Interesting times five
I spoke yesterday to an old Wall Streeter, a college-educated female, who could barely contain her excitement over the Trump presidency.
“The new administration is going to get this country properly working again. I think the equity markets are going to be just fine,” she declared with some level of certainty. For her, there is no question of the equity rally being wishful thinking. I have said myself that the broad electorate in middle America seemed comfortable with the idea that false hope is still better than no hope at all. I now find the same in the city.
I must of course firstly admit that my scepticism might be completely misplaced and that, secondly, the markets are never, at any given time, wrong. If those who control capital are excited by the prospect of the new administration to the extent of a 900 point rally on the Dow, they might well be seeing something that I can’t. That ultimately depends on another factor which came up in conversation with another ageing Wall Street heavy and that is where one pegs the limit of America’s ability to borrow. Is US$20trn the limit? If not, why not go on to US$25trn or to US$30trn?
Having just emerged from a global financial crisis that was, to a significant extent, brought about by borrowers placing their prime concern on how much debt they could comfortably service rather than how much they could ever afford to repay, we should know better. The asset price bubble had, between 2004 and 2007, divorced itself from the underlying interest rate scenario and had gone into overdrive. The Case-Shiller home price index peaked at 206.52 in July 2006 when the Fed Funds target was at 5.25%. It had been at a mere 164.82 when the tightening cycle began in June 2004 at 1%. Just to put this in context, the Case-Shiller 20 City Composite was last reported for August at 191.66. So the market might always be right at the time but with hindsight the occasional misjudgement can come to light.
Cocking a snook
There is certainly no sign of Wall Street wanting to announce that “He’s not my president”. There is, however, an innate feeling that those Wall Street grandees who were supposed to be brought to heel are cocking a snook at the grass-roots Trump voters. We are still over two months away from the inauguration and much can happen between now and then.
Bond markets are of course cautious. The fear of inflation is palpable and the ongoing repricing of the curve should not come as much of a surprise. A 2.75% 10-year and a 3.75% long bond seem to represent levels at which investors might be more comfortable in the medium term, which would more or less bring us into the space where equal risk bond yields and dividend yields would find themselves at or close to parity.
2.75% and 3.75% might, for the purpose of general chat-chat, look like nice round numbers but they also call for a further 15-point fall in the price of the 30-years and a five-point drop in the 10-year space. These are big moves, should they occur, and ones that will be very painful. One New York analyst I spoke to laconically commented, “that’s five years of bond investments out of the window”.
Commodities are also on fire and, in case you’ve missed it, copper is trading at a 15-month high. Whether the recent rise is sustainable is yet to be seen but it demonstrates that China is not the be-all and end-all in global raw materials. The US can still be the news. In the greater scheme, alas, copper at US$5,552.50 per tonne won’t excite anyone compared with the five-year average of US$6,548.60 which is, perchance, very close to the 10-year average of US$6,827.50. Some of the financial press was celebrating the benefits for the principal producers such as Chile, Peru and DR Congo – note though that China and the US make up the rest of the top five producers – although at the top of the commodities boom at the beginning of the decade the meal was commanding prices of above US$10,000.
Oil prices tell us even less than copper. WTI closed last night at US$43.32 per barrel but is trading 2% higher at the time of writing. Having looked into some of the recent production figures, it appears that all the fine rhetoric concerning the control of output is worth not a penny and I understand that Iran is still cranking up its production capacity. Just a month ago we printed prices north of US$50… yeah, yeah, sure.
Mexican wave
There is still a major shake-out going on and, as expected, emerging markets remain caught in the crossfire. There are surely some trading opportunities in bombed out markets, not least of all in the bellwether Mexican peso. As Trump softens his rhetoric – the wall might now in parts only be a fence - the peso must have room for improvement and if I were to be in the mood for a quick punt, this would surely be where it’d stick the first pin.
Meanwhile, back in the UK, Brexit continues to cause trouble. The coward David Cameron has left a total dog’s breakfast behind and despite Theresa “Kitten Heel” May’s attempts to look serene, there is no doubt that she and the rest of her team are struggling to work out which side is up. I just love the little “leaks” that reveal there is still no firm strategy as to how to untie the UK from the EU. Well, let he who is with firm solution cast the first stone.
Apart from that, how does one prepare to negotiate if one has no clue with whom one will be negotiating. The Italian referendum is only weeks away and by next spring there will be a new face in the Elysée Palace. Whose face this will be is unclear and the odds on it being that of Madame Le Pen are slim. The time, however, when the views and voices of the sans-culottes could be simply dismissed by the educated elite are probably over and more heed will have to be paid to middle-France. A change of dynamics in Paris could also change the dynamics of the Brexit negotiations.
We live in interesting times. May they stay so…