Ok, so what have we learned lately?
Well, it seems like we’ve learned that stocks are really sh*tty at their job if equities’ job is to act as a discounting mechanism.
I’ve said this before.
Consider the following quote from Investopedia:
The premise that the stock market essentially discounts, or takes into consideration, all available information and present and potential future events. When unexpected developments occur, the market discounts this new information very rapidly.
That doesn’t make any f*cking sense.
For one thing, how can a market “take into consideration all potential future events”? Obviously it can’t. That’s absurd.
That said, stocks should be expected to discount what we might call “known unknowns.” That is, events that we know are likely to cause turbulence but that also admit of some indeterminacy regarding outcomes. Things that would fall into that category include the French elections and US tax reform.
One thing I’ve noted repeatedly of late is that although European markets likely still aren’t pricing in enough risk around France’s electoral trial by fire, we’re at least seeing some effort on the part of markets to price in the potential for a “surprise.” You can see this in the VSTOXX term structure or, more poignantly, in OAT spreads to bunds:
(SocGen)
In the US, there’s no effort on the part of markets to price in the indeterminate nature of the new administration’s plans with regard to the growth friendly policies that got Trump elected.
And that’s a shame because every day we get more evidence that this was never about tax reform or fiscal stimulus. Rather, it was all about Steve Bannon’s batsh*t crazy social agenda. Just look at what Bannon told Germany days before Mike Pence (who is apparently in the dark about everything, all the time) visited Brussels. That, while tax reform moves at a veritable snail’s pace:
SPICER: EXPECT TO HAVE TAX PLAN RELEASED IN `NEXT COUPLE WEEKS'
it was "2-3 weeks" 2 weeks ago— Heisenberg Report (@heisenbergrpt) February 21, 2017
Believe it or not, I went through all of that trouble just to introduce one chart. Hopefully it was worth it.
Below, find the ratio of the European economic policy uncertainty index to its US equivalent (rhs inverted) plotted against the STOXX 600 versus the S&P.
This demonstrates the evolution of policy uncertainty in Europe versus the US and also shows the degree to which European equities have fallen versus their US peers based on what the EPU suggests is a discrepancy in levels of uncertainty. The question you should ask yourself is this: does the picture this chart paints accurately describe the extent to which the political picture in Europe is cloudier than that in the US? Or, in other words, should those blue lines in fact be flatter than they are given how f*cking crazy Donald Trump is?
(Goldman)
