Thinking Tactically In An Event-Driven, Hyper-Political Trump World

Ben Hunt, Salient

Remember the movie (based on the book) “The Big Short”? A tiny handful of investors sat and waited for Bear Stearns and Lehman Brothers to go belly-up. According to the story, these guys went out and spoke with real estate developers. They spoke to the brokers selling sub-prime mortgages. They spoke to people who clearly had no business buying half a million dollar homes who were out buying…half a million dollar homes. They were essentially predicting an event: the popping of the housing bubble, and the entire mortgage backed derivatives market behind it. It took them years to get it right. But in the fall of 2008 they did, and within the course of six months, oil prices went from around $180 to $50 and the S&P 500 went to that devilish intra-day low of 666 on March 6, 2009. Those investors went from zeroes to heroes. They recovered all their losses and then some.

Later, a number of investment firms turned their focus on monetary policy out of the Federal Reserve. The key event was quantitative easing. For every toxic MBS you had, the Fed would buy it back for a penny more. Entire funds were designed on this trade. The bottom was reached. It’s been up ever since.

And now in November we have been hit with a surprising political event. The election of Donald Trump. What does that mean for world trade? For monetary policy? For fiscal policy? More importantly, how does that embolden world leaders in Europe to follow the U.K.’s footsteps, right out of the European Union’s door?

On Tuesday, RIA Channel hosted a webcast presented by Salient called the Strategic Investor’s Guide to Tactical Investing (available now to watch on demand here) giving financial advisors a sense of how to prepare for big events shaping the flow of capital from one asset to the next, often at break-neck speeds.

“Trump is a regime change event that brings with it a shift from the investing story being all monetary policy all the time to one of fiscal policy hope,” says W. Ben Hunt, Chief Investment Strategist for Salient. “It’s a hope that we can achieve a legislative trifecta of regulatory repeal, tax reform and repatriation of dollars from U.S. corporations overseas that gets spent on things other than stock buy backs, and infrastructure spending,” Hunt says.

It’s a long putt on the green, but not an impossible one.

“A hope-based market is a two-by-four market that is going to get smacked between the eyes with that two-by-four before it gets stopped,” he says about the market’s current momentum. “It’s going to take a catalyst, which is the other piece of event driven investing, to stop this market from levitating on regulatory reform, tax reform and an infrastructure bill. Where will that catalyst come from? I don’t think it comes from the US. The catalyst will come from Europe or China. Especially if (French politician Marine) Le Pen wins, because she wants to dump the euro. If that happens, the European banking system gets a collateral problem, much like the breakdown of the MBS here after 2008. The trigger is the euro.”

So what do investors do about that? If you’re managing client money, one way is to get totally tactical and think about the big events that will disrupt markets. Advisors need to know ahead of time how they would prepare for those events and position accordingly. An easier way is to let someone else do the work and put client money into tactical investment funds like Salient’s Tactical Plus Fund ([stock_quote symbol=”SBTIX” show=”symbol”]), a global long short equity fund.

The fund’s manager, Christopher Guptill, spent about 40 minutes during the webinar explaining his proprietary models and the thought process behind the fund strategy.

Investors all see the market going up. Everyone knows what comes up must come down. And everyone knows that the volume on the political noise coming out of Washington has been cranked to 10 ever since Trump was elected. How should money managers hedge these unknown political risks? Is it by buying the CBOE Volatility Index (VIX [stock_quote symbol=”VIX” show=”symbol”])? Is it the SPDR Gold ([stock_quote symbol=”GLD” show=”symbol”]) ETF, or just keep larger positions in cash? Overlay strategies that are designed to protect an overall portfolio tend to be tactical long-short plays focused on policy and big events, be it a BREXIT bet or an OPEC production cut bet.

The key to surviving in a world where political shocks are becoming more common is as old as portfolio theory itself: embrace the volatility, prepare for positioning ahead of big events, and buy when there’s blood in the streets.

“It’s a mistake to have a blanket attitude to prepare your fund now for bad things,” says Hunt. “That’s not being tactical. You need to know what to look at so when the event occurs you are ready to be adaptive to what’s happened.”

Salient mentioned the French election in May as one event driver. It will get bumpy. How are you preparing for it?

“I’m trying to see which way the winds are blowing,” says Hunt. “Being tactical means you identify the events and prepare to be adaptive and reactive to them.”  Watch the webcast replay here now.