Time for the Contrarian Trade Yet?
The facts are maybe not what they seem in a world of economic data. The importance of the transparency of data is a major factor for markets and that all was drawn into question today when a simple question to the White House Press Secretary about the unemployment rate was drawn into the sharp focus of illusion. So from today onwards I am not sure what number that markets should use when using economic data releases, but according to the White House now those numbers are a lie and an illusion and simply do not reflect the number. Good one.
The contrarian trade perhaps should now be the focus of markets. With no policies announced as yet, but lots of signing away of trade policies and rights, markets will soon start to question whether this economic miracle by Trump can occur. The facts are that hedge funds, leveraged investors and speculators have significantly upped their bearish bets and have shorted Treasuries. Real money managers have taken the alternative view and have gone long treasuries. Treasuries have suffered 5 consecutive months of declines. The interesting point here is that fast money investors are often great contrarian indicators a bit like economists. When they are all in the same direction it’s probably time to change ones strategy. Anecdotally, then if fast money investors are on the same trade then on over 75% of the time the opposite happens with markets correcting the next month or so. To date we know the Europeans when they buy, the treasury 10 year market rallies to the low 2.40’s and when the US Hedge Funds sell, the market weakens to about 2.6%.
What could cause this change is very simple. Simply put markets became excited when Trump said that he could lift economic growth to 4% or so through deregulation, tax cuts and infrastructure. Infrastructure takes time, Trump still has to get Congress and Senate to agree to a blowout in deficits and debt ceiling before any policies have a chance to work to rein in these blowouts. The policy also runs into problems such as productivity, how does Trump get productivity higher? Other issues are the Fed. The Fed has a mandate to keep inflation around 2% and a growth rate over 2% would see inflation rise significantly. The Fed would then try to slow the economy through rate rises. The US already has high debt levels and significant income inequality. These two factors combined with weak productivity and a Fed raising rates could make Trump’s vision very difficult to achieve.
The evidence so far has been that the markets have rallied significantly, however the Dollar is starting to lose its appeal. Bonds have started to recoup some of their losses and the equity markets are starting to question current valuations. This points to a possible selloff.
Trumps view on trade and how he handle this issue will be interesting to watch. He has cut the USA from the TPP which accounts for something like 40% of global trade. The US is very good at introspective trade but when one loses 40% or participating in a market that accounts for 40% of global trade that could test economic growth if it is not quickly rectified.
Aussie Market Today.
The US Dollar was weaker, equities were weaker and bonds were stronger. I expect the AUD to maintain its current position as investors question US growth and equities will retreat a little as investors question current valuations under the current climate. Commodities were mixed and iron ore for the moment has stalled a little and this should allow Aussie Equities to retreat a little in line with US weakness.