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This week’s post was challenging to write. So much hinged on what the market thought of the Trump Inauguration that I couldn’t write it on Sunday.
On Monday, I was glued to the television, dissecting President Trump’s every word, trying to scalp trade.
Only 1458 days left of that…
It was only on Tuesday that I took the time to breathe and assess the situation. So I’m writing this on Tuesday, instead of Sunday. Hopefully it’s all the better for it.
Recent PA
The indices did well last week and started this week off with a bang. Notably, the Russell has finally found the bounce I’ve been planning for, up 6.23%. The Nasdaq is up 4.08%, and the S&P 500 is right there, up 3.97%.
Bitcoin has been the real star of the show, up double digits as of today.
Bitcoin has also been a bit of a drama queen. It traded in a 10% range on inauguration day, a number so absurd that I had to double-check it. I was at my desk trading this, and it was extremely chaotic.
With all this risk asset outperformance, smart readers can probably guess what the dollar and treasury bonds have been doing.
Bonds have been up 2% since last Monday, while the dollar has been down 1.65%. If yields and the dollar down become a trend, we should expect the risk rally to continue.
Animal Spirits
Today, a Stanley Druckenmiller headline hit the tape that I found very interesting, especially in light of last week’s PA.
"I've been doing this for 49 years, and we're probably going from the most anti-business administration to the opposite. We do a lot of talking to CEOs and companies on the ground. And I'd say CEOs are somewhere between relieved and giddy. So we're a believer in animal spirits"
-Stanley Druckenmiller
Druck seems confident that animal spirits will return to the market, and based on his phrasing, he expects them to stay for a while.
Tuesday’s factor performance confirms that the animal spirits are indeed back.
Momentum and beta crushed while everything else lagged. Value, of course, fell to the back of the pack.
If we continue to see bonds gain and the dollar sell off, I suspect Druck might be right.
Macro and Parting Thoughts
I wrote during December and into January that we were in a regime of “It’s so over, we’re so back” like we were during the growth scare last August.
That has proven to be largely true, with the Nasdaq trading in a 7%+ range during that time, oscillating back and forth between the highs and lows. The size of the range undersells the story of the volatility.
I tend to think now that we may be back to a trending market and, indeed, a bullish one.
writes an excellent publication called Capital Wars where he dissects moves in global liquidity.Liquidity increases with stronger bonds and asset prices, but it also increases from something called “central bank liquidity” which is much closer to a “liquidity injection” to the market.
We had been in an environment of decreasing liquidity until last week. More interestingly, we are seeing central bank liquidity tick back up.
A pro-cyclical trend in liquidity, combined with those animal spirits Druck referenced, could get euphoric fast.
Still, I’ve been urging caution for a while now, and I’m not ready to throw it to the wind just yet. This next chart shows why.
Global asset prices have far outpaced any semblance of a “fair” or “reasonable” level, especially US-based markets, which are more dominant than ever.
The ingredients are here for animal spirits to return to the markets and for things to go bonkers once again. The problem is that every successive bout of euphoria takes us farther and farther from equilibrium, which makes it riskier and riskier.
The more bouts of euphoria we get before something goes wrong, the worse the correction will be.
You might read that and think, “Well, surely the market will recognize that risk and reign itself in?”
Don’t be so sure. The market loves nothing more than it loves believing that this time is different and prices will go up forever.
So, I leave you with this straightforward instructional framework:
Stay cautious until we see a trend/euphoria forming.
Pile headlong into the euphoria.
Panic before everyone else.
Sounds simple, right?
We’ll see.
Good luck out there!
Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here. The information is presented for educational reasons only. Investment positions listed in the newsletter may be exited or adjusted without notice.