The experts are out with more ridiculous forecasts about the Trump victory and what it means for the various aspects of the financial markets. But let me toot my own horn for a moment: The trading outcomes for a Trump victory were on target, except for the dollar rally sustaining itself, but that is something I will be analyzing as we go forward. It amazes me how the media rushes back to the same forecasters who have so badly predicted many of the major political outcomes of the last two years. An important book for my readers is Tetlock’s “Superforecasting,” which makes a very powerful argument about following the experts.
But the movement in the STEEPENERS has been “breathtaking.” I want to go on record as saying I disagree with Stan Druckenmiller’s long-term view on the GOLD. This now becomes GOLD versus all fiat currencies so LONG GOLD versus yen, euro, Swiss and anything else as the central banks have started down a dangerous path since the ECB, BOJ and BOE continue on the road of large-scale asset purchases, or QE. The only way this trade will turn is if SHORT-TERM RATES GO TO REAL YIELDS ON THE SHORT END OF THE CURVE. CURVE STEEPENERS WILL NOT HURT ASSETS BECAUSE THEY WILL BE FUNDED WITH ULTRA CHEAP SHORT TERM BORROWING.
There are many things afoot in the global financial world as politics becomes the center piece of financial decisions. We have the Italian referendum on December 4, the FOMC mid-month and the coming French elections. So many moving parts, and, of course we have the actual economic data, which has been tepid around the world. The Trump headwind will give the FED an excuse to keep rates on hold as Yellen and Brainard seek to be on guard to see to it that WAGES run hot.
Also, an important piece to the interest rate puzzle was covered in a Financial Times piece by John Dizard, who notes the significance of the November 28-29 meeting of the Basel Committee on Banking Supervision and its review of the use of their internal Value at Risk (VAR) models that sets capital ratios based on risk. Currently, all sovereign debt is treated as a ZERO RISK WEIGHT. Any change to this current model of risk valuation will result in a rush to raise capital to meet new regulations.
In Dizard’s words, “The specific point of contention is whether the G-20 banks should be able to use their own internal risk models to determine how much of their own capital they should set aside for a given type of lending or securities. U.S. regulators seem to hate models. They think that there should be one range of risk weights for any class of lending, such as project finance.” This is a battle that will severely divide the G-20 so pay attention.
The bottom line (for now): The Trump victory will ruin good and bad people as the stables are swept clean so let us not practice Schadenfreude but roll up our sleeves to fix some of the major problems that plague the U.S. economy. Don’t rejoice in the defeat of your enemy but work to put in place the lessons learned through the arduous battle: “With Malice Towards None, Charity For All” (Abraham Lincoln).
We will get to work looking ahead but I warn against any long-term trades or investments until more is known. Remember what Secretary Lew recently said: “Brexit vote is the adoption of a political idea that most experts say is wrong.” Goodbye Secretary Lew. I hope that you are replaced by the most competent Treasury Secretary, Sheila Bair, who did her best to protect Main Street against the tyrannical excesses of Tim Geithner’s efforts to save Wall Street in its pre-crisis form. Can you hear me Donald? SHEILA BAIR IS THE ONE.