The cheap cheap price of political risk


The Mike Lindell documentary has caused quite a stir in the United States and got us thinking for a bit today.

Let’s first outline the issue:

Mike Lindell produced a 2 hour long documentary that unpacked what he made the case to be as clear evidence of voter fraud, and more importantly, foreign interference in the US election.  There was initially a sense of jubilation among many of President Trump’s supporters after watching the video.

We want to look at this strictly from the point of view of whether this documentary portends a political tail risk event. If it does so, is there any evidence to back it up?

More importantly, can we assume that financial markets are information efficient, in the sense that the collective knowledge of all market participants allows the market as a whole to ‘get ahead of the curve’ and predict this? If we observe nothing – like what we see this morning with Dow Futures up slightly, does this mean that this is a non-issue and can be discounted?

The biggest economic risk is actually political risk. Political risk is an extreme tail-event, an event so rare, that it happens maybe once in a 100 or 200 years. In the last 5 years, there were several minor political risk events such as the Brexit vote in 2016 and Trump’s Election later on in that year.

If you compare both events, the outcome was quite different.

In the case of Trump’s election in 2016, it was the unexpected political outcome in a one of two scenario as possible in an election. During Asian trading, the Dow Industrial futures slumped to -800 points, but by the time US Markets opened later that day, the drop had been erased and the Dow Jones went on a massive risk-on mode rally.

In the case of the Brexit referendum, a similar sell-off was observed that Friday when the results were announced. Once again, it was an unexpected one of two scenario, and the markets took a bit longer to recover, but I believe they recovered within a month or 2 months max.

Now the Mike Lindell documentary presents a very different kind of political risk.

The following chart shows the interest over time in this documentary, which due to the Streisand effect, is predicted to rise despite Big Tech’s best efforts to censor it.

But let us be clear here.

While the documentary itself had a breakout trend, it is nothing compared to the American’s interest for their favorite past-time. This perhaps is the biggest indicator that the ‘status quo’ bias is well founded, people generally don’t care.

The other observation is the idea of ‘collective injury‘, ‘collective grief‘ and ‘collective desire for retribution.’ To my recollection, over the last 70 years, this happened only 2 in the United States, the first being the bombing of Pearl Harbour in 1941 and the second, the 9-11 attacks on September 9th 2001. In both cases, the United States actually declared war as a result.

We scanned the New York Times and the Washington Post and there was no mention of the story by the My Pillow guy. Nothing.

It was an elegant silence.

Currently, there is no view priced into the market of anything either than the continuation of a Biden administration in the United States. You honestly cannot say that the market is currently pricing a 0.00001% chance that the system of government in the United States will change abruptly. The reason is that this risk premium for the converse outcome (think of it like an insurance premium) is so small, it might as well be called as 0.

That is an argument from a financial markets stand-point and is purely a function of the current prices you observe. A contrary perspective would be if you saw the Dow Jones drop to 20,000 points ever since Biden was inaugurated. Then one could argue that ‘hey the market may be pricing something related to political risk.’ But it has not, the Dow Jones is currently at 31,148.

Now the question is whether or not this kind of probability you can get by observing market prices actually translates to a real – world probability of something very unexpected happening that could change the nature of the Government of the United States. We look at the the real-world probability strictly from a political-theory perspective and ignore any information from the stock market.

From a political-theory perspective, the biggest question I have after listening to some of the comments out there is how did Mike Lindell get all this information that pointed to the involvement of nation actor states in the US election. (Now we ourselves have shown that vote switch did occur, so it does not surprise us). What surprised us is the level of detail that has been revealed – IP addresses, machine ids and so on.

I guess there are 2 ways to look at this

  1. A group of individuals began monitoring the internet traffic prior to the election and had a command center to pick up the information and passed the info to the MyPillow Guy
  2. A particular branch of military in the United States monitored the internet traffic and had a command center to pick up the information and passed the info to the MyPillow Guy.

You make your own guess as to which outcome is more probable.

The second thing that has been bugging me a bit this week was the announcement of the resignation of the Amazon guy, the resignation of the CNN President and the decision of the Google guy to relocate out of the US. Why did everything happen in 1 week, so quickly one after the other?

The third thing is why did the US Secretary of Defense announce an immediate 60 day stand-down of the entire US military?

Above is the memo. All units to take 1 day within the next 60 days to discuss the issue. (Note: That means keeping your mouth shut and saying ‘Yes Sir. No Sir. Yes Sir. No Sir.’).  

Why this bugs me is that such a decision should be conveyed by the President as he is the Commander-in-Chief, the Secretary of Defense is a policy maker and advisor. If it was communicated in another way, like the Defense Department will start on a new policy to introduce Wokism at every level in the military, then it may make sense for him to give the order. But what was given was tantamount to an order that affects the defense readiness of the country.

Now we offer a very good counter example over here.

This was a statement put out by the Pentagon the day that Trump tested positive for Covid. In the statement, the Pentagon said “there’s no change to the readiness or capability of our armed forces. “. That means that by default, the Pentagon takes military readiness very seriously, in fact this post was because there were reports that 2 E6-HB Mercury were airborne. In fact, by induction, the nature of the US military command is such that it can be controlled even by remote by the President, such is how they structured their armed forces so that they can offer an effective second strike capability (in order to prevent a first strike-lah.)



So after looking at these 3 things, we simply cannot agree that the current political risk climate in the United States is so low that the stock market does not take notice.

But there in lies the issue with such a binary outcome. Let’s say things came down to the wire and a call was about to be placed that would change the nature of the US Government. But that call never got placed at the last moment because the person had a change of heart.

The observed outcome will always be ‘Situation normal. Nothing to Report.’ Of course, if the call was placed and things did change, then everybody will be saying : “Wow, this was so unexpected.

This is precisely why political risk is so cheap. If you say ‘Nothing will change’, on the long run you have a 99.99% chance of being correct. Conversely, if you cry “Conspiracy Theory” then you have 99.99% chance of being wrong in the long run. Even worse, people will scold you, mock you and you could lose your job – which will explain why no one except  for the big hedge fund managers will take the position, and make the kind of billion dollar gains that everybody wished they made.

The key question is whether one believes they are at the 9,990th index position of a 10,000 long sequence when the Joker card is at the last position.

Our conclusion is simple: 

Manchester United disappointed us yesterday tremendously. They should have held on to a win to keep pressure on City.

Man United are a bunch of jokers, they should defend better.


Another week.

Another sad Monday.


[ Ok, cancel the football season because Citeh is going to win it.]

That is all we have to say.


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