Expect More Volatility

The 'Trump Trade' is unwinding... Expect more volatility... Why inflation could be headed higher no matter what happens next...

The "Trump Trade" is unwinding...

Regular Digest readers know we've been expecting the recent rallies in stocks and the U.S. dollar – and the recent declines in U.S. Treasurys and precious metals – to reverse.

Now it appears the reversal is here. As we noted last week, the U.S. dollar has been falling since the new year began... stocks have essentially gone nowhere for weeks... while bonds and precious metals have been rallying since mid-December.

But we weren't alone in predicting these moves... Our colleague Dr. David "Doc" Eifrig has also been warning his subscribers that this trade had gone too far, too fast. In the latest issue of Retirement Trader – published Friday – Doc shared his latest thoughts on the situation. From the issue...

Look, we've lamented the role that politics has played in financial markets lately. We don't want to try anticipating the capricious actions of Trump, Congress, or the Federal Reserve. We'd rather base our trades on things we can measure... selecting strong businesses that trade for good prices and will succeed on their own merits.

Unfortunately, we have to keep one eye on politics. Macro factors like interest rates and global growth have driven markets for a few years now. Since June's "Brexit" vote, government has played an outsized role in the markets' direction as well.

Doc also explained why he believes the "Trump Trade" reversal could have further to run...

After Trump's election, markets reacted as though global growth would return. Through fiscal stimulus and deregulation, Trump would stimulate growth and, in turn, inflation. This was reflected in investors selling off U.S. Treasury securities. After all, when inflation rises, a low-yielding bond just doesn't look as attractive.

We thought the rally was getting way ahead of the facts. We know Trump's campaign rhetoric... but we won't know his actual policies until he takes office. Fiscal stimulus rarely creates sustained growth – and certainly not under the economic conditions we now face... So now, this trade is reversing.

Here's a chart of the 10-year Treasury yield. Remember, yield moves inversely to price. So when investors dump bonds, yield goes up.

At the same time, the stock rally has stalled. After a sharp rise after the election, stocks are now treading water. The "Dow 20,000" parties keep getting pushed back on the calendar.

These moves continued this morning...

The dollar fell another 1.2% today following weekend comments from President-elect Trump that the U.S. currency was "too strong." (More on this in a moment.) It is now down nearly 3% so far this year, a big move for the world's reserve currency...

Meanwhile, the yield on the 10-year Treasury fell to as low as 2.31%. It has already given up nearly half of its post-election gain...

And the rally in precious metals continued. Gold rallied more than 1.6% to a fresh two-month high. It's now trading back above $1,200 for the first time since before Thanksgiving...

The big question now is, "What comes next?"

Will the "Trump Trade" resume as the new President-elect takes office? Or will the reversal continue to unwind as Trump's promises run into political reality?

As always, we have no crystal ball. But we're willing to make one call today: Expect more volatility.

As Doc noted earlier, we still don't know what a Trump administration will look like...

Or what the new president will say or do.

Markets, sectors, and even individual stocks could whipsaw as details (or rumors) emerge. Take just this weekend's headlines, for example. In just the past few days, Trump has...

• Said he's finalizing a plan to replace Obamacare that will provide "insurance for everybody" (without providing any explanation)

• Warned he will force drug companies to negotiate directly with the government on pricing

• Said the U.S. dollar has become "too strong" and blamed China for "killing us" by deliberately weakening its currency

• Criticized the European Union and called NATO "obsolete"

• Repeated his demand that automakers and "other" companies bring their manufacturing back the U.S.

• Set off a potential "civil war" with the new Republican Congress by criticizing its corporate tax plan

Whether you agree with these sentiments isn't important...

These are big, potentially market-moving statements being made more or less "off the cuff." And he hasn't even taken office yet.

There's simply no telling what else he might say or do (or "tweet") in the weeks and months to come.

It's also not certain Trump's proposals will be successful...

Even if he's able to do much he has promised, not all these policies are sure to be positive for the economy or the markets.

We're all for cutting taxes and red tape. But his plans to ramp up government spending are likely to lead to soaring deficits and rising inflation that may or may not boost the economy.

Perhaps most concerning, his promises to enact tariffs and other protectionist measures could set off a trade war. This could benefit select companies and sectors here in the U.S., but only at the expense of higher consumer prices. It would likely also crush sectors – like retail, which is already struggling – that depend on global trade.

Meanwhile, we see signs that the recent rise in inflation isn't just about Trump's election victory...

This morning, the Wall Street Journal reported Treasury Inflation-Protected Securities – known as "TIPS" – have continued to rally while other "Trump Trade" winners have reversed. From the Journal...

The securities, known as TIPS, rise in value alongside consumer prices... TIPS got a particular boost after the U.S. presidential election, when investors rushed to place bets of faster economic growth and higher inflation. And investor demand hasn't seemed to be exhausted yet. TIPS funds have seen five straight weeks of net inflows, including $700 million in the week through Wednesday, according to Bank of America Merrill Lynch.

It's striking that TIPS have held up even as many so-called Trump trades have begun to reverse, pushing assets like financial shares, infrastructure companies, and small-cap stocks lower. One explanation is that the prospect of higher inflation is about more than simply Mr. Trump's promises to cut taxes, spend on infrastructure and roll back financial regulations.

To be sure, many of Mr. Trump's proposed policies could be inflationary, even if they don't stoke faster economic growth. For example, he has espoused protectionist ideas, such as import tariffs... As imports become more expensive, higher CPI could lead to a stagflationary shock.

In other words, inflation could finally be heading higher for fundamental reasons that have nothing to do with Trump's election. And if Trump is successful at boosting spending or restricting trade, it could only add fuel to the inflationary fire.

This is just one more reason we believe gold prices could be headed much higher this year.

New 52-week highs (as of 1/16/17): none (markets were closed for Martin Luther King Jr. Day).

The feedback on last week's big Stansberry Portfolio Solutions event continues to roll in. If you missed it, you still have a few days to watch a special video replay of the full event. Click here to see it now. And be sure to let us know what you think at feedback@stansberryresearch.com.

"Greetings Porter, I have been an investor for over forty years, and I must say that I have never found a gold mine of investing knowledge so freely offered by any organization other than yours. I have gathered more valuable nuggets about investing in the past two years than I ever expected, and I am extremely grateful. The Stansberry model of business demonstrates a commitment of service to others to a degree that I have never encountered in the investment world. Your expression of wanting your clients to know everything you know if roles were reversed is an expression of the golden rule rarely seen in business.

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"I have read something similar so many times over the years. I want to thank you for that because you have benefited many people like me because you persisted. 'Again, you must be wondering... if I don't believe in teaching and I don't believe most of you will ever put these secrets into action... why then do I continue to write the Friday Digests? Do I get some kind of perverse thrill from tilting at windmills?'

"People ask me how I have achieved success as an investor because I can make $2,000 in 15 minutes. Just like you I tell them that all you have to do is read and educate yourself and you can do that, too. You get this kind of blank look because you know they won't do it. It saddens me a bit. But I will continue to tell them how they can do it. And just like you... if one person does it because I was able to connect with them I will have succeeded. Thanks Porter." – Paid-up subscriber Jeff S.

Regards,

Justin Brill
Baltimore, Maryland
January 17, 2017