Vice President Calvin Coolidge assumed the Presidency of the United States on the death of President Harding and completed that term and was then elected President and declined to run for a second term.
That decision to run once isn’t the only reason Cool Cal has long been my favorite President. Coolidge, known for quietly passing the Roaring Twenties, believed the President should shepherd the country’s liberties, not propose to loot its Treasury.
I like that approach to the Treasury.
Coolidge, the Republican candidate in 1924 with Vice President Charles Dawes, won 54% of the popular vote, 72% of the electoral vote. He took the top half of the country save Wisconsin (which voted for the Progressive Party), including California and New York.
The south from Texas to Florida went for Democrat John Davis, with 29% of the popular vote, 26% of the electoral college.
In 1801, Thomas Jefferson became President on the 36th ballot in Congress after tying Aaron Burr in the electoral vote. Back then, Congress, the people’s representatives, cast votes for two, with first place becoming President, second place, Vice President.
Burr and Jefferson were thus thrown together with no real amity. Maybe that’s a good thing. At any rate, the states consequently amended the Constitution to require separate ballots for each office.
Thus, one would suppose it would violate the Constitution to just rename the candidacy of one person for the office to another person. But what do I know?
What’s both fascinating and unsettling is the market’s apparent disregard for the harlequin nature of US politics.
And yet it makes sense if one stops and studies the facts. People assume the stock market is rational. No, money is directed to the market by models and run through it by machines consuming data. Well, consuming everything. The late gyrations in stocks are principally a product of three things:
- The dependency of Passive investment on short-term substitutes like stock options and futures that expire and reset each month, as they did in the last week.
- Changes to model-driven allocations that behave indiscriminately and are often executed poorly.
- A pervasive reliance for prices and trades on machines wanting to own nothing.
A paradox emerges. Let’s take the Russell 2000 that’s up 10% the last month and diverged in unprecedented fashion from the Nasdaq. The roughly 2,000 stocks comprising it are about 4% of market cap, even after the big gain.
The 114 stocks with $100 billion or more of market cap – Blackstone joined the list this week to move the number from 113 – are more than 16 times larger than the entire Russell 2000.
So if a little money leaves big stocks and goes to small stocks and especially baskets of smallcap options and index futures that are way more liquid, the entire asset class surges.
And people conclude that it’s some kind of major rotation.
Recognize this: It’s a mathematical impossibility for any meaningful rotation to occur from large caps to small caps. It’s like pouring from a bucket into a thimble.
What will happen is that large caps will stop rising, small caps will spurt, and the entire market could then tip over.
Why?
Because you can’t rest 96% of market cap atop 4% and expect the structure to hold. And if the structure starts to collapse, money rushes for the exits because it runs on models.
Look, I’m not saying that’s going to happen. But prudent people should understand the math, the risks, the structure, the mechanics. We are sharply aware of all of those.
We also know that most times these monthly expirations that infuse the market with volatility because suddenly models are trying to re-jigger holdings to align with regulatory requirements work themselves out. The market doesn’t fall apart.
One of these times, it’s not going to work out, because the market is too dependent on large swaths of model-driven behaviors. It would be better to fix it first.
I think it’s where we’ve arrived politically too. The apparatus at the party level is gradually excising the electorate from outcomes. We should recognize the math, the risks, the structure, the mechanics.
In both cases – markets, politics – at some point, the people should probably put themselves back in charge.
