“Voodoo Two Won’t Do”. US Stocks – Divergence Everywhere.

US Equities – Divergence Everywhere
Record levels of bullishness
A lower high in new highs versus new lows
 
Volume not confirming either
 
Not long before higher bond yields hurt US equities – Goldman Sachs
 
US is short of savings for Trumponomics. Achilles Heel for strategy. Even higher trade deficit will be needed. Stephen Roach.
 
Even As foreigners stop buying Treasuries.
 
Additional inflation risks from Trumponomics. Why aren’t Trade and Immigration additional risks?
 
“Voodoo Two Won’t Do”
 
Summary and new asset selection
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Rallies need broad participation, scepticism, and volume for confirmation. All seem absent.
US Equities – Divergence Everywhere
The chart above shows divergence just about everywhere for US stocks. In plain language this means that most stocks are not confirming the rally. Apart from a few big cap stocks, most of the rest of the US equity market is lagging. This is usually regarded as a sign the recent highs may not be sustainable.
Record levels of bullishness
 
When bullish extremes at hit there is very little room for an improvement in perceptions, and a great deal of room for disappointment.
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Volume not confirming either
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Not long before higher bond yields hurt US equities – Goldman Sachs
“Taking a midpoint of Socgen’s and Goldman’s estimates, it means that the 10Y can rise another ~35 bps before it starts acting as a break to further gains in the S&P500 on expectations of the Trump “reflation” trade.”
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US is short of savings for Trumponomics. Achilles Heel for strategy. Even higher trade deficit will be needed. Stephen Roach.
 
“Donald Trump’s economic strategy is severely flawed. The US president-elect wants to restore growth via deficit spending in a country with a chronic shortfall of saving. This points to a further compression in national saving, making a widening of an already outsize trade gap all but inevitable.”
 

 
Even As foreigners stop buying Treasuries.
 
As shown last week foreigners are selling Treasuries at a record pace.
Additional inflation risks from Trumponomics. Why aren’t Trade and Immigration additional risks?
Of course, what Trump will do as president isn’t certain. But if his core policy proposals were to become law—and with Republicans in control of Congress, there’s a decent chance some will—we’d expect inflation to rise. Here are three ways Trump’s policies could heat up prices.”
“Voodoo Two Won’t Do”
 
Richard Duncan has developed a remarkable track record for macro economics and markets over many years. Starting from what I believe is a deep and correct premise – that capitalism ended in 1968, and was replaced by “creditism”. Everything since has followed very much in line with the conditions and requirements for a system of creditism to work.
While there is a chance that trump’s policies might work, the risks are extraordinary. Current circumstances are very different from what they were at the time of Reagan.
 
“Voodoo Economics, the combination of tax cuts and increased military spending, worked for President Reagan, but would it work for President Trump? The latest Macro Watch video argues that it might in the short run, but that the risks those policies pose to the economy and to investors are much greater now than they were in 1981. In fact, Voodoo Economics Round Two could lead to a collapse in asset prices and a disastrous economic breakdown.”
Investors need to think very carefully about the enormous risks of Trump’s policies. Execution on where to borrow and spend will be crucial. The room for error is limited.
 
 
Summary and new asset selection
Now three weeks past the election, and only today has a Treasury Secretary been confirmed! It is clear that the extraordinary market shifts in just three weeks may already have played out and still there is huge uncertainty. Different emphasis and combinations of stated policy could provide very different outcomes, and could even turn out very different from current assumptions.
It is far from certain that these would all be benign, and in particular, depending on foreign capital to finance trumponomics seems problematic and even likely destabilizing.
The market’s immediate rush to judgement is at significant risk. Perhaps, a better conclusion might be that volatility will likely rise, inflation and currency risk has gone up, real growth may have got a temporary boost but the longer term outlook has not changed much. Debt will rise significantly and interest rates are higher, leading to a greater interest rate burden.
Lower risk and inflation protection seems like a good choice. It comes in just one package, now trading at a discount to where it was trading before the election!
Treasury Inflation Protected Securities, look relatively attractive. TIP and VTIP are perhaps the best ETF low cost options.
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