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.