It’s really too early to start calling the world of 2017, considering what a monumental start we will have to it after a monumental finish to 2016 but I am beginning to build some thoughts.
The first thought is more of a reminder of just how far prices move on expectation of change rather than actual change. This might sound obvious but when you see just how far they move before anything concrete ever emerges to back those moves up, you have to realise how far they can come back down again should the thing not happen. I have often mentioned the slack in the steering wheel when it comes to oil prices but the leeway between expected, i.e. speculative, and actual outcome is now being demonstrated in just about every other asset class.
If I were to carry this point further it would morph from ‘point’ to a treatise on the anatomy of bubbles and that is pretty boring so I’ll stop, especially as I am not saying that the current moves have led to bubble status in anything really. So instead I‘ll revert back to the what has changed vs the what is expected to change.
Oil prices. This year we have seen oil trade a 100% range of its low. It got down to mid-twenties and then shot up to the high 50s, so the range has been pretty much 100% of its lows Now let’s put this in perspective by considering what has actually happened to the state of global supply and demand. The tweaks have been marginal and the whole range and been predicated to expectations of future supply and demand. So, guess work. When we can have such huge swings in price just on speculative tea leaf reading without yet having had any real change in supply and demand I really do wonder as to the value of debating the odd $5 move here or there. It is noise. Moreover, I wonder whether it is worth debating any of oil price moves when they can be swung on a whim.
The same is now happening in equities. An interesting comparative to oil is Deutsche Bank stock that last January was suffering exactly the same price punishment as oil and, likewise is nearly 100% higher than where it bottomed. But what has changed? Nothing really, just the expectation that all the dreadful things that were expected to happen haven’t happened. And now we look at the global stock markets, and indeed the global markets everywhere, where the past month's massive moves can be traced back to one factor. Donald Trump.
Equities, commodities, bonds, you name it, all of the huge recent moves can be traced back to the assumed actions of one man. Wow. Wow. Wow. Thinking how the belief in one man can change worlds is scary because it either involves dictatorial oppression [insert lists of global leaders responsible for genocides etc] or the invocation of messiahs and religious leaders. Or a bit of both. I know there are some out there only too happy to place Trump in either of those camps but for me he is one man with some ideas and those ideas will only ever reach effectiveness if he has the support of the structure around him to implement them. That means that a lot of people have to also think his ideas are good ideas and that the side effects of their implementation will be worth enduring.
But my key problem with this whole idea that Trump is going to reflate the world, drive growth and asset prices is that if the answer were so simple why hasn’t anyone tried it before? Nothing is that simple.
So with nothing being simple and the pendulum of expectation now so totally and utterly swung to the reflation trade the risks are what? That it either doesn’t happen at all due to the self-regulating way that policies that have to pass through bodies of committee rubber stamping get squashed, amended or dampened, or that it does happen and the law of unforeseen consequences opens a new set of Pandora’s woes.
This all boils down to a single thought. The markets will chase this consensus reflation trade when the New Year begins, especially if we haven’t seen a fall before then, only for the positions to reverse on 20th of Jan. Why the 20th? Because that's when it normally happens and this year it ties in with Trump's inauguration speech. I’m not saying this is a bubble in the true price sense but I can smell all the behavioural ingredients in the pot.
2 comments:
I think a great passage from the popular book "Influence" reinforces the probability that the market might be getting ahead of itself in thinking that Trump will be able to enact all the pro-growth and pro-business policies he has espoused.
"Political analysts were amazed at Lyndon Johnson's ability to get so many of his programs through Congress during his early administration. Even members of Congress who were thought to be strongly opposed to the proposals were voting from them. Close examination of political scientists has found the cause to be not so much Johnson's political savvy as the large score of favors he had been able to provide to other legislators during his many years of power in the House and Senate. As President, he was able to produce a truly remarkable amount of legislation in a short time by calling in those favors. It is interesting that the same process may account for the problems Jimmy Carter had in getting his programs through Congress during his early administration, despite heavy Democratic majorities in both House and Senate. Carter came to the presidency from outside the Capital Hill establishment. He campaigned on his outside Washington identity, saying that he was indebted to no one. Much of his legislative difficulty upon arriving may be traced to the fact that no one there was indebted to him."
Is it faith in one man (Trump) or is it a reaction to unifying US gov't under Republican leadership? Can the Republicans continue to gain political benefit from policy failure?
'The obstruction grew out of narrow political incentives. “If Republicans didn’t cooperate,” Obama told me, “and there was not a portrait of bipartisan cooperation and a functional federal government, then the party in power would pay the price and they could win back the Senate and/or the House. That wasn’t an inaccurate political calculation.” ' -From https://www.theatlantic.com/magazine/archive/2017/01/my-president-was-black/508793/
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