Letter: The Times They Are A-Changin

New York, January 9, 2017

Dear Friends and Colleagues,

We have gotten used to certain questions having simple answers. But times are changing. A lot of questions that seemed simple up until very recently; now have very complex answers.

Three examples:

For the past 15 years (since Argentina defaulted in 2001), major emerging markets seemed fairly safe, despite some market hiccups. And if somebody asked ‘Will we see a major EM currency crisis this year’, our answer had been ‘no’. But this year is different. Turkey is already on the verge of a currency collapse, and the capital outflows from China cannot be controlled with the current policy mix for much longer. It seems to be a choice between tighter controls or greater flexibility.

For the past 60 years (since the European Coal and Steel Union was founded) European integration has been increasing. A question about whether the EU was about to disintegrate would not even have been taken seriously a few years ago. But this year is different. Brexit has already happened and a Five Star win in Italy and/or a Le Pen win in France in the next round of elections could be the beginning of the end of the EU and/or the Eurozone as we know it.

For the past 90 years (since the Great depression), the United States has been mostly in favor of free trade. A question about whether the US would adopt tariffs on a number of major trading partners has not been relevant for a long time. But this year is different. Mr. Trump is obsessed with bringing down the US trade deficit and he may impose trade sanctions in some form to achieve this goal.

Hence, it is a complex world, with messy answers to questions that seemed simple fairly recently. And in this world, significant macro shocks will be more prevalent. Among the various shocks, it is the truly unexpected ones that have the potential to move markets the most. We saw that in 2016, both around Brexit and around the Trump victory.  And we saw the opposite around the Italian election a month ago. Since the ‘bad outcome’ was expected, the actual election result barely had any market impact.

While most market participants are aware of the three potential shocks outlined above, they are far from fully priced. And it is in this connection that data is crucial. Data that can give you an early read on when the probability of a key event is rising.  This is why we track and analyze Chinese capital flows and European opinion polls obsessively, as well as market positioning data.  Shifts in expectations for events are what matters, even more than the events themselves; and superior data can help you pinpoint those shifts ex ante.

Jens Nordvig
Founder and CEO
Exante Data LLC

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