Observations: Revealed preference meets real limits, Part III

Did markets forget about post-election risks?

In this final installment of my pre-election “Revealed preference” series, I turn to post-election risks, namely the risks of civil unrest in the US and of foreign adversaries seeking to “change the facts on the ground” during the presidential transition period.  The two risks are not independent: US instability increases the likelihood that foreign adversaries seek to gain advantage during the transition; and accordingly, foreign adversaries likely have and will take actions to increase the chances of US instability.  Judging by forward volatility curves, markets appear to be either ignoring these risks or inappropriately pricing them in relative terms, opening attractive hedging opportunities.

I also briefly review how last week’s data – and the market reactions to it – may affect the Fed’s decision and rhetoric this week.