November 16, 2016
Between Trump and Congress,
We are about to see more
spending and stimulating
than this country has seen in decades.
As I wrote immediately after the election, NOBODY was anticipating that we would have both Trump (the biggest surprise) AND a solidly returning Republican Majority in the House and Senate. And by nobody, I mean NO analysts, NO talking heads, and NO million dollar econometric/quantitative models…The markets and the future economy have been served with a totally unforeseen event…with the ensuing reactions having been a screaming stock market and a collapsing bond market…which was ABSOLUTELY the opposite of what ANY analyst on Wall Street would have predicted…And I think both Stocks and Bonds will continue on their current paths…and very well may do so at the same pace we’ve seen since last Wednesday.
In other words, I say do NOT take the fact that stocks have paused for a few days to mean that the bull move is over…Do NOT listen to the average yakhead who is still scratching his perfectly haired head and is still clueless as to what, I believe, is obvious…THAT WE ARE JUST BEGINNING A MASSIVE BULL MOVE IN THE STOCK MARKET.
Political Animal Behavior
This is NOT a politically biased statement, but for 8 years, the almost solely stated purpose of the Republican leadership has been to “get rid of Obama”. For 8 years, and again, I point this out from a purely objective, apolitical, standpoint, the Republican led Congress has been the party of “NO. NO. NO”, in that pretty much anything initiated by Obama or the Democrats was destined to be absolutely stonewalled…or compromised…or butchered into “unrecognizability”, the end result being that, for years, Congress has just been a legislative mud pit…with very little actually getting done.
BUT THAT IS ALL NOW CHANGING…AND I MEAN IMMEDIATELY---I believe that for the next year or two, considering Trump’s intention to build tunnels, bridges, roads, buildings, inner cities, infrastructure, etc…(everything in sight)…and to stimulate economic growth in ANY way he can…AND the fact that you are also going to have EVERY Senator and Congressman (Republican and Democrat alike) CLAMORING to get their piece of the pie for THEIR state, or district or county, I can then easily imagine a fund-it-and-pay-for-it-later Washington spending spree like nothing we’ve ever seen before…I mean, really, after all these years of doing nothing, AND having had the constraints of still dealing with the somewhat crippling aftereffects of the Great Recession, can’t you just so easily envision all those guys KNOWING that the new mantra is, “Build! Build! Build!”, and every single one of them jamming their hand in the government pot to take the bacon back to THEIR constituents? I sure can…and I DON’T write this in an attempt to condemn them for it…All I’m doing, as a trader attempting to predict the market future, is making an observation based on my understanding of human nature, or as noted above, the behavior of these Political Animals…And with them using the rationalization (perhaps accurate, perhaps not), “Growth in the economy will produce all the revenues needed to pay for all this”, I honestly believe the next 6-9 months are going to see something that could easily be described as “Reckless Fiscal Abandon”, which WILL result in growth, but also WILL result in something we have not seen in ages…Price AND Wage INFLATION….which, among other factors (one being rising demand for borrowed money) WILL lead to substantially higher interest rates. PERIOD. PERIOD. PERIOD.
Think about it...USUALLY, when you have 5% unemployment, the powers that be are looking at the possibility of maybe beginning to hit the economic brakes…that so called “full employment” might be a precursor to an overheating economy or maybe some unwanted degree of inflation (or other undesirable consequences)…And while some people might suggest that the 5% figure is misleading as to the true state of the economy (that it’s lousy in other words), the fact remains that this is probably going to be the first time in United States history when we are going to take a possibly “fully employed” economy and juice it with what may end up being the biggest shot of building and job creating legislative amphetamines that anyone has ever seen.
Meanwhile, I would also suppose that if we are about to deport some millions of common laborers, how can this do anything but put a further squeeze on what is already going to be a tight job market? Really, when I talk about taking the bacon back to every district in the country, it is important to understand that those funds ARE being dispersed to create or BUILD something…and it WILL take real human beings to do that….SO, if the official unemployment figure is now 5% (and I personally do not doubt it), what WILL the impact be on wages and prices, when it gets down to, say, 3.5%? Realistically speaking, when we DO create all these “Jobs. Jobs. Jobs”, I would say it then becomes statistically impossible for the employment rate to just sit there at the same 5% rate we now have.
The point is (and too lengthy I know), I SEE NO OTHER OUTCOME FOR 2017 THAN RIP-ROARING ECONOMIC ACTIVITY (WHICH IN ITSELF CAN ONLY RESULT IN COMMODITY & PRODUCT PRICE INFLATION) AND JOB GROWTH AND WAGE INFLATION…AND I THEREFORE BELIEVE WE SHOULD THEN DEFINITELY BE EXPECTING MUCH HIGHER INTEREST RATES THAN THE MARKETS ARE EVEN CLOSE TO REFLECTING RIGHT NOW.
I CONTINUE TO RECOMMEND BUYING PUTS ON EURODOLLARS…THE SOONER THE BETTER…AS I ABSOLUTELY THINK RATES ARE NOW DEFINITIVELY ON THEIR WAY UP.
Here are some charts…
Here’s the long term picture…
And here is a closer look at LIBOR…which has definitely been moving higher since the election…And do not think to yourself, “Doesn’t look like much”. That last move up has taken place in just 4 days…and these ARE new almost 7 year highs in short term rates…
Here is a quick look at the Dow and the Treasury Bond market…And I firmly maintain that NONE of the Wall Street geniuses were on this 1000 point surge in the Dow…and they STILL aren’t there…To the contrary, I think they are all still watching it…or doubting it, or “waiting for a pullback to maybe get some buying done”…but they WON’T get the chance…I still think we could hit 20,000 or 21,000 BY YEAR END…and THEN you will see them all, after the fact, start telling you, “Time to buy!”
For some contract perspective, here is a WEEKLY chart of the June 2016 Eurodollar contact going back to 2012…
What I truly believe is possible from here…
And here is one option I am now buying…And as noted several days ago...New 5 month lows do represent some degree of confirmation that the market is now on the move…I may be dead wrong but I DO THINK THIS MOVE IS ABOUT TO ACCELERATE…It’s just the way the markets work…Part of the time they are doing nothing…and part of the time they are MOVING IN A DIRECTION.
Here’s a thought…I don’t think that any of my suppositions regarding what we are going to see from Trump and Congress are inaccurate…They ARE going to crank up spending and projects in a massive way…And I would expect that by the time we get to inauguration, there won’t be a single Fed Governor left who will be thinking, “We need to keep rates low”. Not a chance. Instead, they WILL be thinking, “This COULD get out of hand. And what we CAN’T do is wait to see how big, or bad, it all gets.”
I’ve said it for months…The markets WILL move long before the Fed does…LOOK at long term rates…The 30 Year Treasury has ALREADY gone up almost a full 1 percent in the past 5 months...and this has happened without the Fed doing ANYTHING…And ditto, the Eurodollar Rate has gone up about 3/10 % in the same time frame…without the Fed doing ANYTHING.
So, one more time. Last week’s election surprise is a monster event…And it only amplifies my belief that the USA and World Economies are about to LIFT OFF.
INTEREST RATES ARE ON THEIR WAY UP…AND I THINK IT WILL BE HAPPENING BIGGER AND FASTER THAN ANYBODY ON WALL STREET HAS EVEN BEGUN TO SUSPECT….THIS IS MY BET…CALL ME IF YOU WANT TO DO SOMETHING WITH IT.
Much too long I know…Thanks if you read it all…
Get SOME of these puts….Or Get some MORE.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars