Prepare for a 'Trump Trade' Reversal
The Dow nears a milestone… Prepare for a 'Trump Trade' reversal… The 'Bond God' warns of higher rates… The U.S. Treasury agrees with Porter?… P.J. O'Rourke breaks down Trump's cabinet picks…
The Dow Jones Industrial Average traded just shy of 20,000 on Tuesday...
The index traded as high as 19,954 – less than 50 points from the milestone number – before closing at 19,911. Still, the Dow joined the S&P 500 Index and the Nasdaq Composite at new closing highs again… the sixth time all three major U.S. indexes have closed at records together since last month's election.
Markets tend to be "magnetized" to big, round numbers… so we won't be surprised if the Dow touches 20,000 soon. But it could be fleeting…
We can't help but notice the market is getting frothy again. Stocks have been a one-way bet since the November's election, and investors are getting downright giddy. As one manager quipped to the Wall Street Journal last night…
"There's a wave of euphoria around the market right now," said Tom Anderson, chief investment officer at Boston Private Wealth. "The consumer is in good shape, the economy is in sound shape and earnings are bouncing back."
For now, the trend remains up. We continue to recommend staying long… But be sure to stay hedged. A reversal in the "Trump Trade" – at least in the short term – is likely.
Our colleague Ben Morris agrees...
In fact, in this morning's issue of DailyWealth Trader, Ben explained why today's highly publicized Federal Reserve decision could mark an important turning point in several markets. Here's Ben…
Everyone expects the Fed to raise rates today. And almost everyone expects the same things to happen when it does. As U.S. interest rates increase – everyone knows – U.S. bond prices fall… the U.S. dollar gets stronger… and foreign currencies weaken. Take it one logical step further and stable stocks that pay big dividends will fall along with bonds, because of their bond-like qualities. Precious metals prices will fall, along with other commodities that are priced in the rising dollar.
If that all makes you suspicious, it should. That's not insight. It's expectation. And as soon as market participants expect something, they act on it. So by now, all these things have already happened. Today's rate hike is old news.
Will the Fed go through with the rate hike? Probably. But it really doesn't matter. The reaction to the rate hike is already extended, before it has even happened. This makes me think we'll see a reversal of recent trends no matter what the Fed says today. We're already starting to see the signs… U.S. Treasurys and precious metals are rising this morning, and the U.S. dollar is down.
'Bond God' Gundlach called it...
Regular Digest readers know Jeffrey Gundlach – CEO of investment firm DoubleLine Capital – was one of the few analysts anywhere to predict Trump would win last month.
He also correctly called a top in U.S. Treasurys – and a bottom in interest rates – earlier this summer when almost everyone was bullish on bonds.
In his latest monthly investor webcast on Tuesday, Gundlach also noted that a short-term reversal is possible. But he repeated his view that a bear market in bonds is just getting started… And much higher interest rates are coming.
Gundlach said Trump's policies will be terrible for bonds. He predicts the benchmark 10-year Treasury yield will rise above 3% next year – a potentially critical level – as government spending and inflation ramp up…
We're getting to the point where further rises in Treasurys, certainly above 3%, would start to have a real impact on market liquidity in corporate bonds and junk bonds. Also, a 10-year Treasury above 3% in my view starts to bring into question some of the aspects of the stock market and of the housing market in particular.
In a separate interview with news service Reuters, Gundlach went even further…
He said the 3% level would "unequivocally" mark the end of the 30-year bond bull market. He also echoed Porter's warnings on high-yield (aka "junk") bonds, noting higher yields will send the junk-bond market into a "black hole of illiquidity."
Longer term, Gundlach believes Trump's "bond unfriendly" policies could push the 10-year Treasury yield to 6% within four to five years.
Speaking of Porter's warnings...
A new report from the U.S. Treasury's independent Office of Financial Research ("OFR") calls soaring corporate debt a "top threat to financial stability."
Like Porter, the report notes the ratio of corporate debt to GDP is soaring. It has already surpassed 2007 levels and is nearing an all-time high. It also notes "nonfinancial firms" – including mutual funds, pension funds, and life insurance companies – now own an incredible 25% of this risky debt.
Why is this important? Because unlike banks, these large firms aren't currently required to meet strict capital requirements… meaning they could be far less prepared for the next credit-default cycle.
The report calls for "stress testing" these firms just like large banks. And what kind of adverse scenario is the OFR concerned about? The report suggests testing for "severe corporate defaults and sharp declines in U.S. equity and commercial real estate prices."
Hmm... Where have we heard that before?
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In today's mailbag, two more subscribers weigh in on P.J. O'Rourke's recommended holiday book list. Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail. And be sure to read on below the mailbag for the latest from P.J.
"Today (12/13/16) you posted a comment by subscriber to P.J. as to a 'good book' re: a good grounding for his college age kids. I would strongly suggest they subscribe (free) to Imprimus, offered by Hillsdale College. Hillsdale accepts NO Federal funding and is dedicated to free thinking." – Paid-up subscriber Jeff G.
"For the subscriber who seeks a book for a college student being tempted by the liberal group think of the campus environment: see Modern Times by Paul Johnson. Provided your reader has an analytical bent, it will help him to think and therefore to understand. This book is dense, but worth it: a brilliant historical synopsis of the scourge of the various anti-freedom, and anti-religious 20th century ideologies and how they have worked, to the advantage of their purveyors, and to the vast suffering of their victims and societies. Promoted and put into practice by those who claim to 'know' (Lenin, Hitler, Mao, Stalin, Pol Pot, national socialists, statists and collectivists of all stripes, you name 'em) how to mold humans into what they are not, based on self-serving 'isms' that have no soul, and are divorced from any understanding of ultimate realities (divine or human).
"Good reading. Then of course, there's also Dostoevsky - he'll clear the head of such illusions. Especially Crime and Punishment. A dramatic if sad description of the pathological effects of absolutist ideology and its ultimate logic of practical violence (to others and oneself) brought on by negative mimesis (the opposite of positive emulation and imitation of virtuous behaviors or 'types' - the hero, the saint, the true scholar, the builder, the inventor, the warrior etc.) which is rampant in today's academic and media cultures. But it also points to the possibility of redemption (as Dostoevsky's Christian faith shows through).
"I don't know why most college students (high school for that matter) are no longer required to read these types of difficult though compelling books (well, I suppose I do: many of their teachers couldn't keep up, and therefore would not assign them - or the reading might make their small brains ache!). It would do young students a lot of good to read such books, and the analytical process of going through them will act as a counterbalance to the prevailing ideology, if not immediately then gradually. One can learn to think on one's own just with these mentors through the written word as companions and guides. Don't really need professors, although a great one can make a huge difference." – Paid-up subscriber Mark N.
Brill comment: Mark, we couldn't agree more…
Regards,
Justin Brill
Baltimore, Maryland
December 14, 2016
President-Elect Trump's Cabinet Picks
The liberal establishment elite loathes Donald Trump's prospective appointees to the White House Cabinet and Cabinet-level positions.
I'll take that as a positive sign.
But Trump's choices are a mixed bag. Time will tell whether this mixture results in a Lincoln-style "Team of Rivals" or whether it breaks the "FedEx Rule" – don't pack the cat with the dog...
Appointments That Look Pretty Good… Or at Least, Pretty Interesting
Secretary of Defense – Retired Marine Corps Gen. James Mattis
Liberals are upset that a military man will be running the military. Am I missing something here? If Trump were hiring a chef, would he say, "I'll give you the job on one condition – you can't cook."
Department of Homeland Security – Retired Marine Corps Gen. John Kelly
He's getting the same kind of criticism. When the security of the homeland is under threat, should we send the Marines? Nah, that's too extreme. That's almost as extreme as owning a gun to protect the security of your home. Liberals think we should swat intruders with a rolled-up copy of the New York Times.
Department of Housing and Urban Development – Ben Carson
The mission of HUD is giving help to poor people. Carson was one. Somehow, in the strange mind of liberals, this disqualifies Carson for the job – as if it would be more in the spirit of giving to choose a blind man to put up the Christmas decorations and a deaf man to select the carols.
Secretary of Education – Betsy DeVos
She's an advocate of charter schools and a generous donor to that cause. Charter schools are an attempt to give public-school students a private-school education. Liberal elites are opposed to that idea.
Let's ask those elites a dumb question. Why do you send your kids to private schools?
Now, let's ask ourselves a couple of smart questions. How much, according to the National Center for Education Statistics, is spent per capita on U.S. public-school students grades K through 12? $12,296 a year. How much, according to the Private School Review, is the average tuition for a private school, grades K through 12? $9,582 a year.
Commerce Secretary – Wilbur Ross
The billionaire investor made his money by taking failing industries and resuscitating them with intense applications of time, effort, and private capital.
Sounds like a plan.
Health and Human Services – Tom Price
As a congressman, Price has championed repealing and replacing Obamacare. We'd better. The Congressional Budget Office estimates that Obamacare health insurance will cost taxpayers $1.3 trillion over the next decade.
This is not how insurance is supposed to work. When your car insurance is more expensive than your car, it's time to take a hike.
Small Business Administration – Linda McMahon
Small business owners know the system is fixed. They don't stand a chance against government regulation and interference. Professional wrestling is fixed, too. (Don't tell the fans.)
Takes one to know one. McMahon – who used to run World Wrestling Entertainment with her husband Vince McMahon – is the right woman for the job.
Secretary of Transportation – Elaine Chao
A brilliant strategic move. She's married to Senate Majority Leader Mitch McConnell. Either the Senate signs off on Trump's great big infrastructure plans or Mitch sleeps in the garage.
Appointments That Indicate "Adult Supervision"
Vice President – Mike Pence
Maybe Pence will be excused from the usual VP duty of attending foreign dignitary funerals and be allowed to stick around to tell President Trump – when Trump gets too impulsive – "It's your funeral."
White House Chief of Staff – Reince Priebus
He made it through the 2016 Republican caucuses, primaries, and convention without letting his head explode. It is to be hoped that Reince's exercise in self-restraint will be good practice for exercising restraint over the cats and dogs in Trump's administration.
Appointments That Fall Into the Category of "We'll See..."
Secretary of State – Rex Tillerson
Is the CEO of ExxonMobil too chummy with murderous thug Vladimir Putin? I'm sure we'll find out in excruciating detail during a Senate confirmation hearing that will test the patience of the nation and The Donald.
In the meantime, my suggestion to Rex is that he take the "Order of Friendship" that he was awarded by Russia in 2013 and display it where it belongs – in the outhouse next to the Sears and Roebuck catalog.
In Tillerson's favor, can he be any worse than the last two Secretaries of State, John Kerry and Hillary Clinton? They were nothing but a pair of flying blab-fests, jetting around the world to yacky-yack in all the places that would later blow up in their faces.
Also, Tillerson of all people must realize that U.S. energy policy cannot be separated from U.S. defense and diplomatic policy.
ExxonMobil has been successful in driving hard bargains for gas and oil exploration in more than 50 countries. Some of those places – such as Venezuela, Yemen, and Kurdistan – are not easy places to do business. Tillerson might be the right guy to tell certain countries to "frack off!"
National Security Adviser – Retired Army Gen. Michael Flynn
Reputedly, he's a bit of a hothead and a bit of a hardhead. The fight against Islamic terrorism doesn't need a lukewarm softy, but the National Security Advisor has to stay cool and think things through.
Which, I guess, is why we have...
Deputy National Security Adviser – K.T. McFarland
She comes straight from Fox News. Not that Fox News is famous for staying cool or always thinking things through. But whatever its faults, Fox News does present a more accurate picture of America and the world than the Obama administration ever has.
Department of Energy – Rick Perry
Good for you, Donald Trump – appointing a man who was one of your most bitter opponents for the 2016 Republican presidential nomination.
But while it's great to "let bygones be bygones," let us not forget that Perry, in his 2012 run for the presidency, promised to eliminate this redundant, intrusive, expensive, and useless federal agency.
As Digest readers may recall, Perry proved somewhat absentminded about the name of the department he has now been named to head. This should jog his memory. Now let's make Perry keep his promise.
Environmental Protection Agency – Oklahoma Attorney General Scott Pruitt
He's somewhat of a "climate change denier," which I am not. Humans have been pumping tons of gunk into the atmosphere since the beginning of the Industrial Revolution. It would be odd if this didn't have some effect. But climate change fanatics need to be opposed.
Climate change has become the go-to liberal excuse for massive expansion of government control over everything. That control is costing us too much in jobs, economic growth, and personal liberty. Better a little cheap skepticism than a lot of expensive credulity.
Secretary of the Treasury – Steve Mnuchin
I'm not sure about putting a former Goldman Sachs guy in charge of the U.S. Treasury. Considering all the bailout funds that the squawking and flapping Goldman Sachs pecked out of taxpayer hands during the financial crisis, this is sort of like setting a chicken to guard the chicken coop.
But I've checked U.S. debt and deficit figures. It's not like we have any nest eggs in there, anyway.
(P.S. Mr. Prospective Secretary, no inviting Hillary to give paid speeches to your staff.)
Attorney General – Jeff Sessions
The senator is alleged to be a racist because he made a joke about the KKK – as if crazy morons running around in bedsheets aren't funny, especially when the bedsheets are the floral-patterned, king-size, fitted-corner kind.
Expect Democrats in the Senate to ask Mrs. Sessions to go through her linen closet and see if anything in there has eyeholes cut into it.
Secretary of Labor – Andrew Puzder
A lot of labor leaders supported Clinton. A lot of the labor rank and file voted for Trump. Therefore, appointing a Secretary of Labor that labor leaders hate is a clever more. Maybe.
Puzder – CEO of the company that runs the fast-food restaurant chains Carl's Jr. and Hardee's – is strongly opposed to raising the minimum wage. There are many strong economic arguments against raising the minimum wage, but I'm not sure how the labor rank and file feels about the issue.
Personally, I'll say this: As a young man, I was a minimum-wage worker. Believe me, I was worth the minimum wage.
Ambassador to the United Nations – Nikki Haley
This would seem to be a waste of a talented politician, who is also one of the few current elected officials offering proof that the GOP can attract support from people other than grumpy old white men like me.
The proper role of the U.S. ambassador to the U.N. is to go to that useless talking shop in New York and tell the representatives from Carjackistan, Potsandpania, Abscondaland, etc. to go take a flying expletive in the direction of a lunar orbit.
I can think of a better person for the job, a person who happens to be in New York a lot anyway.
Mr. President-Elect, you should go to the U.N. yourself.
Regards,
P.J. O'Rourke