The day after the night before

Leaving aside Donald Trump's foreign and social policies, which are best discussed in other forums, let's have a think about what a Trump presidency, aligned with GOP control of Congress, state houses, and state legislatures, might mean for the economy and markets.

1.  Trump has spent his entire career borrowing money and building stuff.   It seems virtually impossible that he won't try to do the same in the White House.   What will be interesting is to see how he interacts with the Tea party/fiscal hawk wing of the GOP; do they cut him some slack because he is ostensibly one of their own, or do they treat him like Obama?  It's very early, of course, but it seems likely that he'll be able to get something through early doors, particularly because infrastructure stimulus is right up the Democrats' strasse.

2. All else being equal, tax cuts and increased spending should raise bond yields.  It seems ludicrous to even write this as some sort of "insight", given that it has historically been virtually axiomatic, but the last eight years have blunted the edge of many a macro blade.  How far and how durable this trend might go of course depends on the size and efficacy of any stimulus packages.

3. The repudiation of free trade is inflationary.   Tariffs/barriers to entry/moving production back to high cost locales all raises the price of goods and services.  As a reminder, here is what free trade has done to consumer goods prices:

Clearly, the impact of a Trump administration on inflation will not be as swift as that of Brexit, given the different fortunes of the dollar and sterling.   Still, from a longer-term perspective, it's worth keeping an eye on how policy may shift inflationary trends.

4.  Two-sided fiscal stimulus is something that markets have not had to confront in many years, nor has the Fed.   While one has to be careful of drawing sweeping market conclusions the day after a surprise shift in narrative, it does seem reasonable to think that curves should be steeper, both across Treasuries and the money market curve.   Lest we forget, Yellen's term expires in early 2018, and she seems about as likely to get re-appointed as she does to play center for the Knicks.  Moreover, if Trump-o-nomics succeeds in engendering inflation, this will warrant a more aggressive response than markets have become accustomed to.   Looking at a chart of the generic 2nd vs 8th eurodollar spread provides some perspective on how far things could go.


5.  In equity space, thinking in index terms is probably the wrong thing to do now that the initial flurry has finished.   It's all about sectoral winners and losers.  If the infrastructure spend is correct, then construction/engineering stocks look pretty attractive, especially as they had been beaten up over the last year or two.  The chart below depicts Fluor, which your author bought earlier today.

6.  Keep an eye on China.  The apparent stabilization of the cycle, combined with a little loosening of speculative restrictions, has seen base metals go doo-lolly recently.    Yet we know that Trump is no fan of China/outsourcing, etc.   The CFETS basket has quietly dipped to a new low recently, and one does wonder if PBOC won't engineer another depreciation before Trump gets in office.


7.  At the very least, Trump's ascension has changed the narrative and, most likely, the direction of policy.  Whatever one thinks of him, his tenure in the White House does make it seem somewhat more likely that old school macro skills will come in handy, rather than experience watching a parade of zombies.  While the recovery in Spoos has obviously seen vol sellers emerge from the woodwork, 5 point days in bonds just don't happen that often....nor do 30 bp swings in red Eurodollars.  While the renaissance of macro has been called nearly as often as its death over the years, this time at least there's a discernible reason to expect a fundamental change in market conditions.   If so, that's at least one development that virtually all readers could agree would be a welcome one.
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Anonymous
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November 9, 2016 at 7:03 PM ×

You could even say that...

Trump is going to make Macro great again!

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Gnome of Zurich
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November 9, 2016 at 7:09 PM ×

It's not only about Trump/Hillary specific sectors like healthcare, rising interest rates are totally in control of the equity show: up are financials and high beta stocks in general, down are the low-beta and stable stocks. It was about time this set of market darlings gets their reckoning.

Looks like 2013 all over again so far.

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Anonymous
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November 9, 2016 at 7:30 PM ×

first piece of infrastructure spending thats a lock in... building the wall. any repub opposing him on that will get killed.

then there is the deportation of illegals... and he has to hire how many people ? again any repub opposing that will get slaughtered.



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Leftback
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November 9, 2016 at 7:56 PM ×

Bondmageddon at the long end today. The Long Bond yield is up by 24 bps. We have had a couple of targets in mind since the Summer for the long bond and they are finally starting to come into view down here. GIven the rarity of 4% moves in the bond markets, opportunities for mean reversion trades are probably not far away. Right now, large numbers of f/i punters are apparently offsides and totally out of position, probably the same tools who got relentlessly squeezed earlier in the year.

Hard to see equities continuing to thrive while this Rates Tantrum is going on, as Gnome points out above, and eventually utilities, preferreds and REITs are going to get killed (and it will be bargain basket time). One more day of beatings for the fixed income market tomorrow until morale improves? We are happier than ever to be long UUP, meanwhile. A more insular, inwardly focused and even navel-gazing US is surely a recipe for a strong dollar regime, and this may be just getting started.

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Anonymous
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November 9, 2016 at 9:32 PM ×

Mega day for the end of financial repression - and that is good for macro.

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CV
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November 9, 2016 at 10:09 PM ×

This is a really, really good post MM! I agree completely about rates, and also about the inflationary impact on tariffs, if enacted, will be inflationary, which will also increase the pressure on yields. The long-run bull in bonds face a stern test here!

Another thing which I think is important is that, as far as I can see, Trump needs foreign savings to kickstart/fund all that infrastructure spending. I.e. he needs to expand the twin deficit. It appears very unrealistic to me that they close the C/A deficit and then expand the budget deficit ... that is not possible in the U.S. economy imho.

Yellen will have no choice but to go with the long-end here, and raise.

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wcw
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November 9, 2016 at 10:42 PM ×

@CV, then 10-year is nowhere near levels that would suggest any need for external funding.

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Anonymous
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November 9, 2016 at 10:55 PM ×

please wcw, not another model...

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GoingSouth
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November 9, 2016 at 11:18 PM ×

Any view on gold? Pre-election it was regarded as one of the main Trump hedges; yet it hasn't really performed, and higher rates and stronger dollar are both obviously gold-negative. Personally, I have a decent chunk currently as I'm amazed how calm the market reaction has been.

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Macro Man
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November 9, 2016 at 11:50 PM ×

It was up nearly $60 when Spooz were on the lows, so I'd suggest that was working as intended. If the inflationary theory is right, then gold should do fine against a basket of currencies. XAUUSD might be a little more two way given a strong $. Looser fiscal and tighter monetary policy is a recipe for $ strength.

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Anonymous
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November 10, 2016 at 3:56 AM ×

Trump will approve Trans Canada? TRP

anti- Iran, so good for Cdn oil? thus C$

Am I dreaming too much

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Anonymous
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November 10, 2016 at 5:53 AM ×

how much political capital does Trump have ? he has delivered stunning results but he also has pissed off influential blocs like the bush clan ? will he be able to push for spending beyond the obvious ?

guess this is where the deal making skills he brags about will be tested. interesting times.

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CV
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November 10, 2016 at 7:42 AM ×

@WCW ... what do you mean?

Maybe my point was poorly made though. In a nutshell I am saying that if the Donald want to, and is able to, spend there is plenty of foreign excess savings at the ready to fund whatever he wants to do ... i.e. he can really go for it if he wants to. Remember, the U.S. is not a "saver's society." ... it would not be unusual for the U.S. to import growth via a higher C/A deficit. Now I realise that this exactly is what Trump does NOT want to do c.f. the anti-trade agenda etc, but I don't see how he can lift the budget deficit the way he wants without also pushing the C/A higher, unless domestic private demand collapses completely.

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Anonymous
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November 10, 2016 at 8:22 AM ×

@LB - When you say "Hard to see equities continuing to thrive" did you notice the DJIA gaining +1100 points in a session? Or Dax gaining 1% at the open today (after a 5% rise yesterday)? lol

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Anonymous
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November 10, 2016 at 8:27 AM ×

Financial commentators and the MSM are such fcking idiots. Equity indexes are gaining 2-5% per day under Trump, they have never been so bullish. I honestly expect the SP500 to reach 3000 by year end, as buy programs front-run the biggest bull market we have ever seen.

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Anonymous
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November 10, 2016 at 9:16 AM ×

Way too much uncertainty with his ticket. He won't be in office for at least 2 months. There's a lot he can say in that time. We bounced hard because Icahn bought $1bln worth of Emini at limit down and let a few inside punters know. That rally was insane.

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Anonymous
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November 10, 2016 at 9:19 AM ×

hell larry kudlow (trump supporter) had an article out saying buy the dip before the election.

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Anonymous
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November 10, 2016 at 9:19 AM ×

Euro move anticipating repatriation of US companies reserves?

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Anonymous
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November 10, 2016 at 9:56 AM ×

Equities are LOVING this strong dollar.

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Skr
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November 10, 2016 at 10:41 AM ×

Speaking of the day after the night before, I have noticed my hands are a lot more hairy today - must be this supermoon (last time this close was
1948) on the 14th.
Expect another week or two of full blown lunacy before the world mellows out as the moon moves away.

The original and the best...
https://youtu.be/1MRu8N2K0NY

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Rossco
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November 10, 2016 at 10:43 AM ×

So if Hillary had win would the spoos be at 2500?

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Anonymous
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November 10, 2016 at 11:06 AM ×

MM what is your rationale behind FLR? Asking specifically to learn more about the process behind your selection of stocks from a sector basket

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fcp
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November 10, 2016 at 12:11 PM ×

Well, hopefully the risk parity guys got smoked in the bond selloff.

Yesterday was textbook Brexit only this time we started flat (instead of net long) so moved faster and made money both sides, instead of getting wiped in the initial sell-off. As soon as the second derivative florida odds turned negative we went 100% short and covered at 4%. Lesson learned, internalised and executed.

Been balls out long ever since, though may buy a bunch of cheap calls and delta hedge the crap out of them in case the market makes a fool of everyone for the third time this week.

We should all have orders in 10% below the market. They are gold in these flash crashy markets. Was surprised how many random FX orders got hit and was quite happy to close them out as the market exhaled.

Took a while to form a view but trump seesm v bullish - no environmental, financial, pharmaceutical or energy regulation. Poor clinton had whole teams ready to swoop on these sectors and tell them what to do.

Trump has done what no-one else could and actually shifted the bond market. This could pull the rest of the world out of this crazy state of affairs. Make Macro Great Again indeed.

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Leftback
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November 10, 2016 at 12:21 PM ×

It's still early….. lots of short covering going on, especially in the "reflation trades" and curve steepeners. There are too many sectors vulnerable to rising rates for this to continue for long.

Thanks for the abuse though…. :-)

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CV
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November 10, 2016 at 1:16 PM ×

Hmm LB, the price action in bonds is ugly here. As in ... bedpan overflowing ugly! Surely, we can't risk a real rout here that takes equities down with it. I.e. a real kick in the nether regions for risk parity funds?

My base case ... equities reverse soon, which gives some relief to battered bonds, but that view is being challenged at the moment.

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Mr. T
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November 10, 2016 at 1:35 PM ×

So much emotional trading going on. The bond market is saying something, if anyone would bother to listen. Not just US - bunds, btps everythings getting hit hard. Trumps "plan" as far as I can tell calls for passing 500B in stimulus spending, over 10 years. $50bil/yr in additional borrowing is not going to cause 10yr rates to rise by what - 30bp? I think to correlate these 2 things is dangerous - this is not "the bond market making way for big infra borrowing". Back in the old days there was this concept of the "bond vigilantes" - I know its probably a foreign concept for the 12yo crowd - but the whole thing was when a politician/corporate would propose big spending they would sell the bonds, raise borrowing costs, and cockblock the whole thing. I think its worth at least considering that the dust on the horizon is some form of their return. Is that Janet Yellen I hear humming the Bonanza theme song?

I'm gently selling the indices this morning, while retaining a basket of "peak globalization" US stocks. Also continue to slowly nibble on Europen financials (via EUFN). Stuff like SPLV/reits/stock-for-bond-proxies are looking increasingly vulnerable to me. Commodity capex has been depressed for many years, higher rates despite potential increased demand will keep it suppressed for longer still. If this isn't a recipe for commodity-based inflation I dont know what is. IOEA - CHIS (anything) - etc. If yellen is going to follow the long end does is the market going to start considering 50bp in Dec? 50bp by Q1? WIRP/long-end seem totally out of whack.

Crazy days.

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Anonymous
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November 10, 2016 at 1:38 PM ×

I just wonder a little about the price action of the last couple of days myself. Now exactly how much did Goldman Sachs and many of the other big banks contribute to Trump's campaign? How is it that some of the beneficiaries from a Trump administration are going to make out again?

I can see how coal companies can be coaxed off the ledge...some of the others, I think I'll wait a bit...

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Anonymous
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November 10, 2016 at 2:11 PM ×

I like how Investing.com, that beacon of hope to preschool wannabe day traders across Asia and beyond, chose early today to amend its layout, removing Treasury Yields from their prominent position at the top of the RH data column shown on every single page view. Because, you know, what use are they to anyone?

Ho ho.

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CV
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November 10, 2016 at 2:55 PM ×

Wow, some pretty big moves here. U.S./EZ financials, EM, bonds ... divergence is story. Adult swim only! Risk parity/passive beta could be in trouble here. Good for active managers ... or well, that could(!) be the narrative here.

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