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Via Tho Bishop of The Mises Institute,

 

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The relentless, steady, monotonous levitation to all time highs keeps chugging along: while last week saw the S&P experience its first 1% intraday move in nearly two months, there has yet to be a comparable move on the downside. As Deutsche Bank notes, pull backs of 3-5% in the S&P 500 are typical every 2 to 3 months historically. The last such pull back occurred just prior to the US presidential election. The 4 month uninterrupted rally since is now well above average and if it continues for another 2 weeks will put it in the top 10% of rallies by duration. At 14%, the size of the rally is also somewhat larger than the historical average between such pullbacks (+10%).

Incidentally, sell-offs of 5% or more occurred on average every 5 to 6 months. With the last one occurring after the Brexit vote, the 8 months since is also well above the historical average. If the rally continues past mid-April it will be in the top 10% by duration. In size, the 19% rally since then is also well above the 14% historical average

So while it is clear that the recent move is an outlier, the next question is what factors have kept the rally going. Here, Deutsche Bank offers several possible answers:

Strong equity inflows following large outflows and massive under-allocation. After stalling at the beginning of the year, US equity fund flows have resumed over the last 5 weeks. US equities have got $80bn of inflows since the election but from a slightly longer term perspective, under-allocation remains massive. Over the last two years cumulative outflows from US equities still stand at a large -$230bn compared to inflows of +$250bn to other developed market equities and +$310bn into bond funds. The direction and pace of equity inflows remains tightly tied to macro data surprises.

US equity fund positioning moved from under- to over-weight though has been pared since. From slightly underweight positioning at the start of the year, positioning rose steadily through January, then leveled off and over the last two weeks has been trimmed even as data surprises which tend to drive positioning have moved up, suggesting funds may already be anticipating a modest slowdown in data surprises

Buybacks remain solid but seasonal slowdown during the earnings blackout period is approaching. After a slowing in Q2 and Q3 last year, buybacks ramped up again in Q4 and the 2016 annual total ($460bn net) was in line with our forecast (Buybacks: Myths, Realities and the Outlook, Jan 2016). We see net buybacks rising in line with earnings growth and forecast $500bn in 2017. Our demand-supply model for equities points to buybacks continuing to provide steady support and by themselves imply 10% upside for the S&P 500 in 2017. However, the buyback blackout periods starting in two weeks should see the pace slow temporarily again.

DB then points out that from a fundamental perspective, the rally has kept going as data surprises skipped typical negative phase. With equity inflows and positioning both tending to follow data surprises, the fundamental reason for the long duration of the equity rally has been the unusually long period without sustained negative surprises. Data surprises generally alternate between positive and negative phases. This time around, however, they skipped a negative phase. After falling to neutral by the end of last year, DB’s index of US data surprises, the MAPI, hovered around neutral for the first 6 weeks of the year, then rose sharply again and moved back up to near a 4 year high. The MAPI has consequently been neutral or positive for the last 3.5 months.

Finally, while rates futures positioning remains very short an upside risk is that bond outflows
resume on strong data and rising rates. Leveraged fund shorts in
bond futures remain very large albeit off extremes while real money bond
funds are already neutral their benchmark. Bond funds have received
steady inflows this year but the historical relationship with rising
data surprises and rates suggests outflows to come.

* * *

That said, as Deutsche Bank pointed out recently, the global “economic surprise” rally is finally poised to roll over after hitting near record highs…

… primarily as a result of a loss in Chinese momentum and the slowdown, or in some cases outright drop, in commodity prices:

Deutsche also added the following warning:

We believe global macro momentum is likely to roll over from current elevated levels:

• Global macro surprises have only been higher 5% of the time since 2003 (when the data series starts), typically roll over from these elevated levels and have shown first signs of softening over the past week;
• Global PMIs are already consistent with global GDP growth 50bps above our economists’ 2017 growth forecasts of 3%, despite the fact that the latter incorporate aggressive assumptions for fiscal stimulus in the US;
• Chinese PMIs are already close to a six-year high, having rebounded by 7 points over the past 15 months. They point to quarterly annualized GDP growth of 8%+ (above the government’s target of 6.5%) and the credit impulse (a key driver of SoE fixed asset investment) is set to turn negative. This suggests the risk to Chinese growth momentum is now to the downside;
• Our model of global PMIs suggests global growth momentum has rebounded because of the easing in financial conditions due to tighter HY spreads and a reduced drag from USD strength as well as lower global uncertainty. However, it also implies that the rebound in growth momentum should start to fade, as the lagged benefit from falling commodity prices is wearing off.

So whether it is any of the above factors, or simply the influx of retail investors as JPM showed last weekend, coupled with an aggressive selloff by institutions and hedge funds, or an even simpler explanation – a relentless short squeeze – it is clear that while everyone has a theory to “explain” what is going on, nobody really knows, even though everyone can admit the duration of this latest market surge is anything but normal.

As such perhaps the best indicator of what to expect in terms of future returns may be the good, old Shiller CAPE. At 30x, the market has been at these valuations only 2% of the time in history, with future returns without fail being negative in the medium to long-run.

Of course, it is the short-run that everyone obsesses about these days, and as such, those betting on further upside may be wiser to just put their money in “Millennial momentum favorites” like Snapchat. At least there nobody pretends to even bother with such anachronistic concepts like “valuation.”

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Via Michael Shedlock of MishTalk.com,

Cardiff Metropolitan University is at the forefront of political correctness sensitivity. The University Bans Lecturers from Using any Sexist or Insensitive Words. The list of banned words is wider than you might think. Here are some examples: mankind, homosexual, housewife, manmade, and sportsmanship.

And please, try to avoid words like “mother” and “father” unless you can say “mother and father” together. Yes, the article states that.

Gee, is there an order for this? Yes, there is. It better be random. Always saying mother first could get you in trouble. The article did not say but the phrase “ladies and gentlemen” clearly has to go.

According to the guide, Mrs. and Miss are considered offensive. Clearly, it’s best to avoid gender-identifying terms altogether.

What happens When these culturally-trained “snowflakes” hit the real world outside of their safe-space university?

Hmm. Am I allowed to use the word “snowflake” like that? Apologies offered for my unsportspersonslike conduct.

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Senator Ben Sasse, a Republican member of the Senate Judiciary and Armed Services Committees, has issued the following statement after President Trump accused former President Obama of wiretapping his phones in 2016 and Obama’s spokesman said that was false.

Sasse raises several key points: if the wiretap was authorized by a FISA Court, Trump should demand to see the application, find out on what grounds it was granted, and then present it to the US public at best, or at least the Senate. In case there was no FISA court, it is possible that Trump was illegally tapped. Finally, there is the possibility that Trump was not wiretapped at all, although for the president to make such a public allegation one would hope that there is at least some factual basis to the charge.

my statement on wiretapping… http://pic.twitter.com/OzYkOCXeEh

— Ben Sasse (@BenSasse) March 4, 2017

Here is Sasse’s full statement.

Sasse Statement On Wiretapping

 

“The President today made some very serious allegations, and the informed citizens that a republic requires deserve more information.

 

If there were wiretaps of then-candidate Trump’s organization or campaign, then it was either with FISA Court authorization or without such authorization.

 

If without, the President should explain what sort of wiretap it was and how he knows this. It is possible that he was illegally tapped.

 

On the other hand, if it was with a legal FISA Court order, then an application for surveillance exists that the Court found credible.

 

The President should ask that this full application regarding surveillance of foreign operatives or operations be made available, ideally to the full public, and at a bare minimum to the U.S. Senate.

Sasses then concludes:

“We are in the midst of a civilization-warping crisis of public trust, and the President’s allegations today demand the thorough and dispassionate attention of serious patriots. A quest for the full truth, rather than knee-jerk partisanship, must be our guide if we are going to rebuild civic trust and health.”

It appears that the Trump admin may already be working on Sasse’s recommendations: as the NYT reports, “a senior White House official said that Donald F. McGahn II, the president’s chief counsel, was working on Saturday to secure access to what the official described as a document issued by the Foreign Intelligence Surveillance Court authorizing surveillance of Mr. Trump and his associates. The official offered no evidence to support the notion that such a document exists; any such move by a White House counsel would be viewed at the Justice Department as a stunning case of interference.”

Alternatively, it would be viewed as a case president seeking to determine if his predecessor was actively plotting to interfere with the election via wiretapping, also a quite “stunning” case.

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Following Peter Lynch's "invest in what you know" mantra, it appears Millennials jumped at the chance to own a piece of Snapchat – the social media platform that's all the rage among Millennials (and my teenage daughters).

 

Yesterday's rampage higher for the company that lost more money last year than its total revenues saw its market cap top $40 billion, bigger than Ebay, HP, and Sony…

 

So who was panic-buying this 'camera' company?

no texting and driving but you may buy shares of $snap on @RobinhoodApp while you @Uber http://pic.twitter.com/EnzJGXYUX2

— Ariel Jalali (@arieljalali) March 2, 2017

The Wall Street Journal has the answer…

Trading activity on Robinhood, an online brokerage platform, jumped by half on Thursday as Snap began trading, with 43% of users active that day buying shares, according to the company.

 

Robinhood’s demographic already skews to the younger side, with a median user age of 29, the company said. But the median age among Snap buyers on Thursday was even younger, at 26. (That happens to be the same age as Snap co-founder–and newly minted billionaire–Evan Spiegel.)

 

Rebecca Shoenthal, a 22-year-old journalism student at the University of North Carolina at Chapel Hill, was among them. She said she bought four shares of Snap for about $24 each. She put in an order for them on Wednesday night, stipulating that she would pay as much as $40 per share.

 

“I wanted to test the waters and play around with some money I wouldn’t be too devastated to lose,” Ms. Shoenthal said. “I think I’m going to stick it out for at least a few years.”

 

Ms. Shoenthal, who uses Snapchat every day, said this was her first big stock pick. She’s gotten interested in stocks this semester because of classes she’s taking on personal finance and branding. She thinks the prospects for Snap are bright, particularly given that Snapchat is changing the way many young people, including her friends, read the news.

 

There was also outsized attention from younger users on StockTwits, a popular social media platform used for sharing trading ideas. About 40% of users are between the ages of 18 and 34, but 60% of those following or viewing the stream of messages about Snap fell within that age range, the company said.

 

Kaleana Markley, a 29-year-old wellness consultant who lives in San Francisco, bought $100 worth of shares on Thursday using a company that offers gift cards for stocks, called Stockpile.

 

“I have high hopes” for Snap, Ms. Markley said. “I think they are doing really cool things.”

 

She doesn’t do much investing generally, citing student loans and the high cost of living in the Bay Area, but got excited by the talk of the IPO. One promising sign of the company’s growth prospects, she said: Even her parents are using it now.

As a reminder, Peter Lynch has actually recently clarified his now-mythical advice – which perhaps some Millennials should be paying attention to…

What’s wrong with the popular-wisdom version of his ideology, which is usually cited as “invest in what you know”?

 

It leaves out the role of serious fundamental stock research. “People buy a stock and they know nothing about it,” he says. “That’s gambling and it’s not good.”

Of course Millennials aren't alone in their "greater fool"-edness. One glimpse at the chart below – of the stock of a company called Snap Interactive – which exploded higher on the day that Snap Inc. announced its IPO… tells you all you need to know about the average stock market participant's attention to details.

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Via Dana Lyons' Tumblr,

Stocks’ record streak without a weak close came to an end yesterday; what does it mean going forward?

By any name – melt-up, relentless bid, creep, etc. – the recent advance in the stock market has been impressive.  And there is no shortage of statistical means by which to demonstrate that – in some cases, unprecedented – impressiveness. Last week, we look at the NASDAQ 100’s record streak of closes above the bottom of 40% of its daily range.  Today, we look at a similar record-tying streak in the S&P 500 that came to a close yesterday.

Specifically, before yesterday, the S&P 500 had gone 35 straight days without a close in the bottom 20% of its daily range. In other words, it hadn’t had a “weak” close in nearly 2 months. For context, that is a record-tying streak going back to at least 1984 (our high-low data prior is a bit spotty). So what does it tell us?

Besides merely emphasizing the fact that stocks have maintained an extraordinarily persistent bid over that time, it caused us to look at other similar streaks in the past for possible instruction as to future performance – i.e., was there follow-through to the streak-ending selling pressure, or did the persistent bid quickly resume again? As such, we looked at every streak in the past 30-plus years that saw the S&P 500 close above the bottom 20% of its daily range for at least 30 days in a row. As it turns out, there were 7 prior such streaks.

 

If it’s tough to see on the chart, these were the dates on which the streaks ended, and the # of days the streak lasted:

9/1/1993 (33)
5/13/2011 (30)
2/14/2012 (30)
6/23/2014 (33)
9/19/2014 30)
12/9/2014 (33)
8/15/2016 (35)
3/1/2017 (35)

As you can see, the last such streak this past August was the other record-tying 35-day streak. That date, August 15, happened to mark the highest close in the S&P 500 until the midst of the post-election rally more than three months later. Such weakness has been more the norm than the exception following these streaks. That can be seen in the following table of the S&P 500′s performance following the end of the previous 30-day streaks.

 

Of the prior seven streaks, most showed little to no upside in the months following the streaks. And more than half of them exhibited larger than normal drawdowns in the weeks and months following the streaks. That said, in most cases, the weakness was temporary and by six months later the index had recovered considerably.

We will see how the bulls respond to this first hint of adversity in a long time. Will they quickly put it behind them and move ahead like an all-star caliber baseball closer – or are they now rattled? Based on the study here, while it is admittedly a limited sample size, any potential edge we can perceive from the aftermath of similar strong-closing streaks would suggest that follow-through to yesterday’s selling pressure would be a fairly good bet.

*  *  *

Like our charts and research? Get an All-Access pass to our complete macro market analysis, every day, at our new site, The Lyons Share .

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While the media continues to blast the occasional OPEC production-related headline, the reality is that crude supply is increasingly becoming a shale story, as the US, now tens of billions in debt lighter – has rapidly emerged as the low-cost, marginal oil producer. As such absent a sharp rebound in prices in the coming 3 months, OPEC is almost guaranteed to revert to its prior production regime, as Saudi Arabia is already pained by the loss of market share to increasingly lower cost US producers, who as shown in the charts below, have seen their all-in production costs plunge thanks to rapid technological advancement.

And yet, when trying to forecast the price of oil, it is becoming increasingly clear that the answer is not on the supply side at all but rather on the demand, where as we have been writing for the past month, things are getting quite troubling. While we urge readers to familiarize themselves with our recent coverage of collapsing gasoline demand to a level which according to a perplexed Goldman Sachs suggests the US economy should be in a recession…

… other troublesome indicators have emerged confirming that not all is well on the demand side. The latest evidence comes from a recent report by Deutsche Bank which shows that the number of miles driven in the US is not only slowing, but in December, it posted the smallest monthly increase since November 2013.

As DB’s Mike Baker writes, “we have hypothesized that the increase in gas prices could pressure miles driven, which as noted below slowed in 2016 versus 2015, and even more so towards the end of the year after the Thanksgiving inflection. The 0.5% increase in miles driven in December 2016 is the smallest monthly increase since November 2014. Gas prices inflected around Thanksgiving 2016 and are up year-on-year on a weekly basis over the last 15 weeks.”

While looking at the above chart of year-on-year change in monthly miles driven in 2016 versus the year-on-year change in average monthly gas prices, Baker notes an approximately (60%) correlation. He then notes that the concern is that gas prices were up only 14% year-on-year in December 2016. The reason why this is troubling is that while there is still no concurrent data, the national average price was approximately $2.23 per gallon as of February 27, 2017 and the price per gallon has increased more than 30% year-on-year over the last three weeks.

In other words, if the deterioration in the trendline persists, it would imply that some time in January of February, we got the first negative print in miles driven in years, and would also explain the recent collapse in gasoline demand. 

Some final thoughts from Baker:

Looking back at recent history, while we’ve seen several small pockets of higher year-on-year prices for a few weeks at a time, gas prices have generally been lower year-on-year on a weekly basis for the last three years. The data we are seeing today is more similar to the increases witnessed late 2009 through 2011. While we would agree that economic / employment pressures also negatively impacted miles driven, though perhaps less so into 2010 and 2011, we would note that annual miles driven increased only 0.3% year-on-year in 2010 following a very easy (0.7%) compare from 2009 and then declined (0.6%) in 2011 against the 0.3% increase from 2010. While the absolute price per gallon is considerably lower as of February 2017 relative to 2010 and 2011, we would also note miles driven are much higher relative to that time frame and even a smaller decline on a percentage basis could have a similar impact on the total miles driven.

The implication is that the US motorists’ sensitivity to rising prices is now far higher than it was even 5 years ago, when the economy was supposedly in far worse shape. While on the surface that would suggest that something is rather wrong with the financial state of the average US consumer, the more immediate implication is that the higher oil – and gasoline – prices rise, the less miles will be driven, the weaker the end demand for gasoline, and ultimately, the greater the gasoline, and crude, inventory glut as the world continues to produce assuming recent demand trendlines, trendlines which with every passing week, we learn are no longer applicable.

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What is the "value of citizenship"? That's the question that Nomad Capitalist answers in their 2017 Passport Index, ranking 199 countries using a weighted approach that considers visa-free travel options, the amount of taxes a country levies on citizens who live abroad, along with the nation’s overall global reputation, civil and personal freedoms, and the ability to hold multiple passports simultaneously. And no, America, you’re not even in the top 20.

As Bloomberg notes, atop the list is Sweden, followed by a bevy of other European Union nations.

A Swedish passport allows visa-free travel to 176 countries or territories, just one fewer than world leader Germany. Moreover, Swedish expats can easily “get out of the high taxes in Sweden and go live somewhere else where there are lower taxes without a lot of headaches,” says Andrew Henderson, the veteran traveler, entrepreneur, and blogger who founded Nomad. “Not too many people are getting into fights with the Swedes,” Henderson said in a video posted on Wednesday…

The British, German, and U.S. passports once billed as the world’s “best” rank below several European nations. (Of the top 43 passports on Nomad’s list, 33 are European.) The common denominator among all these countries is a lack of tax on citizens’ income regardless of where they live. The U.S., by comparison, taxes citizens’ income no matter where it’s earned.

When it comes to passport desirability, America finds itself tied for 35th with Slovenia, both having visa-free travel to 174 nations. The U.S. earned low marks because of its taxation stance toward nonresidents and the world’s perception of America. This last measure was assigned a value based on how a country and its citizens are received around the world, as in when its passport holders are refused entry or “encounter substantial hostility.”

“A U.S. citizen that has to pay tax on their worldwide income, and abide by a bunch of regulations, and whose emails can be spied on – that passport might be a little less valuable than an equivalent European passport that doesn’t have some of those other restrictions,” Henderson, a Cleveland native with several homes abroad, said in his video.

Readers will need no reminder that last year, more than 5,400 people renounced their American citizenship, setting a new annual record amd a 26 percent increase from 2015.

“Being a U.S. citizen isn’t all it’s cracked up to be,” Henderson said. “Quite frankly, I’d much rather be a citizen of a country with a B+ passport, without all those restrictions, than a citizen of the U.S., which has an A passport but comes with a lot of baggage.”

Full Nomad Capitalst Report here.

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Via Christof Gisiger of Finanz und Wirtschaft,

James Bianco, president of Bianco Research, thinks that the Federal Reserve will have to jack up interest rates and the US stock market is running into trouble.

The party on Wall Street is on. Since Donald Trump’s election victory the Dow Jones Industrial advanced more than 15%. This week, the famous stock market indicator traded for the first time over 21,000. Jim Bianco takes a cautious stance. The influential market strategist from Chicago thinks that inflation will soon become a main concern for investors. In his view, this will change the basic relationship between stocks and bonds and could set up the financial markets for severe turmoil, like in the late 1990s when the collapse of Long-Term Capital Management sent shock waves around the globe.

Mr. Bianco, the US stock market is in record mood. What’s your assessment of this rally?
This market has just been grinding higher and higher without any belief that there are any problems. Equities are at an all-time high and volatility measures for the stock market are way down. The S&P 500 has now gone nearly a hundred days without a correction of 1% or more. That’s one of the longest such stretches ever. The last correction of more than 1% was in early November, right before the election. Also, if you look at some of the economic data you’ll see that consumer confidence is at an 18-year high, business confidence is at a 30-year high and the NFIB Small Business Optimism Index is soaring as well. So if you look at all that you would come to the conclusion: «Wow, things are good!»

But?
But then you turn on TV-stations like MSNBC, Fox News or CNN and they’re hyperventilating about Trump and what he said or didn’t say. This is not what you would expect given these all-time highs in confidence and in the stock market. So you’ve got two diametrically opposed things going on and I think to some extent it’s signal and noise: The market believes that Trump is very business friendly, a pro-growth president who is going to cut regulations and taxes. All the rest of this stuff doesn’t matter.

So are there more good times ahead?
The market is in the belief that we are going to get reflation and it’s trading on that belief. Basically, I agree with that. But the real question is what kind of reflation we are going to get. Are we going to get real growth which translates into earnings like the market believes? Or are we going to wind up getting mostly inflation? And that’s what I would argue for. I think that there is an incipient inflation coming and the market is not ready for that.

What does that mean for investors?
Inflation is not quite here yet, but it’s coming. Since the financial crisis we’ve talked about it from time to time. But it has never ever arrived. Now, you’ve got all of this optimism that Trump is going to do this and that and the economy is really going to grow. That’s why the markets are going ahead. But if we get inflation it’s going to be a real big problem. It’s going to be a game changer for the economy and for the markets.

Why?
The most basic relationship there is is the relationship between stocks and bonds: when bond prices go one-way how do stocks react and vice versa. This is not a stable relationship. It’s not something you can write into a textbook and teach everybody at business school. There are times when the movements of stock and bond prices are highly correlated to each other and then there are times when they are not correlated and move in the opposite direction. The premise here is that the stock bond relationship is not stable. It changes over time.

Why is this so important?
From the mid-1960s to the late 1990s stock and bond prices were highly correlated to each other: They moved up and down together. When rates went down stocks went up. During this period what you had was an inflation mindset. Everybody was worried about inflation and during the period of high inflation in the 70s stocks got crushed. Especially on an after inflation basis they did very poorly.

And what happened next?
Around 1997/98 you had a regime shift. Now, bond and stock prices started to move in the opposite direction of each other. When such a regime change happens you get a lot of stress in the financial markets. In the late 1990s we had Long Term Capital Management collapsing, we had the Asian financial crisis and we had the Russian debt moratorium. Markets got all stressed out.

So where’s the connection to the present situation?
Since around twenty years we mainly worry about deflation: When we are relieved that there is no deflation yields go up and stocks go up. When we are worried about deflation yields go down and stocks go down. So when we have a regime shift back to an inflation mindset this will put a lot of stress on the financial markets because the relationship of how bonds and stocks react to each other is not going to work anymore the way you think. It’s going to change.

Where would you see early signs for such a fundamental change?
To be clear, the stock bond relationship hasn’t changed yet. But you will know it’s happening when you see turmoil in the financial markets, especially when risk parity funds start to blow up. Risk parity funds, an investment concept pioneered by Bridgewater Associates, are basically an artifact of the deflationary mindset. They trade the stock-bond relationship based on how it’s been for the last twenty years. So if this relationship changes you could either look at all of these correlation charts, or you could just open up The Wall Street Journal or watch CNBC, and you’ll hear stories about risk parity funds blowing up because their models aren’t working anymore. Basically, the same thing that happened with Long-Term Capital Management could happen with risk parity funds in the next regime change.

How does the Federal Reserve fit into this picture?
The Fed is very accommodative right now. They’re way too easy but it’s okay because we don’t have inflation. So some people may say: «Hey, a little inflation wouldn’t be a bad thing because if it reverberates it would get the economy moving». That might be true if you get a little inflation. But once inflation gets going it’s usually hard to stop at that point.

How come?
The Fed says that if we get inflation they’ve got the tools to respond, namely raising interest rates. That’s 100% right except the question is where you are starting from. Right now, the nominal Fed Funds Rate is only at 0.75%. But they’ve got this giant, bloated balance sheet. So what if you factor that into the equation? Former Fed chairman Bernanke and Bill Dudley at the New York Fed said that every six to ten billion dollars of excess reserves equates to one basis point of Funds Rate reduction. So you’re actually talking about a Fed Fund Rate at around -1.75%. That means if we are going to get inflation the Fed has a long way to go and it has to start jacking up interest rates really hard – and that’s where it could be very disruptive for the markets.

The next FOMC decision is on March 15. Will Fed chief Janet Yellen raise interest for the second time in only three months?
According to the futures markets, we started this week at a 40% probability of a rate hike. Now, we’re all of a sudden at 70 to 80%. So there has been a dramatic shift in the market’s thinking which is highly unusual.  A lot of that move is due to Dudley saying that the argument for a rate hike is compelling. The minutes after he said that the odds for a rate hike went up dramatically. Interestingly, in the last ten years there have been only two FOMC meetings where inside of twenty days to the meeting the market has changed its opinion on what the Fed is going to do. One of them was on September 16. 2008, the day after Lehman went belly up. Also, in such close calls the Fed always tipped to the dovish option to either not raise rates or ease because they’re concerned that if they upset the market it’s going to be all their fault. Now, we’ve got debate and confusion: Will they break with tradition and hike rates? If they do it is significant because they’re actually changing their approach.

What will Trump do with respect to upcoming appointments to the Fed?
There’s a total of seven governors at the Federal Reserve and today there are two vacancies. Soon there will be another vacancy since governor Daniel Tarullo announced that he wants to leave the Fed by April. Additionally, governor Lael Brainard might want to leave, too. And then Yellen’s term is up for renewal next February. Trump has already said that he will replace her. Now here’s the question: If you want to bring people back to work and create all these manufacturing jobs wouldn’t an easier Fed be to your advantage? Probably yes, but I take Trump on his word. He made it very clear. He said he’s going to get rid of Yellen so I’m going to operate under this assumption. That’s why I suspect that in one year to eighteen months we are going to have a new Fed chairman and we’re going to have three or four of the seven Fed governors appointed by Trump.

Who do you think Trump will pick as next Fed chair?
For the first eighty years after the creation of the Federal Reserve the governors and chairmen were mostly bankers, lawyers and other business people. But since 25 years that has changed. Now, they are mostly economists. So that’s a fairly new phenomenon and I think Trump will go back to bankers, lawyers and business people. He will choose people that have been successful in the private sector and not in writing papers at the economics departments of Harvard, MIT or Princeton. With this in mind, a possible candidate could be a guy like John Allison of BB&T or David Nason of GE Capital. Another name we hear is Kevin Warsh who has worked at Morgan Stanley (MS 46.83 1.19%) and was a Fed governor and is now at the Hoover Institute at Stanford University.

What does that mean for monetary policy?
All of these guys have in common that they think extreme monetary policies like QE and negative interest rates are counterproductive: They’re distorting the markets and don’t help the economy. They don’t create jobs. So what Trump’s picks will be doing is raising interest rates and reducing balance sheets. Based on their private sector experience they think that when we stop distorting the markets things will return to normal and we will have faster growth. That will be their argument. They won’t care about all those models with all those math equations which the Fed is operating on now. So you are going to have a very different Fed with a whole different mindset to it.

So how should investors position themselves in today’s markets?
As mentioned, I believe in the reflation trade and that we’re going to see inflation. That’s why I think that the ten year treasury note could move from 2.5% to north of 3% by the spring of next year. But that’s also the most consensus thing somebody could say right now. Everybody believes that interest rates are going to go up and everybody is betting on that. So when I look at it from my perspective as a former technical analyst I see such an overcrowded trade and I see so many people being short the bond market that I’m going to say that at first, we are going down to 2% by the middle of the year. And then, when inflation kicks in, we are going to 3%.

And what’s your outlook for stocks?
I think the stock market will continue to advance from here through the summer because we don’t have inflation and we have this hope about Trump getting the economy going. But then, as interest rates start going up, we are going to see the stock market struggle and these are going to be the early signs that the deflation-inflation mindset is starting to shift.

 

via http://ift.tt/2mZESKe Tyler Durden