There has been a rising suspicion on the validity of Philips curve, not only the Fed has invited doubts on its ability to tackle an economy in a slump but also forced traders to take the help of data scientists in finding new measures to gaze the movement of stock prices. Phillips believed that there exists a trade-off between inflation and unemployment but as data has to show, this relation got diluted with time because, despite various stimulus plans and a decade-low unemployment rate, Fed is unable to reach its target of 2% inflation. The reason being inflation is no longer a domestic phenomenon dependent just on the monetary policy, with the world transforming into a global village. And in this global village with heterogeneity at the peak, events like Trade-wars, sanctions, elections, data privacy, and property rights thefts have made uncertainty certain.
Amid all this, no matter how difficult it gets, people can’t help forming ex-ante schedules despite the proofs of expectations rarely turning into reality. To bridge the gap between the anticipated and unanticipated, the researchers at JP Morgan & Chase have come up with the ‘Volfefe’ index that uses Trump’s tweets to predict movements in the market. Volfefe is named after Trump’s infamous tweet, “Despite the constant negative press covfefe”, this remained on the platform for 6 hours with no explanation coming to this mysteriously half typed sentence with a misspelled word, which most probably stood for coverage. People went mad over the internet searching for the meaning of “covfefe”. Later on, this tweet sent from @realdonaldtrump twitter handle was deleted but Congress got worried about President’s reliability and so they actually came up with the Communications Over Various Feeds Electronically for Engagement Act (COVFEFE ACT) and the truth was engineered to keep him true to his words.
Through Volfefe, data scientists and researchers have tried to crunch information and come up with a certain number by which implied volatility rate moves in 2-year and 5-year treasury bonds by pegging weights to keywords like “China, product, billions”. For decades Volatility index (VIX) has helped investors to speculate on the magnitude of deviations and frequency of movements. VIX calculated using inferred prices in the options market is called forward-looking implied volatility (IV). For example, say a call option of Reliance shares with an option to buy a share at a strike price of Rs. 150 after one month is being traded in the market. The underlying commodity in the stated derivatives market is the share of reliance originally priced at say Rs. 140. Now the price at which this call option trades shows the extent of the market expectation of the prices going beyond Rs. 150 because that will be the scenario where they would exercise the option to buy. While the formula to calculate VIX out of this is mathematically complex, what it really involves is aggregating weighted prices of multiple calls and put option over a range of strike prices. Any movement in this real-time calculated index would give a hint to traders to expect the same in the stock market or reliance share prices in our example.
Now as per Volfefe, not just the options market but trumps mercurial mood can cause movements. In the past 2 years, his tweets have become more frequent and so the swings. Even Bank of America had once put out this note that the day Trump tweets frequently, the market trades lower.
A group of analysts believes that as the number of tweets increases his handles get less reliable and hence the index gets less relevant. Surprisingly, in a poll on who do you believe more, Trump or Media? 31% voted Trump and 72% of them were Republicans, although not sure about what’s more amusing? people believing trump or Republicans not believing him. Investors relying on Volfefe, and hence trump’s tweets to modify their predictions might be thought to be schizophrenic but by looking at the bigger picture, it can be viewed as an attempt to derive the value of the unanticipated variables that usually comes up in the equations determining expectations. And no one can deny the fact that he does provide insights through his tweets, for instance, he tweeted, “Unbeknownst to almost everyone, the major Taliban leaders and, separately, the President of Afghanistan, were going to secretly meet with me at Camp David on Sunday. They were coming to the United States tonight.” This was his tweet just before 9/11, but thankfully a tweet stating the cancellation of the meeting did follow due to attacks in Kabul.
As the ex-US secretary of states puts it, “Trump has a maturity of 8-year-old with insecurities of a teenage girl”, the swings are ought to increase. At the same time, the world is witnessing more and more Trump-like leaders moving the international order from the art of ‘dealing’ to the art of ‘squealing’. So maybe this is not the end and more Volfefe’s are yet to come named after political-offsprings of Trump.