Trumped-up charges

Posted by & filed under Badger's Blog.

Well it’s now a week since the unthinkable became “thunkable”.

Leaving aside the genuine cries of anguish from those around the world who ideally desire the characteristics of inclusion and tolerance from their leadership, the economic hard winds of change, ‘they been a blowin’.

Trumped up

As we wrote on the day of the election, the new Trump presidency coupled with a Republican Senate and Congress, is going to propel future US policies in a profoundly different direction than a Clinton administration.

Markets didn’t believe a Trump win was possible so post-election the phrase “all bets were off ” was never more apt.

The new paradigm of a lower tax, lower regulation, higher spending economic policy is now plainly on the runway, and boy oh boy did the US stock market grasp that as a theme from last Wednesday onwards.

Shares in Financials, Infrastructure, Biotech and Industrials shot up, whilst previously ‘safe-haven bond proxy’ equities such as Utilities and Telecoms were sold off.

It was fascinating as an example to see the market pragmatism at work; it basically said out loud in the case of US banks:

“Well, we pretty much hated you yesterday because Hillary was going to win; Democrats despise the big banks (Elizabeth Warren serving as Chief Inquisitioner) and you were going to be stuck on the naughty step for another 4 years.

Today we love you because the economy is about to get a huge fiscal stimulus, the new Republican administration will be staffed by your people, Dodd Frank (post 2008 Banking Regulations) will get diluted, interest rates will be going up so your net interest margin will expand a lot and you’re back in the game boys, welcome home!”

Trumped down

For every Yin there is a Yang, and the fixed interest market suddenly had an alternate universe to digest and price.

Huge stimulus is now on the way and with it massive new borrowing; interest rates will then be forced up as growth increases, inflation will rise requiring higher rates, the dollar will strengthen leading to potentially more inflation …………

No more lower for longer, now it’s Trump and Pump.

We’ve been saying for too long that buying fixed interest securities at such artificially low yields or very expensive higher yielding equities would ultimately have to end in tears. The day before the election however, there was no catalyst for the pervading orthodoxy to change; there sure is now.

The 10 Year US Treasury yield over the last week has moved up from 1.75% to 2.25%, which doesn’t look startling until you put the move into a percentage.

It’s a rise of 30% which consequentially means a thumping loss in capital value for buyers at 1.75%, ouch!

Conclusion

We think that all things being equal the new Fiscal spending agenda of the US government to create growth, jobs and inflation (so allowing rates to rise) will be copied to some extent in the UK, and possibly parts of Europe as well.

It may in time be seen as a fortuitous turn of events; as the Central Bank led, low interest rate environment looks to many as having run its course.

The questions around whether pumping the economy with capital is a good idea will be argued from the intellectual baselines of the Keynesians who say ‘yes, it most certainly is’ as the economy needs greater velocity; to the Monetarists who say ‘no, it’s going to be wasteful and induce boom and bust economic conditions’ and they may both be partly right.

One thing we know pretty much for certain though, is that Dorothy is most certainly back in Kansas; and for now at least Oz was a dream.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

Comments are closed.