Risk Management and Magical Thinking
November 13, 2020
A key part of dealing with the narrative driven world that we live in is recognising that just because ‘everyone agrees’ that something is true, doesn’t mean that in the end that turns out to be the case. Risk management is thus about remembering Mark Twain’s wise words (of so many), that the biggest risk is not the unknown, but the discovery that what we know for ‘certain’ turns out not to be so.
Over the last week the market has had several, largely positive, surprises. Firstly, that there was no Blue Wave of Democrats sweeping all three branches of the US government. Whether the polls drove the pundits or the pundits the polls doesn’t really matter. The reality is that once again magical thinking was found wanting. Just because the Media believed it to be true, because in their world it really should be, doesn’t make it so. The market liked this, because it doesn’t like politicians having very much power. Or as the great US humourist P J O’Rourke put it:
Giving money and power to government is like giving whiskey and car keys to teenage boys.P J O’Rourke
The second positive surprise came from the Merchants of Health, when Pfizer announced that its vaccine trial showed 90% efficacy. They tested 44,000 of which half had a placebo. Of the 94 cases we should assume that most, probably 85, had taken the placebo, which is great. Except of course what it also means is that with only 84 people out of 22,000 developing symptoms, that the placebo is 99.6% efficient at preventing Covid, whereas the vaccine is 99.96% efficient. And remember this is for getting symptoms. Not dying of it.
This takes us back to framing. If doing x means your risk improves from 99.6% chance of not getting it to 99.96% is it actually worth it? Not just the monetary costs but also the fact that the producers are demanding indemnity from prosecution if anything goes wrong, while many in government are trying to make it compulsory. Given that for most people this is a virus that you have to be tested to see if you have it and from which you are 99.8% to recover if you do, one wonders why it is needed at all. To adapt the meme about Masks “If I pretend it works, will you pretend I’ve taken it?” I’ll take the placebo thanks.
Of course the market is correct to take this positively for it provides a different sort of placebo; it allows western governments who have painted themselves into a corner of lockdown zealotry to escape with their reputations intact (at least as far as they think). Together with more rapid testing (another ‘recent’ announcement, presumably also down to ‘President Elect Biden’) this should allow a semblance of normalcy to return and the men and women in lab coats to be simultaneously feted and pushed back into their labs.
Which brings us to the final thing that we ‘know to be true’. The Donald has gone. We know this because all the press have told us so and many ‘western leaders’ have fallen over themselves to congratulate “President Elect’ Joe Biden. And yet….not yet. Investors need to be very careful of what they actually truly ‘know’ here. The constitution allows for the Republicans to challenge the vote, just as Al Gore did in 2000. Sure it was only a few hundred votes in a single state, but nevertheless the system – and the media – allowed the Gore campaign to drag the count out for 34 days as they sought multiple recounts in search of ‘hanging chads”. Not so now. The challenges are described as ‘baseless’ (which is clever media word play for ‘we haven’t looked’) or it is declared that there is ‘no evidence of widespread fraud’. But there doesn’t need to be widespread fraud. The whole election turns on four states which between them hold 57 electoral college votes; Pennsylvania where the margin is 47,560 together with Wisconsin, 20,000 votes then Arizona and Georgia, where there is a little over 12,000 margin in each. That is a total of 93.664 votes.
Far from being petulant, this is sufficiently close to demand a recount in any event, but given that the media (including Fox) called Arizona for Biden incredibly early whereas Wisconsin, Georgia and Pennsylvania not only all stopped counting early with Biden on 48%, 48% and 43% of the vote respectively, but their ‘post close’ early morning votes came in 70-80% in favour of Biden, we should concede that the Republicans may at least have a point. Thus rather than Trump not conceding being ‘bad for democracy’, as the media almost universally insist, surely it is good to have transparency that the system is clean? After all, haven’t we just spent three years hearing that the Russians rigged the last election?
The bottom line is that while the failed Blue Wave and the collapse of the perma-lockdown narrative are undoubtedly good for markets (even if we fail to see the need for a vaccine), the reduction in risk premia associated with the ‘end of Trump’, including the associated assumption of the end of Antifa (itself an interesting can of worms) needs a little more consideration.
Note this is not to say that Trump will overturn the decision. but as we noted earlier in the week, it is very much a non zero probability. As such we should not treat it as “something we know for sure”.