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Sellside research does the heavy lifting for investors trying to quickly get up to speed on a range of issues – whether it’s the company’s quarterly earnings expectations or the upcoming Euroclearability of Korean government bonds.
In theory, any topic that matters to investors and financial markets is fair game. But is that the only limitation? Does Ulice ever worry about looking a little… silly?
Consider the American election.
Careful analyzes that disentangle the potential economic and market consequences of different configurations of presidential and congressional power have begun to land. A good example is a recent note from Goldman Sachs, which concluded that — in the grand scheme of things — the election won’t have much of an impact on stocks, but that the dollar and bond yields could be affected by a large tariff increase.
That’s an interesting big picture. Is the analysis complete? Not according to Goldman. They write:
We explicitly do not take geopolitical risks into account…
That sounds like an acknowledgment of the bottom line risks that investors might care about. Why exclude them? Perhaps Goldman doesn’t want to waste resources on things it firmly believes will never happen. Or maybe they don’t want to write about things that would make them look alarmist?
What kind of tail risks might fall into this category? Fears that the chain of events will lead to a Chinese invasion of Taiwan are not unheard of. And although Nigel Farage got Trump to commit to staying in NATO, there are still fears that Putin would use the opportunity of a Republican victory to invade Estonia. But perhaps the riskiest on the risk end — which we’ve heard at least one fund manager discuss publicly — is the prospect of the election starting a second US civil war.
Let’s imagine you’re a hungry young analyst for whom the Second American Civil War is a topic you need to cover. How do you convince your boss that it’s worth the time and reputational risk? In the spirit of seeking more complete coverage of waterfront research, we thought we’d push for prominence.
First of all, does anyone really think this is a remote possibility?
Americans do, as it turns out. A 2022 Economist/YouGov poll found that 43 percent of Americans said civil war was “somewhat” or “very likely” in the next decade. This May, Rasmussen Reports asked Americans about their five-year outlook. They found that forty-one percent of likely voters believe the US is “likely” or “very likely” to experience a second civil war sometime in the next five years. Only twenty percent say it is not likely at all.
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We all know that people can be weird and funny about answering surveys. So it’s probably irrelevant if hello polloi to report to pollsters that civil war is more likely than not in the next few years.
However, the prospect of an impending civil war seems to worry at least some elites. Given the whole was-it-or-wasn’t-a-coup thing, you don’t have to look hard for politicians warning that civil war is a “real possibility.” But politicians say all sorts of crazy things.
Perhaps more seriously, retired US Army generals have warned of the risk of an insurgency following a disputed presidential election in 2024. In their minds, rogue troops could organize to support any “legitimate” commander-in-chief they want. “Under such a scenario,” he argues, “it is not outlandish to say that military disintegration could lead to civil war.
And let’s not forget Ray Dalio. If the founder and CIO Mentor of the world’s largest hedge fund is giving out interviews saying there’s maybe a forty percent chance of civil war, surely that will convince your firm that this is research clients will want to read? (Though Dali’s definition is vague to the point of not actually being falsifiable.)
We at Alphaville would love to see investment banks spewing out “What a Civil War Would Mean for the Markets” notes. In part, this is because we can laugh at them when, in retrospect, they turn out to be alarmist. But also because there really shouldn’t be a taboo around thinking about and publishing tail risk scenarios.
And while forty percent sounds uncomfortably high as a potential probability of a second civil war to us, analysts can at least find safe harbor in the “forty percent rule.” This is an idea popularized for many years by a friend of Alphaville Lorcan Roche Kelly before it was formalized by Dario Perkins of TS Lombard that analysts could safely discuss big calls without consensus while protecting themselves from the danger of looking like a muppet by assigning less than a fifty percent probability that the event being discussed would occur. As Dario says:
40% means it’s more likely than anyone else says, so your clients need to heed your warnings, but they also shouldn’t be too surprised if, you know, the extreme event doesn’t actually happen.
It was installed by big firms to predict the chances that the European Stability Mechanism would not be ratified, that the US would default on its debt, and that Le Pen would win the French presidency in 2017. Of course, none of these things actually happened. But scenario planning is good.
Come on guys and girls – don’t let the Quora boards monopolize investment advice on this matter. Send us your Civil War notes so we can see how you’d do the unthinkable.