The Trump Conundrum

The Trump Conundrum

In a few more days the President Elect Trump will become President and as yet apart from the odd 140 characters that have been tweeted we have little idea of policies relating to a number initiatives. Such policies include trade, changes in a banking regulatory environment, building a wall economic policies and Obama Care. The problem with Obama Care is that it uses a largely Republican led initiative but that policy was hastily cobbled together. How the Republicans dismantle the Health system will be interesting

Therefore it’s rather odd that markets continue to propel forward without seeing any fine print. Maybe the present is buy the rumour sell the fact in which case the markets may have reason to watch very closely every word that Trump utters. In fact South Korea have established a Department that monitors every Trump tweet. The reasoning being that the South Koreans don’t have any idea on current US Trade Policies, nor Trump’s policies on Defense.

On Friday we had several Fed Officials talking about the likelihood of markets not factoring enough rate hikes. The Fed is basing their analysis on the 140 character tweets and what Trump has said previously.

So Wall Street is full steam ahead but what about Main Street? The story appears to be different. Shopping Malls are struggling with higher rates of tenant’s no longer occupying space. Retailers such as Macey’s Nordstroms, Sears etc are struggling with falling sales at a time when they should be buoyant. Miners are doing well because regulations on their activities are to be cut and aviation is softening. So the story is rather mixed.

The rally continues and this is strange given no detail. Citibank and Goldman Sachs have seen their share prices rise significantly. Goldmans a firm that was derided by Trump yet has supplied a number of key personnel in his Cabinet is up 30% since the Trump victory.

Markets are walking a dangerous path. Bonds have been sold and for good reason if the growth story eventuates. The US economy is close to full employment if not already so it will be interesting to see what growth policies are enacted given that taxes are to be cut. Equities and credit will continue to do well under the current low information regime. Bonds are currently nearing fair value but expect significant volatility. In the meantime rates are rising and this will eventually impact the Dividend Discount Model

Aussie Market Today.

Markets are rather choppy on low news, thin markets and rising price volatility. The US 10 year is hovering around the 2.40% -2.50% levels and this appears to be attracting good bids. The US 10 year auction was well bid and saw good demand from a number of global investors. The US Dollar index was a tad weaker Friday but the Dollar will remain strong and will eventually impact on the US Manufacturing sector. Commodities were generally stronger on Friday and this bodes well for the Aussie dollar. Commodities over the break have seen a strong bid tone out of China. Equities improved so I expect that improvement to flow through to Australia. Bonds were better bid however the spread between US Treasuries 10 year and 10 year Aussie bonds is now about 26 bp. This contraction in my view cannot remain.