November 22, 2016
The Markets Binge Feed On Trump

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The Politically Correct, who dominate the media, thought he could never win, and were gobsmacked—which quickly morphed into sustained rage at Trump.

Investors, who relied mainly on the media, were also gobsmacked—which quickly morphed to sustained excitement about what Trump would do to promote growth and after-tax profits—and sent US stock indices to new all-time highs.

We are in sustained surprise that investors seem to assume that whatever Donald wants, Donald gets.

The Republicans managed to barely hang on to a two-seat lead in the Senate, which means the Democrats will have sustained opportunities to sustain debate—in committees and on the Floor. They retained a powerful majority in the House, but House Republicans are divided into blocs which can stop legislation from coming to votes. The President will find that his blustering and rage won’t work. He will have to discover persuasion as a strategy—and that will take this singular egotist time to learn.

We have already begun to shift our geopolitical attention to the next probable electoral revolt against the Davos Class: in 12 days Italians vote on a constitutional reform package, and polls suggest the margin of rejection will be within the range of Brexit and Trump upsets. Italy is hugely over-indebted, and its banking system is in ghastly shape. The opponents in the referendum want to take Italy out of the euro, which would mean holders of Italian government and bank debts would be repaid in liras.

Those who peer further into the future fear elections in Holland and France, in which populists far to Trump’s right threaten the survival of the Eurozone. The euro is already sagging, and should both those elections go to anti-euro parties, it could enter free fall, producing a collapse in the trillions of negative-yield euro bonds, which are largely held by banks.

We have advised clients to maintain good exposure to Gold and Cash, and to reduce bond risks by selling long-duration bonds.  We have argued that implementation of the Trump agenda would boost US GDP and would be good for many equity groups

But we have not suggested an across the board rush into US equities, including oil stocks—yet. The OPEC meeting might be the first in two years to drive oil prices higher on a sustained basis, but the Iran/Sunni divide, and Russia’s ambiguous policies could produce another disappointment.

US stocks are at all-time highs, which is reasonable if the Trump agenda passes Congress rapidly and if the state and local governments controlled by Republicans move rapidly to define and finance the infrastructure projects which have been on drawing boards since the days of the Bush Administration. Even the big tax reduction he has promised may be held back by Democrats in the Senate and the Tea Party Republicans in the House. The argument that Reagan ran big deficits and it all worked out OK, ignores the reality that the National Debt was small when Reagan took office and interest rates were plunging, so new issues we continually priced at less cost to the Budget. The exact reverse applies today. (That said, citing history in an increasingly ahistorical society often gets you nowhere.)

Gold has obviously disappointed us, but it has been, in part, a victim of the shock and awe in financial markets from the Trump election. We had not, we confess, taken our eyes off the US and Europe geopolitical excitement to look at India and assess Mr. Modi’s radical currency “reforms,” which have created a liquidity crisis and prevented Indian investors from stepping into a falling Gold market. We now understand why the respected Raghuram Rajan resigned as head of the Reserve Bank of India in June, and why he has not been heard to comment on the currency crisis there.

Summing up, we no longer fear a US recession in 2017, but we do not counsel huge enthusiasm for US or European or Canadian equities at these prices. Those markets are much higher than they were a month ago, but, in the near-term, not necessarily worth a lot more than they were a month ago. As for those who say that Gold cannot survive a strong dollar, we invite you to recall what happened to Gold and Silver when the Eurozone faced the crisis of Grexit. What could be facing Europe within weeks and months would make Grexit look like the pygmy it really was, back when it was—week after week—the biggest financial headline.

Trompe-l’oeil was an illusionist technique of creating depth that some Renaissance masters mastered. What you seemed to see was what the painter saw, but the depth was illusory.

Some of the powerful effect of what Mr. Trump dispenses is a blend of reality and the illusion of enthusiasts. He is good for the American economy and capital markets, but it could take more time than today’s excited investors believe.