Theme-atic

So here we are a week on from the election.  It's funny, isn't it?  After years of struggling with not enough themes in the macro space, if anything now we have too many; it's hard to keep track of everything being priced.  This, of course, is a good thing, as it provides mispricings and potential profit in cross-asset mean reversion strategies.   For instance, since the election copper and EM local currency debt have sustained 1 SD+ moves in the opposite direction for just the fifth time in the last decade.  (H/T the Git.)

Obviously, in terms of the post-election macro themes that are dominating the market, the notion of infrastructure-led reflation in the US is dominating the pack.  It's a good story, too; not only does it fit with some of Trump's campaign promises, but there's also a sense that this is something that ought to happen (at least amongst anyone who's had the dubious pleasure of riding Metro North into Grand Central Station.   It makes Southern Railway look like the TGV.)

Whether or not it comes to fruition is in many ways irrelevant, at least in the near term.   Surfing the waves of narrative and spotting the latest (or next) hope has been a fantastic way to make great money over the last week.  Long may it continue!   If the dollar can survive Yellen's testimony in a couple of days then we may have to present the Forecaster of the Year award to Buzz Lightyear by acclimation.

That being said, it does looks like some pricing has reached the froth stage, much like copper at the end of last week.   Although the chart isn't quite as ugly, 5y5y inflation swaps tried to bat on yesterday but pretty clearly rejected a further advance.   Some sort of consolidation/correction would not only be normal, it would be healthy.

In the big picture, however, there is one theme that is better established, more pervasive, and potentially much more significant than and road-and-wall building program.   Macro Man refers to the electoral rebellion against the comfortable consensus of globalization and the associated "elites".

From the Arab Spring to Syriza to Brexit to Trump, each defeat for the comfortable consensus has become more and more "unbelievable."  A decade ago, it would have been virtually unthinkable for the UK to leave the EU or the US to elect a president whose public statements are in some cases indistinguishable from passages in Mein Kampf.  Yet here we are.

Is Trump the apotheosis of this theme?   Surely nothing could be as big a surprise after last Tuesday?  As big a surprise?  Perhaps not.   As big a shock to economies and markets?   Clearly there could be.  The most obvious sacred cow yet to visit the abattoir remains the Eurozone, where "whatever it takes" has gotten the job done for 5 years now.

While it would hardly be a surprise at his juncture for Renzi to lose the referendum in Italy, thus eventually vacating power, the potential nuclear fallout- 5* wins an election with a mandate of withdrawing from the euro- remains a fairly wingnut risk case.  Slightly less wingnut, though still deemed unlikely, is victory for Marine Le Pen in next year's French presidential elections.  If the FN candidate were to win, she too would potentially set the wheels in motion for a Eurozone exodus.

To some extent, these outcomes have started to get priced.  The execrable performance of the 50y BTP is clearly not just down to bond market beta, and provides yet another reminder of the danger of central banks incentivizing people to buy bad assets at stupid prices.

The Bund/OAT spread has also blown out, and while at first blush the risk case looks to be in the price...

...a little perspective suggests that it isn't, not really.

Is a Bund/OAT widener a good trade from here?  Frankly, that depends on your time horizon and the depth of your pockets.  If 2016 is really about electoral surprise rather than rebellion, then at this juncture you'd have to put something on Renzi actually winning his referendum.  It seems more likely, however, that those who've only benefited from the global consensus through an increase in selective purchasing power rather than nominal incomes will continue to make themselves heard in the ballot box.

As long as that's the case, it's incumbent upon risk takers to remain on the lookout for both the threat of adverse outcomes and the opportunity that such outcomes may beget on both a tacticalk and strategic basis.