The Sun Also Rises… Eventually

This is incredible stock market action right now. The S&P 500 has rallied over 130 points off the election night lows. It appears that American will be much better run these next few years. A republican congress combined with a business friendly President is something the world hasn’t seen in decades. The probability that the political gridlock may finally be loosening up is another boon to the economy. After a barren investment climate these past 4 years, companies and investors finally have pro-business government policy to look forward to.

But guys, there’s this thing called the credit cycle, and the American consumer is maxed out. Inflation is rising. US treasury bonds are beginning to price in said inflation and selling off. The 10 year just broke 2.0%.

If Trump can pass a stimulus bill in the face of rising inflation, the US economy will run very hot. Rates in the US could sell off incredibly sharply. The Fed will be forced to tighten, most likely far beyond China’s tolerance. Most likely, barring a significant foreign shock (Italian Referendum anyone?) the Fed will hike rates in December.

The dollar has rallied sharply since Trump got elected most likely due to expectations of higher interest rates. This has made matters much worse for China as the offshore Yuan plunged to a new record low of 6.82 on the dollar. Once again, I would like to remind those that were investing in EM unaware of a housing bubble in the US got clobbered in 2008. Those who ignore China’s problems do so at their own peril. Higher US interest rates and tighter monetary policy will only exacerbate China’s ballooning problems.

Although I remain incredibly upbeat on Donald Trump’s victory, the magnitude and time horizon of said event will be not be felt as strongly as quickly as the market currently anticipates.  The effects of his policies will likely harm our fragile trade partners and risk throwing the globe into another recession. I admit I could be wrong on the strength of China’s economy. But given the strength of capital flight at the slightest sign of weakness in the Yuan, I doubt that the market is closer to the truth than I.


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