Ok, let’s say you believe Martin Shkreli (and you know, why would you have any reason to doubt Shkreli?) when it comes to his contention that Bloomberg is “an overpriced, legacy software system that subsidizes a money-losing media company.”
Well even if you believed that and you were under the (deluded) impression that you could find a better provider of market data, I’m going to go out on a limb here and say the admittedly steep monthly cost is worth it just for the real-time market commentary from BBG’s live bloggers. So there’s a Heisenberg plug for MLIV (you’re welcome @TheTerminal, I will gladly accept a discount as compensation for my endorsement).
One of those bloggers is Cameron Crise. Now admittedly, Heisenberg likes to have a little fun with Cameron’s posts now and again, but at the end of the day, he writes some great commentary and even if you don’t agree with what he says, he almost always does you a service by collecting a bunch of data to back up his assertions, which is great because in many cases, it’s data that you would have had to go and get yourself, so it’s a real value add.
On Thursday, Crise is out talking about what everyone else is talking about: namely the sudden resurgence of the U.S. “reflation” meme or, more colloquially, “the Trump trade.”
That trade has been dead (or dying) for a while. Of course you wouldn’t know it if all you cared about was the Dow (which probably means Trump himself has no idea just how little faith FX and rates have shown in the prospects for #MAGA).
But even the most cursory look under the hood reveals the extent to which no one believes this President.
Although September may mark a turning point, the dollar has fallen every single month since Trump hilariously told WSJ that a strong dollar is “a sign of confidence” in his presidency.
10Y yields have been trapped in the worst rut in 52 years, a state of affairs that is directly attributable to Trump as outlined here last night, and as the following very simple chart from Goldman illustrates:
Meanwhile, small-caps have underperformed pretty much all year retracing nearly the entirety of the post-election “bump”:
And as for the best equity measure of “faith” in tax reform, well, here’s what “fool me three times” looks like:
So that brings us to the big (or maybe “bigly” is better) question: is the “Trump trade” really back? Or is this all a Chinese illusion (as SocGen’s Kit Juckes suggested in a great note out on Thursday morning)?
This is a critical question to answer lest we should all end up like George Bush:
Yes: “you fool me, you can’t get fooled again.”
Or can you/we?
Read below as the above-mentioned Cameron Crise asks whether this is a case of Einsteinian insanity or whether this time, there’s something to the “hope” inherent in the resurgence of the Trump trade.
There’s an oft-quoted cliche that the definition of insanity is trying the same thing over and over expecting a different result. Another aphorism puts it slightly differently: fool me once, shame on you; fool me twice, shame on me. Financial markets seem to be in the throes of another love affair with the U.S. reflation trade as the dollar, bond yields, and small-cap stocks have all enjoyed a stellar September. Are markets crazy to succumb to another bout of tax-cut fever? Perhaps, and it will be important to keep track of how much good news on the fiscal front is in the price. However, investors should also remember that there are plenty of sane reasons why markets reflated this month.
- For the past few weeks markets have been operating from the November 2016 playbook. Sell tech stocks and buy small caps. Buy dollars against other major currencies. Sell bonds and buy inflation breakevens. Those trades all performed well for a few weeks and then suffered for much of 2017. Are traders cruisin’ for a bruisin’ again?
- At this point it’s pretty early in the game to quantify how much of recent market developments represent optimism over favorable U.S. fiscal policy outcomes. Probably the best way to isolate this factor is to look at the performance of high tax firms versus the broader index. While companies with higher-than-average tax rates have outperformed recently, on an aggregate basis they are still slightly down since just before the election
- The rise in bond yields has been notable, but it’s important to remember the starting point. August ended among concerns over the economic impact of the recent hurricanes and left the Treasury market badly overbought and traders overly pessimistic about the Fed. To a large degree the recent rise in yields has been about unwinding unrealistic expectations, a process that may be largely complete for the time being
- As for the dollar, it may be a coincidence that it started its recovery when USD/CNY hit 6.50 and the PBOC made it easier to short yuan — but probably not. Obviously yields will remain a significant driver of the dollar’s fortunes, so it’s important not to get too bullish too quickly
- At the end of August there was clearly too much pessimism priced into Treasury yields and the dollar. Much of that has now been unwound. Recent trends can continue without raising too much of an eyebrow — say, 10- year yields to the 2.40-2.45 level. Absent a fresh catalyst, however, pushing beyond there will require buying into the same narrative that failed so badly earlier this year. While that might not be crazy, there’s no guarantee that it’s sane