Notes From Underground: Nothing New to See, Except the Equity Markets Finally Added Some Risk Premium

The market did not selloff today. Risk was merely repriced and greater premiums were being offered in an effort to attract buyers. Everything discussed in this blog during the past six months was brought to light and the most important outcome was that the narrative has changed. The Trump agenda of tax and health care reform, and regulatory rollbacks was seen being delayed by the possible legal issues confronting the White House. Notes From Underground is apolitical and is solely vested in understanding the policy impact of any political outcomes, which is why it is geared toward political economy. Or, as Deng Xiaoping would say: “I don’t care if the cat is white or black as long as it catches mice.” Since Trump’s inauguration, the mainstream  media has been relentless in its effort to cast Trump in a negative light and the Tweeter-in-chief has certainly provided the tinder to keep the fires lit.

It is very easy to celebrate the bonfire of the vanities but for all those celebrating the potential “resignation” of The Donald be prepared for the emergence of V.P. Mike Pence, who is a true midwestern conservative. President Trump carries no labels and adheres to no ideology except MAGA, which is so banal as to be jejune (h/t Woody Allen). In my humble opinion, the Trump fiasco is increasing the power of the FREEDOM CAUCUS as they are the group that will most probably come to determine whether Trump stays or goes. The rising power of the Freedom Caucus will result in more outcomes similar to the first effort to pass the repeal of the ACA.

My point here is this: Wipe away all of the supposed sugar high from infrastructure projects and tax reform, which removes much of the octane of the stock market rally. As longtime readers are aware, at Notes From Underground I relish the Dostoyevskian math that 2+2=5. The current political situation adheres to that simple concept. The equity markets have been supported by the massive central bank liquidity injections. As the market has climbed the proverbial wall of worry, complacency has been the operative sentiment. While contentment has served investors well, it seems that Hyman Minsky is getting warm in the bullpen. Major investors such as Bill Gross have been busy enhancing their returns by selling volatility because of the passive investor’s complacency.

Today, for the first time in months a sharp intraday break didn’t turn into a late-day rally so those short option premiums didn’t get a reprieve. How much pain will the premium sellers be willing to absorb is critical to all markets. I will be more interested now in not seeing support levels in the equity markets but measuring where the rallies fail.

***Another reminder to my readers: It is important to watch the currency, gold and bond markets in relation the November election period. (That’s the day before the election–when Hillary was a guaranteed winner–to the violent market paroxysms of Tuesday night, and ultimately, to the weekly closes of Friday, November 11, 2016.) It is important to put into perspective where the markets have been in an effort to find profitable trades. These have been difficult times in the global macro world but trading is a dynamic endeavor and the breakdown of previous algo-driven correlations will provide opportunities. Stay focused and flexible. One day ‘s trading outcome to not make a change in trend or low held views but we will be vigilant to any hints in a change in investor sentiment. The central banks wield enormous influence and have the power of Fed Governor Jerome Powell’s printing press as a tool to salve the wounds of complacent investors.

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3 Responses to “Notes From Underground: Nothing New to See, Except the Equity Markets Finally Added Some Risk Premium”

  1. Publius Says:

    Amusing how reports of today’s tiny break state that it’s due to Trump concerns, as if there haven’t been any in the last four months. It boggles my mind the equity mkt has been immune to the administration’s daily follies. He states random policies from time to time and I think he has no idea. Staff maybe.

    Yra—why the disconnect from markets moving when hourly events come to light? It used to be a bomb here, a coup there would move metals, energy…


    • Yra Says:

      Publius—the central banks have smoothed the runways—remember that precious metals rally for a quick trade with geopolitics not a sustained move—wars are quick events in these times and as peter Boockvar has also noted of late—gold is a currency and I have stated that which is why it is a play against central bank policy in their fear of deflation

  2. Chicken Says:

    And salve wounds they shall, it seems that’s the natural tendency of bought and paid for.

    Lots of war mongering volume, but certainly that used mule is as old and tired as labor arbitrage?

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