What Trade War? Market Is Mispricing The Swans (Again)

If I’ve said it once (and I’m pretty sure I have), I’ve said it a thousand times: the market is terrible at pricing the tails.

And while, by definition, you can’t price in “black” swans, you can price in “grey” ones (aside: do yourself a favor and use the Nassim Taleb lexicon with caution because frankly, a good portion of it is completely nonsensical). Well, if you’re looking for a swan that could be classified as “grey” rather than “black,” that swan is a trade war with China.

After all, “grey” swans (and again, we’re getting into Taleb-speak here which is itself a pretty “grey” area) are “near-Black Swans [but] they are somewhat tractable and are rare but expected.”

Well if ever there were some sh*t that was “rare” but “expected” it’s a trade war with China. A trade war with Beijing – an eventuality championed by Trump’s economic spirit animal and fake economist Peter Navarro – is so “expected” in fact, that you can scarcely turn on the news without hearing about it.

Given that, you’d expect that relevant stocks would be pricing it in, but guess what? They’re not…

Via Goldman

While things haven’t turned sour as many have feared, some trade friction between the two nations seems inevitable. The current setup, in our view, is reminiscent of a typical tail-risk event where an unfavorable outcome appears not well discounted in equity prices, given the very modest underperformance of USexposed Chinese stocks vs. the broader market (also US stocks facing China demand).