Buckle Up And Sell

A macro trader shares his thoughts on what the literal f*ck is happening.
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We’ve come a long way in a short period, it’s natural to get some profit taking, and up until now this has all been about optimism over wave of new fiscal spending from Trump and higher inflation expectations from rising cost of imports due to tariffs and other protectionism etc.

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The problem is he’s pissed off so many people in his own party and didn't win the popular vote. It’s kinda wishful thinking that this loose cannon can really get much done if he doesn't play nice. If he doesn't, he could end up with rebellions inside his own party, with maybe even some moderate GOPers crossing the aisle. Also hard to see the Tea Party letting him just have his way with all this unfunded new spending. First test is ongoing with House GOP trying to suggest a cheaper "wall," but let’s see how that goes. So much hope has been priced in, now he needs to deliver to justify a much higher push in risk.

The next question is whether risk premium formulas start to account for higher short term rates. That would be bearish stocks, but so far this year bearish moves have never really materialized.

Tech stocks may also wobble, Bezos owns a company that sells cheap Chinese crap back to many of the same Americans who used to make it! And he owns Trump's least favorite paper, the Washington Post! They want more H-1 visas? Good luck with that. Biotech/healthcare sector may also be in his sights, liberalizing health insurance markets will eat into margins, and rightly so!

For the moment I'm focusing shorts on Eurostoxx. Most EU indices failed to break out of YTD ranges. Not even the DAX made a new high. The upcoming Italian referendum aside, Trump’s victory is very bad for EU as it confirms the Brexit movement (is Le Pen next in France? Renzi out in Italy?) and it emboldens Putin. Trump’s gonna let him teabag every moderate on the continent.

Which takes us to crude and the effect that has on inflation expectations. Any OPEC deal will be great for US producers and US Capex intentions, and that’s good for stocks. But I’m still skeptical they get anything done. And even if they did, OPEC + non-OPEC (ie: Russia) production has grown massively over the past year. Freezes at these levels still mean too much production. Also, as we go into winter the Russians can’t turn off pipelines, they need to keep running lest the 10-20% water content in crude freeze. Then you have serious problems with old and very long pipelines. Any Trump-Russia deal would have to include a Syrian deal, which means you have to include Iran, so very likely the Iran deal stays and those extra barrels Iran’s been pumping since sanctions were lifted are here to stay. So the temporary boost stocks got from energy is likely over. Another way of looking at this is how crude is doing relative to other commodities, base metals in particular, and risk; meh.

As for the steepening move, it will continue. It started with the BoJ pegging its 10y to zero, but all the talk of fiscal spending and end of NIRP gave it all a boost. Problem is if nothing gets done, we may have soon seen a high in yields with growth remaining sluggish and then maybe the bonds are once again a buy. Lower crude prices will also drag inflation expectations back down. Either way, the cat is out of the bag, the 30 year bull market in bonds is likely over, global austerity is over, savings rates may have seen a high, governments wanna spend...and they will

And we haven't really even heard from the Fed yet. Meaning on top of all this we may have to wait for Dec. 14 for more clues on forward guidance.

Mouthy Macro Trader is an actual trader who will be sharing his thoughts with Dealbreaker from time to time. You can respond to him in the comments... he can take it.

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