Wednesday 9 November 2016

Trump from here...

I think Trump is a mouthpiece for a social trend.

I think the following led up to here:

Volker killed inflation in early 80s, cut rates, ignited a credit cycle that with Greenspan underwriting it transformed into a credit super cycle so far lasting 35 years...

China entered the global labour market in the early 90s and drove down manufacturing wages. That led to the current framework of falling incomes until recently for ordinary workers, governments subsidising their living through deficit spending and the corporate sector enjoying record profits. The two sectoral deficits (individuals and govts) drove up the credit/ gdp levels and gave the corp sector/ 1%ers/ CA deficit excess sectoral profits.

Greenspan lucked out with the internet bubble after the initial impact of Chinese mercantilism, then when that blew up he pumped up a housing bubble that culminated in the GFC.

Post GFC we have had the same policy framework, namely governments try and reinflate the prior bubble: housing, government deficit spending to support incomes/ aggregate demand, debt to gdp rising. Anything to keep the credit cycle growing and to support aggregate demand within an over indebted economic balance sheet.

However inflation has most impact nearest its source and least impact distant to the source. So you have successive blow ups in peripheral assets that have progressively gotten closer to the source, the source being Fed/ PBoC. Namely Dubai (09), Greece (10), PIGS (11/ 12), EM/ Industrial commodities (11-16), Oil (14-16), UK (June 16- ), what next? US, France?

From here:
EM has gone through its cyclical downturn (April 11-March 16). They have had a terms of trade shock, declining FX rates, BoP rebalancing, have growth, lower debt and many countries have new reform minded governments. Asset valuations are lower, banks are working through an NPL cycle.

That is an new economic cycle in EM combined with reform.

From a cyclical standpoint, if Trump drives a reflation, commodities should be bid. Historically that has been good for CTAs, but it also boosts the terms of trade of most EM countries. In the US higher wages, lower corp profits, higher defaults, higher yields, higher discount rates, its all negative for long biased investment. The USD must be weak medium term. Short term, I expect a strong USD on liquidation, we have seem EM FX dump today but G4 FX mixed.

I think right now we have a liquidation phase and then sometime after, maybe Jan-Feb we see the new trends emerge.

In Europe, all I will say is that most core countries have the same social statists mindset. Most of France's problems are self inflicted. Could we have a Frexit? Yeah, But that has nothing to do with France's problems or the solutions. UK was never a core country. Overall the Euro is the only credible reserve currency after the USD, so I think it must start a new bull market next year. 

As for the US, the just voted in a serial bankrupt construction contractor with access to a printing press and a $500bn 'New Deal' infrastructure plan. 

Saturday 5 November 2016

Trading Trump

My view now is that Trump wins a landslide and that maybe both houses go Republican.

US is in a slow growth/ full employment stage of cycle and Trump announces fiscal stimulus in form of infrastructure spending and sending home illegals further tightens labour markets.
Fed is constrained from hiking. Libor is nearly 1% so even if Fed hikes to 1% it will have no impact anyway. Dont think they will hike beyond that.
USD will become a weak currency. Im waiting for a market liquidation to sell my USD longs and go long EURO and EM. Staying short Sterling for now though.
Inflation/ Wages/ Nominal GDP start to rise and although the government increases its deficit from a sectoral perspective, corp profit margins fall, but not enough for a recession, just growth scares and an increase in defaults. I think you should consider what happens to CLO equity if there are sustained 4 or 5% default rates. You might be better off in BB or B.
Bond curve steepens.
If there is a recession this could temporarily reverse a lot of this, so USD and bonds up, but I think that that is temporary and we are back to inflation fairly quickly .
Dont forget in the 16 years preceding Volker inflation eroded 90% of the USD purchasing power.
You want to be long cheap economic assets and short debt for that. However most equity is overvalued at the moment, need it to crash first. It will crash as margins come down, discount rates and inflation go up.  
...EM has crashed already and yields are high in private credit. 

As for Trump, I think he will make George W look like Abraham Lincoln, and Bush invaded Iraq while allowing Rumsfeld to ignore Colin Powel's State Dept's plans to administer the country afterwards, and he oversaw the Fed pumping up real estate leading to the GFC.

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