Deep Risk Under President Trump

Since winning the election in November there’s been constant speculation about what Donald Trump’s policies will mean for the markets.

While it’s always fun for investment people to debate the merits of economic plans or tax policies, there are plenty of risks to consider with Trump’s ways of doing business. He’s tweeted or made statements about a number of different industries and corporations. People are worried about his regulatory ideas. He’s threatened several countries or their leaders.

My colleague Josh Brown spoke with NPR’s David Brancaccio this week and voiced some concerns about the potential ramifications:

The reason why U.S. stocks trade at a premium to stock markets around the world — one of the main reasons why, there are several, but one of them is that people know that the rule of law is respected. Our financial markets are governed. We’ve got a strong regulatory system. Contract law is first and foremost in business dealings. So when you exchange your dollars for essentially a piece of paper, the only thing backing that piece of paper is the rule of law. So if you feel like the rule of law is being corrupted or disintegrating or worse, then it’s hard to get your head around: “Well, do I really want to pay 25 times earnings or 20 times earnings for a business and I’m only receiving essentially a certificate? Maybe I’m willing to pay less.” And that kind of thinking starts off subconscious, but ultimately that can be very damaging.

No one really knows if Trump’s policies will have these effects but it’s a risk worth considering.

In his book Deep Risk, Bill Bernstein describes two different types of risks for financial markets:

Risk, then, comes in two flavors: “shallow risk,” a loss of real capital that recovers relatively quickly, say within several years; and “deep risk,” a permanent loss of real capital.

Put into different words, shallow risk, if handled properly, deprives you only of sleep for a while; deep risk deprives you of sustenance.

Other than the inflation-induced bond bear market of the 1950s-1980s, U.S. investors haven’t really experienced much in the way of deep risk in the post-WWII era. Stocks fall occasionally but have always recovered in due time.

The four main causes of deep risk according to Bernstein are hyperinflation, prolonged deflation, devastation (wars or geopolitical disasters) or government confiscation of assets. Here are his examples of each in what he calls the four horsemen of financial disaster:

  • Severe, prolonged hyperinflation, as occurred in Weimar Germany, post-Second World War Hungary and Latin America, in current-day Zimbabwe, and to a lesser degree after both world wars in many other major European nations.
  • Severe, prolonged economic recession/ depression with consequent deflation, as occurred in post-1990 Japan, and as often plagued the United States and the rest of the developed world during the Valhalla of the gold standard, especially during the Great Depression.
  • Confiscation of assets, as occurred after the communist takeovers in Russia, Eastern Europe, China, and Cuba, or with very high taxation rates in nearly all developed nations in the 1960s– 1980s.
  • Devastation, due to international conflict or civil war, as occurred in continental Europe and Japan during the Second World War, or in much of today’s Middle East.

For the most part, modern day investors in the U.S. haven’t really had to deal with any of these risks, which is nice. None of these risks are very fun to consider, but there are ways in which you can protect yourself. Here’s a table from Deep Risk that lays out how to manage each risk:


The good news is that a globally diversified portfolio can mitigate many of these risks. The biggest problem for investors dealing with deep risk is the concentration of assets in a single country. Home bias is a killer if you’re dealing with severe inflation, deflation, war or confiscation.

You can also think of shallow risk and deep risk in terms of where you are in your investment lifecycle. As a young person with many years ahead of you and oodles of human capital at your disposal, shallow risk should be the least of your worries. You should welcome bouts of volatility because it will allow you to buy in at lower prices over time.

On the other hand, older or retired investors should have a more balanced take on how they approach these risks. While you still may have a few decades in retirement to grow your assets, you also have to worry about seeing your investments decline when you need to spend down your portfolios.

Let’s hope shallow risk — run-of-the-mill market volatility — is the only thing we have to worry about over the next four years. But with Trump threatening countries, companies, regulations and industries, it’s worth understanding what could happen if we do experience deep risk within our financial markets.

Investors have to understand how to protect their financial assets under a wide range of scenarios and different types of risk.

How the rule of law can affect the stock market (Marketplace)
Deep Risk: How History Informs Portfolio Design

Now here’s what I’ve been reading lately:


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  • “The good news is that a globally diversified portfolio can mitigate many of these risks.” Not with respect to confiscation if the assets are in custody with a U.S. financial institution. With FATCA I am not certain that globally diversified custody offers protection, either.

    Nick de Peyster

  • Jeff

    Ben, I find myself linking to your blog frequently. You communicate wisdom and thoughtful analysis with an economy of words.

    I get the issue of trump and deep risk but I had the exact same response – thinking the world had changed and that contract law and property rights out the window – in early 2010 when Obama essentially said the GM bond holders were the bad guys and that their contracts were null and void and the govt will tell you what you get. Just a thought.

    • Ben

      Very true. Not trying to play politics here, just trying to think about possibilities.

  • John Russell

    There always seems to be risk. It is obviously inherent in the markets. But if the market was worried about these deep risks then wouldn’t be priced in? Many commentators, Josh Brown included have voiced their concern about Trump. But, the ability of commentators or prognosticators to provide real insight has proven to be low. Think Brexit and US election. In a way, today’s column goes against much of what you have written in the past.

    • Ben

      I don’t think so. I’m always trying to think in a wide range of outcomes. See here for the other side of this:

    • Mark Massey

      JR, well stated. And I agree with your last sentence as well. By the way, Josh Brown is an example of someone who should stay off of Twitter. Does he need that kind of exposure that is potentially off-putting to existing and potential clients? He is obviously anti-Trump and that is a turn off to me. Of all he was quoted, none of that is what Trump is attempting or suggesting. What Josh said is so out there it is as if he is hoping for it.

  • TGates

    Wow, criticize Ben and all of a sudden your post is wiped off of the blog. Ben, were you in Berkley last night?

    • Ben

      No need for snarky comments here or name calling. Keep it civil or comments are gone.

      • TGates

        Ben, please go back and reread your Deep Risk comments and the comments to this blog. You may not have meant to make this political but that is exactly how it came across to me and obviously others. This did not come across as a “wide range of possible outcomes”, maybe you should have acknowledged that and then linked “the other side” as you outline above to the original article. As someone who tries to read you regularly and purchased your book I have respect for your view, however have zero respect for someone who tries to shut down dissent or contrary view with the all encompassing “civil” filter. Please define snarky for me so I will not repeat that mistake in the future.

        • Ben

          See here:

          I’m not a political person at all. just trying to make sense of what’s going on. another perspective here:

          • TGates

            Thank you.

        • MG

          Tgates, regarding “however have zero respect for someone who tries to shut down dissent or contrary view”, this is Ben’s blog, and he pays to have it maintained, so he has every right moderate it in any way he sees fit to maintain his view of decorum. His blog is not government sponsored, so he does not need to “tolerate” anything.

          Ben, thank you for keeping this comments section civil.

          • TGates

            MG, this blog is in the public domain and if Ben wants to regulate comments that dissent with him that is OK with me. The result will be a blog that fewer people will read, respond to or respect. Not all of us communicate the same way and some with more passion than others despite how much that might bother you. It is called “diversity of opinion”. I disagreed with Ben because he made a political statement but says he is not political. I pointed it out, accept his word he is not a political person and I am sure will be more clear about his points in the future. That is called learning. We all do it every day.

  • copernicus875

    How do diversified bond funds help mitigate these risks, specially the inflation risk?

  • ASmith

    I seriously hope this is not a sign of things to come. Ben has been
    writing very well received posts for awhile now. Then he writes
    something marginally political on a topic which is almost painfully
    obvious about someone who is widely regarded as “unpredictable” (who
    brags about this himself), does things radically differently than anyone
    before him and likes to “shake things up” (the very definition of
    uncertainty, which introduces risk), and he is attacked for voicing his
    opinion on his own blog. Wow. And just think about all the awful
    things that were said about Obama over the last 8 years that were never
    challenged! I can’t wait for Trump to try to overturn the First Amendment in
    one of his endless executive orders. Looks like we already have his
    “Orange Shirt” thought-police trying to shut down anything that isn’t a
    glowing review of Dear Leaders’ greatness.
    Ben, this was a very appropriate and topical post. Keep up the great work and don’t let them
    silence you on any issue you chose to write about!

  • MT QZ

    No rule of law under Trump? You make me LOL.
    Trump is all about LAW AND ORDER.
    What is Hillary was elected?
    Infinite donations from Saudi Arabia.

  • MT QZ

    For me, I feel more confident buying US equities now that TOPKEK trump is president.

  • MT QZ

    Government confiscation of assets is the greatest risk for me. As a non-resident alien, all my US-based assets are subject to a 40% estate tax. The election of Trump and his promise to repeal the death tax makes me more confident buying US equities. Also true for US persons with net worth >5 million.

  • Kevin Lynch

    I find it interesting how zealous Trump supporters are and any perceived
    criticism is met with ridiculous partisanship. How dare anyone have
    thoughts that shed any perceived negativity on the man. I use perceived because investing requires the removal of emotion as much as possible from your assessment of an investment and it is obvious that some of the commenters here have not done that. He’s the POTUS.
    Of course his actions can affect the economy, the man could also do with
    a lesson in American civics. His unpredictability, his use of twitter
    irrespective of impact on real people and companies, his temper
    tantrums, his Pro Putin comments, his endorsement and use of advisors
    who don’t believe in the American system of government etc. All of this
    is not business as usual and increases risk simply because of the
    associated unknowns. It doesn’t matter whether we like him, dislike him, voted for
    him or not. He’s the POTUS and no one understands the rule book under
    Trump. Investors seek stability. I’m investing for the long haul but to
    ignore the fact that a Trump presidency could increase investor risk
    would be careless. I had hoped some things I dislike about American government such as the strength of the lobby and corporate cronyism might be reigned in under him but based on what I’ve seen to date, not happening. This article is right on point.