Markets overreact
At least it looks like it. If I’m right, we will see some of today’s extreme displacements partially walked back over the coming days.
Stocks (VT): +1.31%
US Stocks (VTI): +2.80%
XS Stocks (VXUS): -1.21%
US Treasuries (GOVT): -0.81%
Commodities (COMT): -0.68%
Copper (CPER): -4.75%
Gold (IAU): -3.05%
And within US Stocks, value and smaller companies solidly outperformed glam teracaps, with the DJIA +3.57% & R2K 5.84% versus the S&P +2.53% & NASDAQ +2.95%.
It’s not that these moves are without foundation, but that they likely are exaggerated by emotionalism aided by relief that the outcome was clear and timely known, and more narrowly focused on first order effects than the reality will justify. Higher order sequalae will prevail in due course.
The dollar-up-commodities-down trade looks particularly overdone. Commodities as a class (GSCI, copper, gold (COMT, CPER, IAU)) were lower. This is a bit puzzling given the media narrative that Trump’s policies, especially with legislative support from tentative Republican majorities in both the House and Senate, will be more highly inflationary than the status quo. No one is mistaking Mr Trump for a fiscal conservative; the chain of causality appears to have run from higher bond yields to a stronger dollar to lower commodity prices. Yet more inflationary would imply a weaker dollar and higher commodity prices. This gives me the impression there is no small measure of knee jerk to today’s moves and some thinking through yet to come.
One of these things will turn out to be wrong. Either commodity prices will rise or Trump’s policies will not be more inflationary. Lower prices for metals, food and energy don’t square with higher inflation. It’s one or the other. Take your pick.
Of course the Fed will get its two cents in tomorrow. But its penchant for meeting expectations relegates it to near irrelevance next to this week’s electoral developments.
It was a real treat to stumble across this post election interview with one of the sharpest macro minds around:
Can the U.S. survive its debt? The ‘doom loop’ trap, gold’s & dollar’s future under Trump – Stephanie Pomboy
Compared to print, most audio or video content presents an unfavorable time-to-value ratio, but this one hits the bull’s eye on multiple major issues and packs in the value. Highly recommended.
Venturing outside the purely economic box:
1 Securing the borders 👍
2 De-escalating war 👍
3 Cutting mega-corporate tax rates 👎
4 Modest tariffs to raise revenue 👍
5 Punitive tariffs to bully
trading partners 👎
6 Strategic bitcoin reserve 👎
7 Reducing bureaucracy and regulation 👍
8 Protecting freedom of speech 👍
Of course all have some economic impact. Besides saving countless lives, de-escalating tensions with Russia and avoiding World War III for instance could reinstate the “peace dividend” that so supported prosperity before the turn of the century.