‘Good’ Trump Isn’t Coming Back, Get Used To ‘Bad’ Trump, One Bank Warns

There was always something highly absurd about the “Trump bump”.

Despite myriad dire predictions from economists prior to the election, stocks raced higher on the promise of tax cuts, deregulation and fiscal stimulus and by January 2018, equity markets had hit something that, at the time, seemed like escape velocity, as the S&P blew past multiple analysts’ year-end targets in just the first three weeks of the year.

There was just one glaring problem: anybody who had ever known or done business with Donald Trump (and really, anyone who followed him on Twitter prior to his ascension to the Oval Office) knew that giving him free rein to dictate or otherwise shape economic and foreign policy was akin to letting a chimpanzee loose in the NORAD control room. It wasn’t a matter of if something would go horribly wrong, but rather when.

The “when” became “now” starting in late September/early October as the combination of tariffs on $200 billion in Chinese goods and Jerome Powell’s “long way from neutral” misstep together conspired to pull one too many blocks from the bottom of the Jenga tower.

Subsequently, stocks suffered an egregious three-month rout, credit spreads ballooned wider, the previously bulletproof leveraged loan market went into free fall and everyone braced for impact amid a generalized sense that the train had finally careened clear off the tracks.

(Bloomberg)

All of that was made immeasurably worse when Jim Mattis resigned and Trump proceeded to shut down the government in lieu of ransom money for his “tremendous” wall idea.

Once things got going in the wrong direction, there was no stopping it. The narrative had shifted. “Investors should keep in mind that the narrative is often driven by price action, and price action is driven by flows and positioning”, JPMorgan’s Marko Kolanovic wrote on Wednesday, adding the following:

For instance, during the May-October period last year, there were strong inflows on account of declining volatility in the aftermath of the Feb-April turmoil. These flows pushed the market higher, despite negative seasonality, the fact that the trade war was escalating, and that there were expectations for a continuation of the quarterly rate hikes at the time. Once deleveraging started in Q4, stocks were moving lower regardless of the narrative (e.g., many stocks sold off on decent Q3 earnings and the market sold off after the G20 and Powell pivot).

Speaking of “narratives”, SocGen is out with a highly amusing “editorial”, one section of which is called “The end of the G1 story: from ‘good’ to ‘bad’ Trump.”

“Since a month prior to Donald Trump’s election in November 2016, markets have been keen to gear to the ‘good’ Trump”, the bank writes, before rehashing the story investors told themselves to justify the rally:

He was the Trump driving growth through (unfinanced) spending, trying to rebalance global trade, increasing energy production at the expense of OPEC and deregulating, a policy reminiscent of the Reagan years.

Well, suffice to say “good” Trump is gone now.

“The switch from ‘good’ to ‘bad’ Trump happened a month prior to the midterms”, SocGen continues, on the way to reminding you that having lost the double majority in Congress, Trump is now constrained with regard to his “freedom to act, especially with the public finances.”

On top of that, there’s the whole impeachment issue. “The Democrats are desperately in search of a path to trigger impeachment and are, understandably, not gifting the President with many easy options”, the bank continues.

So, who is “bad” Trump? Here’s who he is, according to SocGen:

The bad Trump is the one who, in spite of a budget deficit already at 5%, is asking for even more spending; who alienates many of the US’s traditional geopolitical partners; who breaks major treaties that have formed the backbone of the global peace process since 1945.

And does SocGen think “good” Trump is likely to make a comeback in 2019? In a word: No. In several words:

The author of these lines does not believe markets will come back to the “good” Trump story anytime soon.

We concur.

For SocGen, that means that going forward, market participants are likely to be “forced” to rotate into and otherwise re-weight Europe, Japan and, amusingly, China.

What was “America first” will henceforth be known as “‘G9’ (G10 minus the US), plus China”, the bank says.

#Sad.