Friday, January 27, 2017

Higher Rates Matter

Just because the market went up higher along with interest rates doesn't mean that it can keep doing so.  We are around 2.50% on 10 year yields, a level which starts to impede economic growth.  This is a financially repressed economy, which needs low interest rates to maintain reasonable growth rates.  Trump seems to still be acting like he's on the campaign trail.  There is only so much abuse that some of these nations will take before they retaliate and start a trade war.

Now I don't think a trade war is as negative as those in the liberal media and in business news channels make it out to be.  And yes, it is pretty clear that the media has taken a decisively anti-Trump stance.  Yes, it will reduce some exports for the US, but the US isn't that dependent on exports.  And the stuff that they do export, is not as price sensitive as the stuff that is imported.  So in a trade war, the US will win, and the opposing nations will take a much bigger hit.

So let's assume there is a trade war, that will reduce the US exports by 20%.  Well, the US imports would probably be reduced by at least 30%.  So the trade balance improves, and US manufacturers come in to take the remaining share of the pie left by the import reductions.  That will cause price of goods to rise, and increase inflation.  But let's get real, when was the last time the Fed raised rates because of high inflation?  1981?  The Fed is solely focused on the S&P 500.  If the S&P is rising, then they will be hawkish.  If the S&P is falling, they will be dovish.  No questions asked.

If you want to be negative on the S&P, it will be because we are overvalued, interest rates are higher, and the economy is just not that strong.  Not because of some tariffs and border taxes.

That little breakout seems to be fading here today.  I like the short side, but will wait till next week.

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