This often gets lost in the proverbial shuffle for those swept up in the equity euphoria, but up until the tax bill passed, those looking for evidence of “confidence” in Donald Trump’s “tremendous” economic acumen would have been hard pressed to find any in markets.
All of the much ballyhooed “Trump trades” were faded aggressively throughout the year and in what is perhaps one of the most hilarious examples of accidentally trolling oneself in history, the dollar had its worst year since 2003 starting just after Trump told the Wall Street Journal that the stronger the dollar, the more “confident” people were in his administration.
And look, we’re not just making this up. It’s not just the dollar. Look at value vs. growth or small caps vs. large caps in equities. Or for Christ’s sake, look at the curve, which has been screaming “recession ahoy!” at the top of its curve lungs for months.
To be fair, the latest leg higher in stocks is at least in partly attributable to the tax plan, a contention that’s clearly illustrated in the following chart which shows how quickly everyone ratcheted up their EPS estimates:
Still, that’s a recent phenomenon and on Monday, Andrew Lapthorne is out with his latest post which finds the SocGen strategist asking the following question: “Is the decline in the U.S. yield curve and the dollar reflecting U.S. profit weakness?”
After noting that the weak dollar and collapsing yield curve seem to raise questions about the prevailing bullish narrative in the U.S., Lapthorne reminds you about “the steady decline in growth in net operating cashflow in the US once the energy sector is excluded, decelerating from around 7% per annum to just below 3% per annum today, a rate of growth normally associated with a period of weak economic growth.”
Maybe if we plot that against the curve and the dollar, things will make more sense. Here are those charts:
“This apparently weak cashflow growth runs counter to both net income and sales growth, but as the saying goes Revenue is Vanity, Profits is Sanity, Cash is Reality, so we should take note of such a slowdown, particularly when such a slowdown in recent years at least seems to coincide with both a slump in the US dollar and a decline in the US yield curve,” Andrew adds, before concluding as follows: “If the cashflow growth signal is correct, and that reinforces the yield curve view of US economic prosperity, then equity markets could be in for a nasty surprise.”