The sell side is clearly not talking about a second American Civil War. Would it?

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Sellside research does the heavy lifting for investors who want to quickly get up to speed on a range of issues – whether it’s expectations for a company’s quarterly results or the upcoming Euroclearability of Korean government bonds.

In theory, any topic of interest to investors and financial markets is fair game. But is that the only limitation? Does the Street ever worry that he looks a little… weird?

Think of the American elections.

Careful analysis has begun, teasing apart the potential economic and market implications of different configurations of presidential and congressional power. A recent note from Goldman Sachs is a good example, concluding that – in the grand scheme of things – the election won’t have a major impact on stocks anyway, but that dollar and bond yields will be driven down by large rate increases in the can be thrown around.

These are interesting things in the big picture. Is the analysis complete? Not according to Goldman. They write:

We do not explicitly consider the tail risks of geopolitics…

This sounds like an acknowledgment of tail risks that could be important to investors. Why exclude them? Perhaps Goldman doesn’t want to waste resources worrying about things they strongly believe will never happen. Or maybe they don’t want to write about things that make them seem alarming?

What types of tail risks can fall into this category? Concerns that a series of events will lead to China invading Taiwan are not unheard of. And despite Nigel Farage pushing Trump to stay in NATO, fears remain that Putin would take the chance of a Republican victory to invade Estonia. But perhaps the most tail risk of all tail risks – which we’ve heard at least one fund manager discuss publicly – is the prospect that the election will trigger a Second American Civil War.

Imagine you are a hungry young analyst whose topic to cover is the Second American Civil War. How do you convince your boss that it’s worth the time and reputational risk? In the spirit of seeking broader coverage of waterfront research, we thought we would make a case for salience.

First off, does anyone actually think this is a remote possibility?

Americans do that, it turns out. A 2022 Economist/YouGov poll found that forty-three percent of Americans said a civil war would be “somewhat” or “very likely” in the next decade. In May of this year, Rasmussen Reports surveyed Americans about their five-year outlook. They found that forty-one percent of likely voters believe the U.S. is “likely” or “very likely” to experience a second civil war sometime in the next five years. Only twenty percent say this is ‘not at all likely’.

We all know that people can answer polls in a strange and hilarious way. So it’s probably not relevant if hi polloi report to pollsters that civil war seems more likely than not in the coming years.

That said, the prospect of a coming civil war appears to be worrying at least some elites. Given the whole was-it-or-wasn’t-it-a-coup thing, you don’t have to look hard to find politicians warning that civil war is “a real possibility.” But politicians say all kinds of crazy things.

Perhaps even more serious, retired US Army generals have warned of the risk of an insurrection after the disputed 2024 presidential election. In their minds, rogue units could organize to support whatever “rightful” commander-in-chief they wanted. “In such a scenario,” they argue, “it is not surprising to say that a military collapse could lead to a civil war.”

And let’s not forget Ray Dalio. If the founder and CIO mentor of the world’s largest hedge fund gives interviews saying there’s perhaps a 40 percent chance of civil war, will that surely convince your company that this is research customers want to read? (Even though Dalio’s definition is so vague as to be essentially unfalsifiable.)

We at Alphaville would like to see investment banks release a “What a Civil War Would Mean for the Markets.” This is partly because we can laugh at them when, in retrospect, they turn out to be alarmist. But also because there should not really be any taboos around devising and publishing tail risk scenarios.

And while forty percent as a potential probability of a Second Civil War sounds uncomfortably high, analysts can at least find safe harbor in the “forty percent rule.” This is the idea popularized by a friend of Alphaville over many years Lorcan Roche Kelly before it was formalized by Dario Perkins of TS Lombard that analysts can safely discuss major, non-consensus calls, while hedging themselves against the danger of looking like a muppet by assigning a less than fifty percent probability that the event discussed will occur. As Dario puts it:

40% means the odds are better than anyone says. That’s why your customers should heed your warning, but also that they shouldn’t be too surprised if, you know, the extreme event doesn’t actually happen.

It was rolled out by major companies to predict the chances that the European Stability Mechanism would not be ratified, that the US would default on its debts and that Le Pen would win the French presidency in 2017. Of course, none of these things are actually the case. happened. But scenario planning is good.

So come on guys and gals: don’t let Quora message boards monopolize investment advice on this issue. Send your Civil War notes so we can see how you can cover the unthinkable.