I recently read an excellent essay by a Hedge Fund CIO Eric Peters in which he correctly argues that Trump’s election has thrown completely open the Overton Window and as I have been arguing for quite some time made politics or as this site calls it macro-politics essential for understanding market valuation. As he correctly describes it the Overton Window is the political science idea that politicians normally choose their course of action from only a very narrow range of actual choices and that Trump has made this reality way more unpredictable by expanding the range of possibilities dramatically. In this essay I just want to elaborate further on this key idea and explain more fully why this is the case.
Ultimately if one is going to use this understanding of an expanded Overton Window one needs to appreciate fully why this is all the case.
First, a bit of context. As I’ve suggested elsewhere the great practitioner of real-politique Henry Kissinger when he sat on various corporate and foundation boards would often answer fairly mundane policy questions by going way back in history–even to another century to explain a certain outcome. In this case we do not need to go back all that far thank goodness.But one does need to understand that the Overton Window has been closed in fact for the last 3 decades ever since the Soviet Empire broke up as there existed a pretty broad base case consensus as to what policy should be especially at a global macro scale. I’ve described this as an international organization model but this consisted for the most part of the US being hegemon, but taking the edge off its own power, a global free trade imperative, the use of international agreements especially through bodies like the UN, broad support of the EU model and its inevitable espansion, and at least in some circles especially academia and the international foundation world often a belief in the inevitable rise of China to supplant the US as global leader over time. In this world of broad political consensus though one could certainly challenge some of these key tenets, the Overton Window was indeed closed. If you were a hedge fund or a big “in the know” market player you could fairly consistently fade any political news that challenged this ascendent model. You could also count on most political figures to color within the lines so to speak and not risk bold departures that would likely fail. Even the search for Sir John Templeton like global crises remained reasonably predictable; One simply searched for naive political actors who thought they could challenge the prevailing system and shorted their indiscretion or assumed a return to normalcy and went long battered assets as they once more did indeed return to predictable results. And for quite a while as inflation in this predictable world remained quiescent, and cheaper outsourced goods continually juiced the productivity numbers, there was always relatively cheap money available to save the day when things went south. That ascendent model is no longer ascendent for a variety of reasons we will discuss in later posts, but this is crucial for markets.
This model like many market models (see my essay on market bubbles and narrative) probably always had an expiration date and may inevitably in the end if not already become a high risk game of musical chairs, but it held for quite a while. Trump is in part a cause of the breaking up of this model, but he is also an effect of its inevitable unworkableness in the long run. Leaders in the US, and they have done this over and over again (can anyone say “japan will take over the world”.or “the Euro will be sovereign over the dollar”), never really intended to let China become the new hegemon despite what a few naive academics might think, and the international organization model I have written of in earlier posts has huge flaws that as always make it eventually unsustainable.
That brings us to the second key deeper concept from political science which is perhaps even more important than the Overton principle, the idea of the Turning Point Election. This is one of the most important ideas of all in beginning to understand the implications of politics for markets. Yet if you go to Google or Bing all that comes up of this idea is nothing whatsoever only endless results for Turning Point Action, a proTrump organization run by Charles Kirk for the younger generation. This idea is that occasionally in US history there is an election in which the entire direction of US politics changes. When this occurs for over a decade at least and usually much longer political groups and policy take a major irreversible change in direction, The first time Trump was elected it could still be considered a fluke. This second time now this is not the case. Even his staunchest critics have had to acknowledge that now it’s no fluke and both the democratic opposition and global system will have to fundamentally change their approach. In an earlier period the result of such a turning point election, not all together different from the present, case was what was called then the New Democratic Party. Whether the democratic party will now pursue a similar change of course remains to be seen but its not clear they really have a choice.
Now the New Republican Party if one wants to call it that could still blow it, and Trump could still mess it up if he acts too imprudently or fails to find a way to address the many profound issues the US is faced with at the present moment, but certainly the winds of change are in the air so to speak. Now at this site I remain politically neutral. I have my own political beliefs but the goal is just to give you knowledge you can then use yourself. Regardless of your own political persuasions you need to know that this was indeed a turning point election otherwise you will have no idea what you are doing in the markets. Those market participants still acting like its business as usual are in for.a rude awakening and this includes a lot of 30 something MBA’s and lots of CEOs who have never known any other world than that of the post-Soviet breakup, after 1990 consensus. There’s probably a great deal of alpha in fully understanding this reality.
However, I have some even worse news for those who have never known a different economic reality and I say this neutrally not at all as a partisan, while its too soon to know for sure it does indeed look like this is not only a turning point election for the US but in fact a turning point even globally. For example, some of the big changes coming out of Musk but also Zuckerberg, and Bezos are not just about the US but are changes with global cultural significance. Much of what Trump can do as President and he clearly knows this is on the global not simply American stage and his success domestically in fact hinges on his success globally. Tariffs, for example, are meant to change the global picture and most specifically the global flows of capital allocation away from the US back to the US. From Millei in Argentina, to the recent Romanian election, to changes in politics in France away from Macron, and in Germany away from Sholz—-some of the biggest proponents of the earlier consensus are losing power as this turning point sweeps the globe. I will have much to say about this and what it means for markets later but I just want to get you up to speed on some of these.key initial concepts. The Overton Window is being ripped wide open because we are in Turning Point Election land both in the US and globally. The options have expanded in part because the earlier options are no longer holding authority or proving effective.
The other key concept one needs to understand effectively the expansion of the Overton Window is the Great Man and Woman Theory of History. Ever since Hegel as the Owl of Minerva saw Napoleon on horseback, powerful leaders and masses have done an incredibly serious and complex dance together so please do not believe here that I think there is some new aristocracy that can simply arbitrariliy without having to concern themselves with constituencies, interest groups, or voters pronounce edicts . Instead the key concept is that with the earlier global consensus the idea was that. leaders were given a mandate only to the extent that they followed the reigning consensus. That is why you could predictably fade leaders that departed from the usual conventional path. The result was that there was a kind of group think at work that in fact discouraged any pronunced drive for power or more extensive creativity. Its a little like all the mutual fund managers buying NVIDIA not necessarily because they think it couldn’t possibly be a bubble but because they are afraid if they don’t have it in their portfolio they might underperform and lose their jobs and not have the tuition for the private school for their kids or make that payment on the house in the Hamptons.
Trump is not that group think guy. He was never that guy and never will be that guy. You don’t become a billionaire doing what every one else is doing only a little more. You become a billionaire by shattering the Overton Window or in market parlance the Eugen Fama Efficient Market Hypothesis window. You actually go against like George Soros the Bank of England and win or you buy a beaten down hotel next to Grand Central Station in New York City and turn it into a marquee property. Now this is of course both Trump’s strength and weakness: the fact that while in many ways incredibly responsive to his customers in this case voters he doesn’t accept the paint already on the canvas. This caused him a lot of problems in his first term as he tried to change the canvas but metaphorically did not realize how resistant the paint was and tried to do so with the same palette and paint brushes. Here’s the key point though Trump is now back in power, he knows the canvas incredibly well, he’s got all new paint brushes and paint. And believers in the earlier consensus such as Musk and even Bezos and Zuckerberg are if anything now on his side. He is not going to do for better and for worse that old consensus group think thing. Think of it to continue the metaphor like the beginnings of abstract expressionism–and the art world itself is likely to move in this very direction in the next decade, but consider it as a big change of this sort. If you’re still thinking WPA huge worker murals as a market participant you are not prepared for what is coming on the horizon. You’re a little bit like an art curator or critic when abstract expressionism started to emerge as a powerful new art force in the 50’s. The Overton Window is about to change from a fairly predictable landscape painting or photograph perhaps in contemporary form of earth moving projects somewhere in the Third World to a complex Kandinsky, Pollock, or Dekooning painting or Siskind photo. Whatever you do don’t say you had no warning about this huge change to markets and valuations.
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