It’s actually not just Day One we need to consider. It’s Days Two and Three as well, given that he gets almost 72 hours to exercise his executive power before the markets get a chance to price all those changes. And yet, as we have seen, volatility measures are low; the belief in both long USD and short UST remains strong (despite the recent correction); and the recent Brexit fandango in GBP suggests political risk is still confined to the realms of “short term noise”.
This is all rather strange. The ratio of investor conviction to investor positioning looks out of whack; and, more worryingly, so does investor positioning to the extent of certainty ahead. You’re telling your buddy in the shoot-out that you’re not sure how many bullets are in your gun as he asks you to cover him…but he heads off into the hail of bullets anyway. 
The whole Trump is the new Reagan narrative is about to get blown up. He may indeed drive economic reflation but before that he’s got to strike a whole bunch of new trade deals; get a bunch of American companies to bring business back onshore; and get a bunch of his buddies into the Fed and the Supreme Court. Will there be time to call China a currency manipulator before his bedtime? Doesn’t matter really, because if he decides to on Day Four, he will go for it. (But the Treasury report on currency manipulation is semi annual you say? Ah but presidential power derives from their comments as much as their heavily-constrained actions).
Even if his first few days are not as frenetic as he had initially suggested, the fact is that the path of future outcomes for the economy is much wider than before. Concomitantly, the amount of risk placed into reflation trades may be too large for the uncertainty ahead.
Indeed, the path of future rate hikes isn’t even the roadmap anymore. We already discussed how Yellen may not be around to do her 6 hikes by 2019… well after the ECB, the German FinMin was straight on the wires with the “disadvantages” to QE, and how, with German inflation edging up to 2%, this creates “political problems in explaining to the German audience”. Will Draghi want to blow up the Eurozone by refusing to taper? The man who said he would do whatever it takes to save it? So, no, the framework that guided your investments for the past few years will not be the one for the year ahead.
Instead, focus on this chart, from Fathom Consulting:
Tariffs down, global trade up (the right hand scale is inverted).
This entire equation, that has lasted for 25 years, is turning. It’s time to look for stocks or currencies that benefit from protectionism, and shy away from the most open economies or those that rely on exports to the US. Short AUD and short CAD, long NOK and even long USD?
Answers on a postcard. You’ve got 3 days to come up with them!
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