Our posting has been sporadic lately as new business initiatives have kept us away from the keyboard. Distractions we will happily endure, so no complaints. But, in our four months away, we’ve found that

. . .absolutely nothing has changed in the markets.

Everywhere we look investors and commentators seem to be living in fear of the low levels seen in the VIX, the most widely watched measure of market volatility.  Yes, volatility has been at historical lows for quite some time, but it can also stay low longer.  Just because volatility is low is not a reason for it to increase.  While we can predict with 100% certainty that the VIX will spike upward at some point, instead of worrying about whether the low level in vol portends great danger, maybe we should consider why it’s been so low lately.

Historically, geopolitics has been a big mover of markets. Currency crises and devaluations, war, blockades, political upheaval, Brexit, all have negatively impacted markets.  So much so it seems like we are conditioned to fear the geopolitical bogeyman.  Literally as I was typing, this showed up on my Twitter TimeLine:

Image - Twitter

But what about the opposite?  What of geopolitics being a source of persistent calm in markets?  The Reagan “Peace Dividend” which carried through to two subsequent administrations is an obvious example.  Like Reagan was, President Trump is widely derided as a madman.  Unstable and insane are some of the adjectives frequently used to describe him.  Just last week, the Freak of the Week was Trump’s mocking of Kim Jong Un’s comment regarding the nuclear button on Kim’s desk.

But what actually happened?  Almost immediately after, South Korea seized two ships suspected of selling oil to North Korea, and North Korea sent a delegation to South Korea to discuss a détente of sorts.  It would be foolish to overlook the fact that Trump’s comments and aggressive stance vis-à-vis North Korea could have emboldened South Korea to stop the oil smuggling.  Indeed, just three months prior, the Chicago Tribune wrote an article openly speculating about Russian smugglers sending oil to North Korea.

In the last few months we’ve also seen this: the Saudis sharing intelligence with Israel, a historically unprecedented move; the Saudis moving aggressively against Hezbollah, Yemen and other bad actors in the Middle East; and widespread protests erupting in Iran, which were far different in scale and scope from what was seen in 2009.  No matter your politics, as much as some will either never admit or hate to admit, it is possible that President Trump’s foreign policy stance could prove to be quite consequential.  The market is telling us it is a real possibility.

When one considers positive surprises that drive markets, we would bet that few have ever considered this: Trump could have as lasting and positive an impact on easing geopolitical tensions as Kennedy, Nixon or Reagan.  The president’s domestic policies have already had an impact on markets.  If you doubted “Animal Spirits” you missed a great leg up in markets.  If political tensions continue to abate, you will see another.

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