Tax Cuts and a Weaker Dollar

The institutions are throwing caution to the wind and diving into risk.  In both stocks AND bonds.  When you have this much complacency and fearlessness, you see buyers of stocks and buyers of long bonds.  They don't want the shorter duration stuff anymore in fixed income, because the Fed is going to raise rates a bunch more times, flattening the yield curve, according to the "experts".

With bond, stock, commodity, and FX volatility so low, it encourages bigger positions in stocks and bonds.  The best way to get a big position in bonds is to go for the 30 year bond, the biggest bang for your buck.  The best way to get a big position in stocks is to go for Nasdaq stocks, also the biggest bang for your buck.  The S&P is at 2600!  Who would have expected that with revenue growth at 5%? Of course, US corporate profit margins are at all time highs and those who said it was mean reverting are saying its different this time.  This is due to quasi monopolies in existence in the US, thanks to the big corporations lobbying on Capitol Hill to extend and expand patents, keep competition to a minimum, etc.

And now you have the big time corporate tax cuts coming down the pike, which seems to be unpopular among those who actually have seen the proposals, which is a small minority, of course.  This should help corporations expand their profit margins further, at expense of a weaker dollar.  Yes, a weaker dollar.  Fiscal stimulus that lead to higher deficits with limited economic impact are dollar negative, not positive.  And this tax cut will just be another way for corporations to expand their stock buyback programs.  With individuals getting very small tax cuts, it provides limited economic stimulus.

The Republicans have deftly crammed down a very business friendly bill, at the expense of the value of the dollar, because the Fed will end up printing the money to pay for the deficits anyway to keep the Treasury's interest rates low.  If Japan can do it, for sure the US can do it with the world's reserve currency and a Fed that is a slave to financial markets.

If you follow the most likely course of events over the next 5 years, it is as follows:   You will have massive budget deficits, thanks to an aging population which raises Medicare and Social Security spending, and of course, the Trump tax cuts.  The proposal appears to have a giant loophole for individuals to incorporate themselves in order to benefit from the lower business tax rates for S corps and LLCs.  So the deficit will likely go up a lot more than projected.  Of course, the deficits which will be funded by Treasuries, will eventually be financed by Fed QE, when there is the slightest downtick in the economy.  And when Fed starts cutting rates again, the dollar will get destroyed and you have 2010 to 2012 all over again, as the Eurozone can't handle a strong euro.

Back to the current market.  It is a pig of a stock market.  There is no value.  It is what it is.  I am looking at a possible small short for Friday, as CNBC Fast Money seemed wildly bullish.  And is usually a sign that upside is limited.

But during this time of year, you may get a slight pullback in late November, early December, but that is about it.  You almost never see weakness starting from mid December to year end.  So if you want to short, you want to keep it short term, and the pullbacks will be small.  Next year will be the time to get aggressive on shorts, not now.  Tops usually last a long time, so the opportunity to short at high prices will be there for a while.  No rush.