Mid-Term Churn

Now that Election Day is nearly a week behind us, the bunting has all been put away and the confetti swept from the streets…wait, this was a midterm election, so maybe no bunting or confetti, but at least TV ads are back to selling, not slinging, and a few yard signs have come down. For all the glamour and hype that a midterm election typically lacks, this one saw big change across the nation. But whether you experienced elation or devastation…wait, midterm year, make that modest content or mild disappointment, one fact remains: what happened on Tuesday was not without precedent.

Some call it the Six-Year Itch, others the Six-Year Curse, but whatever you call it, there is a phenomenon that has been playing out over the last 100 years wherein whichever political party has held the White House for two consecutive terms has lost, on average, nearly 7 senate seats in the midterm election in year six of the second presidential term. This is not to downplay the importance of your favorite candidate’s platform or leave you thinking that your vote doesn’t matter because we’re all just locked in a great political machine where outcomes are pre-determined and freewill is an illusion (too existential? Sorry, maybe it’s all the Bill Gross we’ve been reading). The takeaway from this, rather, is that more so than stasis, fluctuation is the natural state that all political systems constantly strive to achieve (existential indeed!). And election cycles are not unique in this respect.

Commodity prices, taken as a whole, share much the same general trend as political cycles, but rather than swinging from left to right and back again, they crest and dip on a horizontal axis. On a macro-level, economists note trends that they call Commodity Supercycles. These typically play out over decades as demand develops faster than production capacity can satisfy, prices rise, and by the time production catches up, there tends to be overcompensation, driving prices back down. On a micro-level, commodity prices are much more erratic. Since we’ve been talking election cycles, here’s an interesting example that should resonate with even those who don’t follow the prices of palladium and sorghum (if such a person even exists): January 2005 and January 2009 both kicked off presidential terms. The average price of a gallon of gas in these months was $1.85 and $1.84 respectively. But unless you drove a pre-Tesla electric car prototype during the 43rd President’s second term, you probably know that gas prices during that time moved by a lot more than just a penny. As a matter of fact, within this window, gas prices swung up well over $4.00 and then back down to nearly $1.50.

Both political cycles and commodity price fluctuations highlight a key tenet of hedging: the good times never seem to last, but then again, neither do the bad. Unfortunately, neither a nation, nor a business, can skip from election cycle to election cycle, or from supercycle to supercycle. Even if prices or rates tend to equalize ever so many years, your business is impacted by rate changes on a daily basis, and to deal with this reality, an effective hedging program can prove key. It’s important to keep in mind that the purpose of hedging is to level out volatility and achieve a level of risk that you are comfortable with. This perspective is necessary to measure the true success of a hedging program.

Forgetting that the purpose of hedging is ironing out volatility rather than capitalizing on every market movement can have consequences analogous to another gas-price related phenomenon. Believe it or not, there is a definite correlation between temporal dips in gasoline prices and boosts to sales in new light-trucks and SUVs. If the make-or-break factor when considering purchasing a brand new, gas-guzzling, stuff-hauling depreciation bomb is as narrow as 40 cents at the pump, then perhaps it’s best to stick to your hatchback because you can all but count on gas prices pulling an about face sooner, if not later. Hedging is about finding the proverbial risk vehicle that you can live with every day, no matter what prices at the pump happen to be doing.

But just as a Commodity Supercycle is not so different from the Six-Year Curse, neither is buying a new V-8 when gas prices stumble all that different from voting in an extreme candidate on the heels of a flash-in-the-pan controversy. What is constant in both politics and markets is that if you’re only shopping for today, you might not be happy with what you’ve got tomorrow. To find the right hedging strategy, it’s important to answer a few key questions: Where is my exposure? What’s the most cost effective way to reduce my risk? What level of risk can I live with? Chatham has experts familiar with the markets and types of risk specific to your business who can help you talk through these and other important questions. So hurry up and give us a call, because before you know it, they’ll be rolling out the bunting for real, and who knows what that might bring?

Call 610.925.3120 or email us.