Do we have too much optimism?

Do we have too much optimism?

A number of stories hit the news services today and these stories pose the question as to whether markets are way too optimistic. For starters a couple of hawkish Republican Economists have hit out at the Fed suggesting that the Fed is well behind the curve. On the other hand we have a number of economists talk about Obama’s legacy and how his fiscal policy has created a tough question for Trump. Under Obama and remember Obama came in when the economy was at its worst he inherited a high unemployment rate, only two other Presidents created more jobs. Lyndon Johnson and Clinton, where both inherited an economy that had just turned so they were able to reap the benefits.

For Trump to create more jobs will require more, higher educated people as well as manufacturing. The problem with manufacturing is that these days it does not create the jobs it once did. For example Ford recently announced it was no longer building a plant in Mexico and Trump claimed credit. What many do not realise is that the Plant did not progress was because of several factors. One, the plant was producing small sedans a sector currently out of favour in the USA. Second the location to where the plant was relocated was next to Ford’s R&D section. The new plant is there for different models including building automated cars, additionally more robotics are incorporated and that means relatively jobs if any will be created.

On the economy if the Fed is behind the curve then bonds are too expensive and equities must be a little ahead of itself. Currently the S&P is expensive to bonds (see attached graph). Brexit looks like being very interesting given the UK has no plan on Brexit which is to begin soon and Theresa May when questioned by the Queen had no idea how she would initiate Brexit and what it meant for the UK economy. This could be quite dangerous for the pound, because if there is no plan the pound is very vulnerable to a significant fall.

Inflation is starting to pick up on populist politics. If this trend holds bonds have to rise and investors should be looking to increases in revenues and profitability for companies to justify current levels.

The Congress and Senate sit shortly and apparently the first agenda item is to repeal Obama Care. With no replacement or plan such a move may prove to be controversial.

Aussie Market Today.

Nasdaq hit a new high but the broader markets were down. Equities slid as commodities in particular crude fell. For the Aussie market with commodities a tad weaker this should translate into a slightly weak equity market. Bonds had a good day, 10 years rallying about 7 bp to close around 2.37. This move allowed the spread between Aussie 10 years and US 10 years to widen to about 35 points.  With Aussie 10 years about 2.73 I expect that this margin will contract on the day and we could see Aussie bonds rally a few points.