 2017”.

So what happens next? We’ve been suggesting you avoid US stocks as a group for a while. And with faith in the Trump reflation trade vanishing, we could certainly see another deflationary scare.

The market is all set for the Federal Reserve to raise interest rates again in the near future. A major market panic could tempt the Fed to put that off. That would be bad news for the US dollar – no longer as crowded a trade as it was, but probably not done falling yet.

Can the economic recovery itself help markets cope without the hope of another bout of stimulus? Let’s watch the data. But given valuations, there’s ample scope for upsets.

So it’s time to hunker down for the Trump disillusionment trade. I think we’ll see the dollar fall against most currencies for a while – especially the euro. That’s probably good news for gold, but the fear over the reflation trade means miners, cyclicals and the like could hit a hurdle for the time being. We’ll keep you up to date.

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