Everyone remembers what happened post-Brexit. Lots of anxiety over a nothing-burger and those memories are still fresh in the minds of fund managers. They don't want to be left standing at the bus station. They are jumping on this post-election bounce with a renewed view of Trump and his policies, forgetting about his tough trade talk, and his wild and unpredictable rants, and awaiting fresh fiscal stimulus in the form of massive tax cuts and infrastructure spending.
The mood has changed from that of apprehension about a post-election selloff and Trump fears to embracing Trump and his economic policies and even praising his victory speech. That is what happens when everyone waits for the event to be over to deploy their cash. And yes, that cash is all on the long side. You have to think about asset managers from a long only perspective. There are few if any "real" hedge funds anymore, most are masquerading as expensive, lower beta equity index funds.
So when they go to cash, and then deploy their cash, it means they are buying stock. Not bonds, but stocks. Bonds are things you hold when you are uncertain, not when you are certain. And investors are certain that things will be rosy when Trump puts out his economic plan.
Ignored in this rally to the moon is the sharp rise in bond yields, a killer for those low growth high dividend paying stocks. How soon we forget that corporate America benefited BIGLY from being able to issue loads of bonds at low interest rates, much of them used for stock buybacks. That game has gotten a bit more expensive now. Sure you will get some bridges to nowhere built and have some tax cuts, but it is taking from one hand (bondholders) and giving it to another (receivers of tax cuts). You see, it is no longer a gravy train now because QE is not monetizing deficit spending like it did from 2009 to 2014. And thus, deficit spending has a price now: more Treasury supply = higher yields. When QE was in full force, deficit spending didn't have a price. The Fed effectively put a ceiling on yields with their POMO.
This is getting closer to how envisioned the final stage of this bull market to be. A Fed that has stopped QE, felt pressure to raise interest rates as markets go higher under a deficit spending boom, with investors excited about overvalued equities as the potential for higher GDP growth under Trump's fiscal stimulus gets everyone excited. Trump will try to do what Reagan did in the 80s. But the big difference is that global demographics are much worse now and the debt ratios much higher.
There are no good short term opportunities in stocks, but I do see an opportunity brewing in the not so distant future in bonds. But let's wait for these moves to mature, over the coming weeks and months. A lot of money has still not been deployed and the latecomers will always be there to keep the market on trend until they are satiated with supply.
The next 6 months are going to show you what a top looks like after a long bull market. I can already envision a blowoff top in the S&P as it heads towards 2300 as the latecomers pile in. It will be a sight to see.
Thursday, November 10, 2016
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