Sold the rumour, bought the fact…

  • No change
  • A new ‘refugee’ crisis?
  • Bounceback for big miners
  • More to complain about
  • Rebellion
  • More reasons why the mainstream got it wrong

Well, that wasn’t supposed to happen.

Trump wins. US stocks soar.

What happened to the idea that a Trump presidency would lead to financial disaster and geopolitical Armageddon?

That’s the markets for you.

The old market saying is, ‘Buy the rumour, sell the fact.’ To show you what an odd year it has been, investors have pretty much switched that around. They sold the rumour, and have now bought the fact.

We can only imagine what will happen next…

Markets

Overnight, the Dow Jones Industrial Average closed up 256.95 points, or 1.4%.

The S&P 500 gained 23.7 points, or 1.11%.

In Europe, the Euro Stoxx 50 index added 32.86 points, or 1.09%. Meanwhile, the FTSE 100 gained 1%, and Germany’s DAX index added 1.56%.

In Asian markets, Japan’s Nikkei 225 index is up 974.98 points, or 6%. China’s CSI 300 is up 1.1%.

In Australia, the S&P/ASX 200 is up 156.44 points, or 3.03%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$45.09 per barrel. Brent crude is US$46.31 per barrel.

Gold is US$1,283.35 (AU$1,674.08) per troy ounce. Silver is US$18.57 (AU$24.22) per troy ounce.

The Aussie dollar is worth 76.65 US Cents.

No change

So, Trump will be the 45th president of the United States when he’s sworn in on 20 January next year.

The question is: will it make a difference to anything at all? Or, despite the claims of this being a victory of the ‘little people’ over the elites, will the ‘deep state’ remain in control?

Questions, questions.

Our take is that from the perspective the ‘deep state’ being in control, nothing will change.

Even with the best intentions in the world, it’s hard to think that an anti-elitist president can do anything to take apart the multiple layers of government bureaucracy.

There are too many vested interests. The government bureaucracy and those who work for and in it are the biggest vested interests of all.

Forget about the vested interests on Wall Street, or within big business, or within the globalist elite. The biggest problem is the government itself.

That’s why we don’t expect to see much, if any, change at all.

The ‘deep state’ and other vested interests will fight tooth and nail to prevent Trump making any changes. Just as they’re fighting against Brexit in the UK.

Trump says the North American Free Trade Agreement (NAFTA) was a terrible deal for America. He’s said he’d like to tear it up. But will he?

We doubt it. There are too many vested interests. American companies that relocated to Mexico, or which outsourced production to Mexico, will pay lobbyists millions of dollars. Those lobbyists will be in the ear of the US government at every turn.

They’ll spread fear among the establishment, and convince them that all they need to do are make small changes to NAFTA and everything will be fine.

Is NAFTA a bad deal? Sure it is. Any trade agreement is a bad deal, especially one that contains the words ‘free trade’. That’s not because we’re anti-free trade. Far from it.

The reality is that real free trade doesn’t need an agreement. Free trade is the natural state of trade. You buy something from someone who’s prepared to sell it to you. That’s free trade.

Whenever any government signs a ‘free trade’ deal, it’s really a ‘protection, tariffs and subsidies’ deal. They all are. It’s one government agreeing with another that they can protect one industry from another.

That’s all. If governments really wanted free trade (which they don’t), they would just stay the heck out of the way…and let people trade.

Unfortunately, we don’t think Mr Trump has that in mind either. In fact, from what we can gather, the kind of deals Mr Trump prefers are ‘protectionist, tariffs and subsidies’ deals.

And like all such deals, the ultimate loser is the consumer.

The likely upshot is that even if a Trump administration abandons NAFTA, what remains will likely be no better for the American consumer.

A new ‘refugee’ crisis?

Closer to home, Bloomberg reports:

In the wake of the most fractious U.S. presidential election in recent memory, Immigration New Zealand has been inundated with web visits from U.S.-based Internet users with thousands registering their interest in its visa programs. Some 56,300 visits were recorded in the 24 hours to 9 a.m. New Zealand time Thursday, INZ Marketing Manager Greg Forsythe said. That’s more than 24 times the daily average of 2,300 visits.

Trump wins. New Zealand wins. Assuming New Zealanders like the idea of several thousand American ‘refugees’ arriving on their shores.

Bounceback for big miners

Enough with that — for now.

Back to investing.

It has been a stunning reversal for BHP Billiton Ltd [ASX:BHP] this year.

After slumming it to a multi-year low of $14.20 in January, BHP is now at a one-year high of $24.31. That’s a 71% gain. Not bad for what is now a $123.9 billion market capitalised stock.



chart image

Source: Bloomberg
Click to enlarge


It’s a similar story for Rio Tinto Ltd [ASX:RIO]. The stock is up 78.8% from its February low. It’s now trading at the highest level since early 2015.

So, what’s the deal?

The commodities prices rebound, that’s what.

Here are a few examples of how commodities have bounced back from their recent lows:

  • West Texas Intermediate crude oil, up 72.1% since February 2016
  • Copper, up 29.5% since January 2016
  • Sugar, up 75.3% since February 2016
  • Corn, up 13.6% since September 2016
  • Iron ore, up 85.3% since December 2015
  • Gold, up 22.5% since December 2015
  • Coffee, up 52.4% since January 2016

Naturally, BHP and Rio don’t produce all these commodities. But almost every commodity you can think of has risen in price this year.

For the most part, commodity prices have rebounded because the markets now see a potential US interest rate rise as a positive sign of economic growth.

Since the start of November, the prospects for a US Federal Reserve interest rate rise have gone from around 60% to 82%. That’s even after a Donald Trump win at the polls.

Of course, during most of the previous seven years, markets wanted interest rates to stay low. They wanted more money printing, which was also occasionally good for commodities.

But, will an interest rate rise really happen? And if it does, would the US economy be able to cope with it?

Who will buy it, and at what cost?

Trump is certainly no fan of Fed chairwoman, Janet Yellen. But as the Financial Times reports:

The election of Donald Trump as US president will unleash a policy shift away from monetary policy towards fiscal measures in the coming months, some of his advisers told the Financial Times.

In particular, some members of his economic advisory team are convinced that central banks such as the US Federal Reserve have exhausted their use of super-loose monetary policy. Instead, in the coming months they hope to announce a wave of measures such as infrastructure spending, tax reform and deregulation to boost growth — and combat years of economic stagnation.

Hmmmm. So the government will spend more, right? Interesting. Bear that in mind as you read this from the Wall Street Journal:

A slowdown in the growth of federal revenues, as well as rising government spending, pushed the U.S. deficit up in the2016 fiscal year for the first time since 2011, reversing the trend of falling deficits as the economy recovered in recent years.

The budget shortfall widened to $587 billion in the fiscal year that ended Sept. 30, the Treasury Department said Friday, up 34% from the previous fiscal year.

The US government already spends US$587 billion more than it takes in. Can we assume a Trump administration would cut spending elsewhere, before it spends on new projects?

Probably not. So how would it pay for these projects? By issuing new debt, of course.

US national debt currently stands at US$19.8 trillion and rising. Expect that number to rise further.

Not only that, but who will buy the new and extra US government debt? As it stands, the US Federal Reserve is by far the biggest holder of US government bonds.

You can see that in the chart below:



chart image

Source: Bloomberg
Click to enlarge


The Fed’s holdings exceed China and Japan’s holdings combined.

As always, it’s not just a question of who will buy the bonds, but also what yield they will demand.

The Fed wants to increase interest rates this year. But will that be enough to give investors the yield they want? It seems unlikely if the plan is for a big and meaningful increase in government spending.

That could cause interest rates to rise naturally. Good news for savers. But perhaps not so good for the government and its multi-trillion-dollar debt.

The market seems certain that interest rates will rise next month. Maybe they will. But we’re still more inclined to think that the economic data will worsen between now and then, causing the Fed to postpone any increase until 2017…at the earliest.

More to complain about

It’s not just in the US where interest rates are a hot topic. As Bloomberg reports:

Australian bonds tumbled, sending 10-year yields up by the most in more than three years and adding to a global debt-market selloff that followed the shock election of Donald Trump as U.S. president.

You can check out the chart below.



chart image

Source: Bloomberg
Click to enlarge


After sinking to a record low of 1.814% just three months ago, 10-year Australian government bond yields now stand at 2.48%.

That’s a big move. And it won’t be welcomed by the Aussie government, as its debt pile continues to grow. And it won’t be welcomed by the Aussie banks, who are already complaining about rising funding costs.

Rebellion

Speaking of banks, the natives are getting restless. More from Bloomberg:

About 51% of shareholders opposed the lender’s remuneration report at annual general meeting, Commonwealth Bank said in a statement to the stock exchange.

Oh dear. Commonwealth Bank of Australia [ASX:CBA] investors doubtless aren’t happy that the bank’s recent full-year dividend of $2.22 was the same as the 2015 full-year dividend.

That’s not what bank investors have grown to expect over the years. They want growth. From the sounds of it, they aren’t going to get it.

More reasons why the mainstream got it wrong

If you’re looking for the real reason the mainstream got it wrong, it’s simple.

Most mainstream reporters and journalists tend to be ‘soft left’ on the political spectrum. So it’s hard for them to be objective.

Even if they want and try to portray an unbiased view, it’s only natural that they will have biases.

Also, they will likely move in circles of similarly minded people, which again confirms their biases. With all that, it’s hard for them to believe that someone else can have a different view — ‘I don’t know anyone who supports Trump.’

It’s only natural for people to have a bias and then to seek confirmation of it. It’s not just in journalism either.

It happens in the investment world, too.

When you take a position on a stock, it takes a lot of discipline to remain objective. Most can’t do it. Whether you’re an investor, analyst, commentator or market observer, biases are common. You look at something, and once you’ve reached a decision, you tend to seek confirmation that you’ve made the right decision.

That’s why mainstream journalists are in shock. They have no comprehension of how anyone could vote for Trump. Their only explanation is that those who voted for him must be stupid…or worse.

Showing that they still don’t get the reasons why Trump won, check out this quote from the otherwise intelligent, FiveThirtyEight.com website:

America hasn’t put its demons — including racism, anti-Semitism and misogyny — behind it. White people still make up the vast majority of the electorate, particularly when considering their share of the Electoral College, and their votes usually determine the winner.

The implication is clear. If you’re white, then you’re racist, anti-Semitic, and a misogynist.

As the same website noted, it would only have taken a shift of one vote in every 100 in the key states to go from Republican to Democrat, and the result would have changed.

Perhaps they might like to consider that all it took was for them to insult one in every 100 voters in those same five key states, in order for those voters to switch to Trump.

That should give them something to think about…assuming they’ll bother to do so.

Cheers,
Kris