Will President Trump Finish His First Term? The Inside View and The Outside View

If you want to bet on anything there is a market ready to take your bet. Like if you want to bet on whether President Trump will complete his first full term as President or not.

After President Trump fired FBI Director James Comey the probability for President Trump not finishing his first term jumped up to 50%.

Not finishing his first term includes impeachment, resignation, and death by natural causes.

My immediate reaction is these odds seem high. While other people, maybe under the influence of the Halo and Horn Effect, believe these odds to be too low.

Whatever your viewpoint, what this does offer us is a look at the Inside View and Outside View.

Inside View

The inside view can be described as intuitive forecasting. From Michael Mauboussin in his book Think Twice,

An inside view considers a problem by focusing on the specific task and by using information that is close at hand, and makes predictions based on that narrow and unique set of inputs.

The inputs may include and grossly overweight “anecdotal evidence and fallacious perceptions.”

Michael uses the example of Big Brown and his bid to win the Triple Crown in 2008.

Big Brown won the first 2 legs of the Triple Crown (the Kentucky Derby and the Preakness) with the Belmont Stakes remaining. Based on how handily Big Brown won the first 2 races and how weak the field would be in the Belmont, Big Brown was the overwhelming favorite to win. Even Big Brown’s trainer, Rick Dutrow, proclaimed it was a “foregone conclusion” that Big Brown would win.

Right before the race bettors pushed Big Brown’s odds of winning to 3/10 or a 76% chance to win.

Then Big Brown lost and he lost big. Big Brown came in dead last.

Racing fans and bettors put too much weight on Big Brown’s recent wins. A belief that Big Brown was just too dominant to lose permeated bettors’ minds.

What the majority of bettors never asked was how many has horse been one win away from the Triple Crown? And then how many times has that horse won?

Outside View

Again, Michael Mauboussin in his book Think Twice describes the outside view as such.

The outside view asks if there are similar situations that can provide a statistical basis for making a decision. Rather than seeing a problem as unique, the outside view wants to know if others have faced comparable problems and, if so, what happened.

Continuing with Michael’s example of Big Brown.

Of the 29 horses that were one win away from the Triple Crown, only 11 have done so. This is a 38% success rate.

But Michael then points out that before 1950 8 out of 9 horses won their Triple Crown bid but after 1950 only 3 out of 20 horses won their bid, a 15% success rate.

Base Rate

The outside view is also known as the base rate.

The base rate for winning the Triple Crown falls within the range of 15-38%. With the post-1950 numbers being the most applicable.

Big Brown’s chances of winning the Triple Crown were pushed up to 76%. A large divergence from the base rate.

What is the Base Rate for a President not Finishing Out a Full 4-Year Term?

We need to know a couple things.

How many President’s have died in office but were not assassinated?

  • William Henry Harrison
  • Zachary Taylor
  • Warren G. Harding
  • Franklin Delano Roosevelt

Only 4 out of the previous 44 Presidents or 9%.

How many Presidents have resigned from Office?

  • Richard M. Nixon

1 out of the previous 44 or 2.27%.

How many Presidents have been impeached while in office?

  • Andrew Johnson
  • Bill Clinton

2 out of previous 44 or 4.55%.

How many Presidents were impeached and removed from office?

  • Zero

The House starts the impeachment process but the Senate conducts the trial. No President has been found guilty by the Senate.

For the most part, these events are mutually exclusive and we can simply sum each probability.

(We could make it harder by focusing only on those events that happened in a President’s first 4-year term but let’s keep it simple.)

The base rate for President Trump not finishing his first term because of either death, resignation, or being impeached by the House and found guilty in the Senate is.

9% + 2.27% + 0% = 11.27%

Base Rate is the Starting Point

The lesson from Phillip Tetlock’s book the Superforecasting: The Art and Science of Prediction is any prediction needs to start with the base rate. Then given new information and specific knowledge you will incrementally raise or lower your odds based on the new information.

If you do not have any new knowledge or specific insights then stick with the base rate.

The firing of James Comey is definitely new information. Optically, the timing of his firing – with the FBI opening up an investigation into Trump’s Russia connections – is bad. Even if it is just that, poor timing.

Some people are comparing the firing to Nixon’s Saturday Night Massacre. When President Nixon fired the special prosecutor investigating into the Watergate break-in.

Is it enough new information to move the odds that President Trump doesn’t finish his first term up to 50%?

I don’t know.

What I do know is I don’t have any special insight into such matters. So I’ll stick with 11.27%.

Does a New High in Margin Debt Mean The Market Has Peaked?

Margin debt hit a new high back February. The twitterverse was lit with hottakes about market tops and crashes.

Déjà Vu All Over Again

We went through this exact same exercise a year ago.

A new high in margin debt doesn’t mean the stock market has peaked or a crash is around the corner. It simply means the stock market has been going up. It’s a coincidence indicator. When the value of your portfolio increases you can borrow more on margin.

Tellingly, margin debt as a percentage of the S&P500 has remained the same as pointed out by Jake at Econompic

The absolute dollar amount of margin debt like the stock market will continue to go up until it doesn’t.

A Lot of Good Things Are Happening but Not According to the News

News media is in the amygdala business. The amygdala is our fear center.

Turn on the news. What are they usually talking about? Death, terrorism, financial markets in turmoil. Anything and everything that stimulates your amygdala and fires up your fear response.

Regular news media viewers fall prey to the Mean World Syndrome. They believe the world is worse off than it really is. A #ProTip to a certain President who watches a lot of cable news.

The world and humanity are a lot better off than the average person thinks.

The bad news dominates the headlines. You have to pay close attention to notice when good news sneaks in. Like this piece of great news that Barry Ritholtz noticed.

More than one-third of the adult population in the United States has a bachelor’s degree or higher marking the first time in decades of data.

“The percentage rose to 33.4 percent in 2016, a significant milestone since the Current Population Survey began collecting educational attainment in 1940,” said Kurt Bauman, Chief of the Education and Social Stratification Branch. “In 1940, only 4.6 percent had reached that level of education.”

Click image to enlarge. From the Census via The Big Picture.

Where to Find Good News

Or you have to find it in alternative media.

Peter Diamandis, author of Abundance, and Dan Sullivan got together on the Podcast Exponential Wisdom to highlight all the important positive trends going on in the world today.

For example, robots and automation reducing the need for child labor. It allows kids to have more time to get an education. Educated kids lead to educated adults who have more educated kids. The economy benefits immensely. Especially, when you allow girls to get an education.

Besides economic gains, more educated people in the world produces a cognitive surplus. As Peter Diamandis states, it only takes one person to come up with a cure for cancer for the entire world to benefit.

There is a lot of good happening in the world but you wouldn’t know from the news. Turn off the TV. Stop reading the newspaper. If the news is important enough, it will reach you.

The Dow Jones Losing Streak and Fear Inducing Headlines

The Dow Jones Industrial index is suffering it’s longest losing streak since 2011.

That is a dire-sounding headline. The Dow Jones must be suffering large losses.

The 8-day losing streak, it ended Monday with a positive trading day, produced a whopping 1.9% loss. That big 2011 losing streak produced a loss of 6.7%.

The financial news media exists to generate readers and viewers. Headlines that say current random market fluctuations are within normal expectations just don’t generate the same type of visceral reaction. Everything is fine doesn’t grab your attention, it doesn’t make you buy that newspaper or watch a few TV ads.

The financial news media knows wants you to be fearful. They know that in today’s modern world money equates to life. If they can get you to feel like your money and therefore your life is in danger, that you’ll pay a little more attention to them as you seek out answers on what to do.

Investment decisions made in fear will always lead to poor decisions. The people within financial news media know this but they can’t help themselves. Their business model depends on it.

It is time in the market not timing the market that will determine the returns in your portfolio.

The next time your pulse surges and your breath shortens over the latest financial news headline, stop. Breathe. Put the recent market moves into a broader perspective. Review your portfolio’s investment plan. Review your long-term goals and how your investment plan will help get you there.

Does selling now help any of this?