On this blog, we often talk about the changing of patterns and how it breaks the investment thesis for certain types of products. For instance, our November 2012 monthly article on quantitative investment pointed out that products based on replicable trends sometimes fail spectacularly when there is a quantum shift in established patterns. This disruption manifests in classically accepted patterns, like the relationship between treasuries and municipals, or the expectation of mean reversion for commodity prices. With apologies to Shakespeare, sometimes what’s past is not prologue.
Yesterday was Super Tuesday. I was up late last night watching the results of the political primaries across the south and northeastern states. Front runners – Donald Trump and Hillary Clinton – continue to build on their delegate leads on their way to their nomination, but none of their largest political opponents – Marco Rubio, Bernie Sanders, et al. – will be in a hurry to quit the race. Much has been written about the impact of the 2008 financial crash and its lackluster recovery’s contribution to the current political climate. There is a clearly good argument to be made for disenfranchised constituencies and demographics asserting themselves like never before during this political season, with a number of protest candidates on both the right and the left side of the political spectrum looking for a significant shake up of the status quo. It is this shake up which has made predictions for this political system so difficult for political pundits to predict effectively. Moreover, the capacity of some of these protest candidates to change economic and investment realities is significant. This is obviously true if they are elected, but it may be true even if they aren’t, since they may still manage to push the political center of the underlying electorate. Given the push-back against the status quo from both the left and the right, I think it’s fair to expect some volatility from the political environment spilling into the economic (and investment) status quo.