This band was a little early in their political discourse (this song is from 2005), but it rings true in the current environment.

I have no doubt that there was waffling and waning on courses of action played out in previous administrations, but now it’s just political theatre for all to see. The sausage is being made in front of us.

Markets are paying attention. Markets are rational, in the long run, but speculative sentiment  is for the “here and now”. It dominates the short term.

I have no idea what direction market the will move next week, next month, or this year—except that it will go up on some days and down on others. But, I do know that markets dislike uncertainty.

Uncertainty is distinct from risk. Risk is quantifiable and manageable; uncertainty is not.

It’s the tail event of a trade war, or of hundreds of billions coming out of share repurchase activity. It’s the heavy foot of the Fed pressing on the gas way too late in the economic cycle. It’s the specter of global elimination of term limits (see Russia and China), and perpetual rulers. Does anyone not believe President Trump would seek a third term after watching on as his “peers” Putin and Xi establish permanent rule with relative ease?

I would argue that each of these events are distinct and independent events. There is no distribution with which to quantify them all.

Mathematically, the variance of independent events (in my opinion, a definition of uncertainty) is additive when combined together.

This suggests that layering in the wide variance within which any of these independent events may occur should increase market volatility substantially.

Practitioners are much more used to correlated events, where diversification can be useful in mitigating quantifiable risk.

For me, this isn’t a signal to sell and run. It too shall pass. I worry more that people will panic and hit the sell button at the bottom and then miss the recovery.

I do believe markets will be more volatile going forward. Making money has been too easy since 2009. It’s about to get harder.