How to hedge Trump Impeachment

• Buy Mexican equity, Mexican peso, Japanese yen
• Sell copper, UW US equity and EM equity

One can find people’s mood/nervousness of Trump impeachment at https://trends.google.com/trends/explore?date=today%2012-m&q=trump%20impeachment

 

 

Two things where I disagree with GMO’s quarterly letter

Very interesting and pleasant read of GMO’s Quarter Letter “This Time Seems Very, Very Different” . However, two things on which I disagree with Jeremy Grantham:

1) Globalization and branding help to drive high profit margin?

Globalization and branding may sound a plausible explanation for high profit margin of S&P 500 companies. After all, with globalization those companies can now easily tap into international customers. However, according to S&P,  “S&P 500 Foreign Sales at 44.3% in 2015, Lowest Level Since 2006”. That looks at odd with Jeremy’s assertion.

2) Benefit of real interest rate being competed away?

Jeremy dismisses the effect of real interest rate on equity valuation (see the screenshot below), saying that the benefit of real interest rate will be competed away. I disagree. Reducing real interest rate is exactly a policy tool that many central banks use to boost the economy (after they boost the stock markets…). While individual firms might compete away some benefit of lower interest rate, the market as a whole benefits from it. In fact, the GMO paper seems implicitly highlighting the effect of real interest rate on equity valuation.

Political events vs markets – not linear

If one had a crystal ball end of 2015 and knew in advance that British would vote for leave in June, Trump would get elected in November and Renzi would resign in December 2016, then he probably would buy gold and sell equity. And unfortunately that person would lose money even with perfect foresight of political events.

However, if he did the same exercise end of 2016 and knew in advance that May would trigger Article 50 end of March and call a snap election in April, the defeat of the anti-euro party in the Dutch election, Erdogan’s win in the Turkish referendum, and Macron’s win in the first round of the French election, would that person sell gold and buy equity? Probably so……and that would have made him decent gains.

At the end of the day, in your opinion, should one trust a crystal ball that predicts political events?