Aaaaaand relax

Much as he might hate this, it’s not all about Trump. The fact is that the global economy was already on a reflating trend before his election. Curves were steepening from early October and after a well-earned Christmas break, have been doing the same since the new year began.The difference this time is that the US Dollar is not joining in with an outperformance

Perhaps the world is catching onto the fact that this is a global reflation trade? Chinese PPI is roaring back into positive territory, but world CPI is yet to catch up. Sure, World CPI does sometimes never quite catch up to the Chinese levels, but the divergence now is stark:

Note that Chinese industrial profits overnight fell to lowest increase in a year, as profit margins start to bite. Eventually they’re going to have to start raising prices… just at the point where protectionist policies might make them more expensive anyway! It’s the fear of this protectionism and “bad inflation” (after years of Bad Deflation) that is leading to some confusion over why equity markets haven’t taken more of a hit. The thing is, they did. Given the long-only bias of equity markets, what with continual money sloshing around needing to be put to work to earn some kind of return, it’s actually negative when they tread water. That means some selling interest, or at least a slowing of the pace of buying. So now they’re starting to take off again, this is in line with a resumption of the reflation trend. It’s as if investors took a deep breath over the Trump inauguration, and they’re now breathing out. Allied to which, volatility levels in equities are just so low. Now, that doesn’t mean they always will be, and if anything it suggests that rebuilding positions now will ultimately lead to an excess of leverage in the wrong place. But, somehow the Trump election served to create a divergence between asset classes that left equities in super calm territory – here’s our favourite cross-asset vol chart:

The thing is, Trump was supposed to mean uncertainty which meant Bad Things. But not all his uncertainty is bad. Small business optimism is rocketing through the roof. Infrastructure projects are on the agenda. Tax cuts! Big changes which could be very good for a whole bunch of stocks. And now we get into the positive feedback loop of all of this. If 1) global reflation is back; 2) Trump might not be All Bad; 3) volatility looks well behaved then………… why not get into one of the market’s favourite things, and that’s carry? Hence our favourite “positive risk” indicator, the basket-case but yield-heavy South African Rand, is at one year highs:

Time for some optimism, folks?



I am optimistic except for:

– The possibility for French or Italian politics to explode the Eurozone this year.
– The heightened probability of a clash between great powers, most notably US-China and Russia-Europe.
– The fact that China’s recovery has been heavily built on credit, perhaps exacerbating structural issues.
– The chances for a global trade war that could crush aggregate demand.

Other than that I feel fine!



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