Every rally has its owls, and the Trump rally, circling a figure that arouses strong passions, has even more. In addition to the usual permabears and bullophobes, in addition to all those who continue to wait confidently for the implosion of Europe and the collapse of China, this time we have all those who came too lightly in the elections, those who sold on Trump's victory and they no longer bought and, above all, all those (and there are many among managers and economists too) in which political passion takes precedence over analytical skills and the desire to make money or correct forecasts.
Since political passion exists, and how, even among the laudatores of Trumpism, the effort to be detached must be doubled. Being ideological, in the markets, never pays. Until now, the most interesting objection to the Trump rally was made by Trump himself when, during the electoral campaign, he spoke several times (also inspired by Carl Icahn) of the high levels reached by the stock markets and of the artificiality and political nature ( in the sense of politics, not of policy) of low rates.
Be very careful, he repeatedly recommended to voters, and he also acted consistently, liquidating his entire share portfolio between the summer and autumn, at a stage in which, as he later revealed, he did not think he would win the elections. The objection to the Trump rally was made by Carl Icahn when he ran away from Trump Tower on the night of the victory to run and buy a billion of those shares that the rest of the world, terrified, was throwing away. The counter-objection was made again by Carl Icahn, who in recent days revealed that he had sold a large part of the shares that the rest of the world was desperately snatching out of hand and returned to neutral, long on individual companies and short on indexes .
Another interesting way of describing the limits of the Trump rally is to frame the political cycle within the business cycle, as David Rosenberg does. Reagan, Clinton and Obama all left after a recession and with markets cleaned up and undervalued. The economic recovery and the large stock market rises that followed helped them to achieve the second term. Trump starts with an ultra-mature cycle and with a stock market that has already tripled. It is not the presidents who create recoveries and recessions but the Fed and this Fed, which is politically unwilling to do Trump any favours, has finally set out on the road to raising rates, which before killing the recovery will kill the equity hike.
These are arguments worthy of consideration, but it is undeniable that strong policies to support demand (tax reductions for households, military and infrastructure expenditure), if accompanied by strong policies to support supply (tax reductions for companies, deregulation, energy policy, repatriation of firms' foreign assets) can prolong and strengthen growth without thereby creating inflation, especially if, on the margins of the labor market, there are tens of millions of people who could enter it and keep wage inflation low.
The Trump rally, therefore, is not necessarily over. What is definitely over is its first phase, the one based on vague expectations. This first phase was modular. The four modules, stocks, foreign exchange, bonds and commodities have priced Trump each in isolation from the others. And so equities have priced in earnings growth from tax cuts and cycle extensions. Exchange rates focused on the dollar due to the greater differential in interest rates and growth. Bonds, on the other hand, priced in the new scenario of accelerated rate hikes, while commodities celebrated the greater global demand produced by American policies. All right, but up to a certain point, because the rise in the dollar and interest rates cannot be reconciled, beyond a certain level, with the rise in the stock market. Here we are then entered into a phase of reconciliation between the different modules.
Trumpism (and here we are talking about ex ante Trumpism, the imagined one) has a value, but it is necessarily a finite value, not an infinite one. If it is worth 100, this 100 must be distributed among the various asset classes. If we assume that the stock market maintains these levels then the dollar will have to go back a bit and something will have to be returned to the bonds, which have sacrificed themselves for everyone. This phase of reconciliation is being accompanied by a classic redistribution, one whereby Icahn sells and some still underweight institutional buys. Phases of this type are usually lateral for the dominant variable (in this case the stock exchange) and retracement phases for the others (bonds and dollar).
In the meantime, real Trumpism is advancing ever closer, which will not necessarily be the one imagined if only because it will be infinitely more articulated and complex. What is expected is nothing less than a general review of the entire tax system and of the entire system of multilateral institutions that emerged from the Second World War. Everything will be called into question, there will be winners and losers. The mere institution of a border tax (which, moreover, will only bring America into line with what everyone else is already doing by disguising it as a refund or exemption from VAT on exports) will have effects that are difficult to predict, not only on the various American sectors, but also on their suppliers, buyers or competitors from the rest of the world.
The ambitions of the new administration and the new Congress are enormous, but the complexity of the problems and interests involved is also enormous. Although we intend to start with maximum energy, it is probable that many reforms will prove to be longer and more tiring than one might think today, while their effects, more than in 2017, will be visible from next year onwards. The path for the markets, after the current phase of reconciliation and distribution, will probably be up again for the stock markets as soon as we see the first decrees (already from 23 January) and the first concrete drafts of the reforms. From there on we will see the markets rotate and break up. It will no longer be cyclical towards defensives but much more complicated. In practice, each listed company will make its own story depending, for example, on its starting tax rate, its exposure to foreign countries, its capital repatriation and reinvestment plans. We will have to study day and night as much as we have been able to doze off in recent years under the automatic pilot of central banks.
In the end, if Trumpism does not collapse crushed by the weight of its ambitions, America will be stronger and the economic cycle will be able to live its two-three years of residual life more intensely (the prognosis that prevailed before the elections) and perhaps enjoy of extra time. If things turn out to be more complicated than they appear today, the cycle of rate hikes will be slower and the strengthening of the dollar more modest.
It is possible that the new trumpifying Fed will prefer a counter-Qe (sale of portfolio securities and deflation of the balance sheet) to a rate hike, but the trumpification will be slow and will only be completed in 2018. European stock markets, which are benefiting greatly from the weak euro, must be wary of wishing for an ever stronger dollar. Piercing parity would mean putting America in difficulty, from which everything starts and where everything ends, and embarking on inflation at a time when it has started to show signs of life again. This could lead Germany to call for an accelerated end to Qe, putting the indebted periphery in difficulty. In such a fluid environment, equities are still preferable to bonds, but without exaggerating.
The best thing will be to maintain a fairly high level of liquidity in order to take advantage of volatility and turnover. We repeat, there are no crashes or recessions on the horizon, but on the other hand there is a heated political struggle in America, new international tensions and a Europe in search of an identity, all with valuations that tend to be high. Let's enjoy the show while maintaining a certain caution.
