Blain's Morning Porridge - The Trump Dump and when to put your buying boots on..
Blain’s Morning Porridge – March 22nd 2017
“Americans can always be counted upon to do the right thing.. after they have exhausted all other possibilities..”
Ha! So finally I got something right(ish) when I wrote about the imminent Trump Dump y’day.
It was hardly rocket science: the over-inflated expectations on his deliverables have been crystallised by the farce developing around the “repeal and replace” of Obamacare. Taken together with The Donald’s increasingly bizarre behaviour, the paranoid denials, the tweets and all the other issues, the realisation we’ve probably bought a pup is coming into a disappointing inevitability.
However, it’s not the end of the world. The sun will come up tomorrow.. But… Markets are waking up to the reality of the Trump hangover.. which is going to mean a renewed focus on all the complacencies we’ve let build up in recent months.
No surprise the mood has gone more than a little bit Risk Off.
My list of stuff we’ve been ignoring includes, but is not limited to: expectations and sentiment wibbles, overbought stocks, the long term consequences of QE, the rise of protectionism, Dollar wobbles, Credit bubbles, and rising inflation vs bond markets. Overlay that with the political issues: Europe (in all its multihued wonder), the UK and Brexit, China and Russia… More about all of these in coming days…
I spoke with my stock picking guru, Steve Previs, y’day and again this morning. (Steve wears special wizard robes and a pointy-hat to do his chartist stuff. We’ve built him a special darkened room emblazoned with star-charts and the bones of mythical beasts hidden in the bowels of the building.) He was telling me y’day: “we are in the early stage of a distribution top… don’t panic until we see a large and persistant rise in selling pressure.”
This morning he’s telling me that “large and persistent” selling pressure is here!
There are various rules to apply here, but the first one to remember is: “its better to miss the last 5% of a rally than catch the first 20% of a market crash..” The second is “markets always over-react”. Bear that in mind. Steve cautioned me that a correction could be a very good thing. Take some of the froth out the market and seek the optimal buying opportunity.
Steve will tell me when the charts tell him its happening, but it strikes me a renewed rally in stocks also needs to be underlaid by deliverables from Trump. Keep a close eye on Washington to see what we actually get approved and done in coming weeks.
According to the Bank of America’s survey of investment sentiment, 90% of US investors doubt there will be a tax-reform deal in Washington before the summer! One third of US managers doubt any deal can be done this year! These numbers are quoted from an Ambrose article in the Torygraph this morning.
Other data points include: 34% of funds think global stocks rose too fast – a higher number than pre-Lehman, while 81% think Wall Street is overvalued. Yet 65% of the market is underweight bonds….
A final set of numbers to worry about. The US stock market was valued at 50% of GDP in the 1980s. Ahead of the dot.com bubble burst it peaked at 146%. Today it is 167%. Be concerned.. be very concerned..
Meanwhile, back in the continent that brought you the Smurfs…
Over the last few weeks I’ve had a number of “exchange of views” with clients who refuse to take French risk. I think they are over-estimating the chance of Le Pen being elected – a better idea would be to focus on still wide French/German spreads, and buy-it ahead of a snap back on the inevitable market joy when Macron is elected. I’ve even got some bonds in mind – I think the rally will be significant and worth a pop.
But, but and but again…
Yesterday I was blathering about “Maskirovka” – the Russian strategy of misdirection: hiding the facts, confusing the enemy, and pointing them towards the wrong conclusions.
This morning we hear discredited French candidate Fillon apparently has links to Russian money. Now, the Russians would prefer to see Le Pen elected as she will destabilise Europe the most, so how does it help if the already discredited number 3 is taken out the equation thereby helping her number one rival Macron?
Le Pen is on record supporting Russia on its “annexation” of Crimea. She’s also on the FBI’s Bad Girl list when it comes to Russian links. So I’m not surprised the other French candidates are being tarred with the Russian brush “to even the pitch”.
Lots of people think the Russians are in deep in the French Election.. But, so far Macron is in the clear.. Why? What do the Russian expect that we don’t know?
Final thot: yesterday I saw the following headline flick across Bloomberg: Federal Reserve Bank of Minneapolis President Neel Kashkari says “I’m watching European banks to see if bail-in works in Italy. Doubt it. TLAC = bail in = fantasy.”
Out of time and back to day job!
Fastnet Race Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain