What does maximum pain look like today?... Prisons rally and pesos tumble... The end of the bond market supercycle... When high interest rates hurt stocks... Gundlach sees 6% rates in five years... Doug Casey's favorite joke...
The "Trump Rally" is on...
But are the markets' expectations for our new leader realistic? Can "The Donald" do for our economy what he's done for reality-TV-show ratings and beauty pageants?
Coming into election night – November 8 – the market was clearly anti-Trump. Though we were never sure why Trump's promises of lower taxes, more jobs, and deregulation would spook investors.
Calls abounded for market destruction should Trump win.
Banking giant HSBC warned, "Look out below." Bridgewater Associates, the world's largest hedge fund, said stocks could fall nearly 11% if Trump took the White House.
And as Trump garnered more and more votes on election night, the bears were proven right... at least for a moment. S&P futures plunged 5% and gold jumped 3% to more than $1,300 an ounce. The fear trade was on.
One person who wasn't shaken by the knee-jerk selloff...
Billionaire investor Carl Icahn actually left Trump's victory party in the early morning to bet $1 billion on stocks. As he told Bloomberg...
I would have tried to put a lot more to work, but I couldn't put more than about $1 billion to work, and then the market got away. But I'm still happy about it. The S&P was so liquid – it was unbelievably liquid – the world was going nuts. Last night it was amazing, the world was going into a panic with no reason.
But the bears' victory was short-lived. Markets opened higher Wednesday morning. And the rally hasn't stopped... The S&P and Dow both hit all-time highs last week.
A quick synopsis of the "Trump Trades" to date...
Since the election, here's what has gone up and what has gone down.
But before we begin, keep this in mind...
Nobody thought a Trump victory would happen... but it did.
Nobody thought "Brexit" would happen... but it did.
Nobody thinks the market can go down today... well, we'll see.
My point is this: The rally to date has been a guessing game. People are betting on what Trump's policies will be before he has even taken office. They're betting on which parts of the economy he'll regulate and which will operate freely. They're betting on future tax rates and government spending.
They're betting the $1 trillion Trump prints to spend on infrastructure will cause inflation (never mind the $4 trillion we've already pumped into the system).
The same playbook didn't work for Japan – so-called "Abenomics" – so why would it be any different here?
But the market has no idea what will actually happen. And it will react violently if their guesses are proven wrong.
If anything, the only sure bet right now is change.
Checking in on the market's "fear gauge"...
Coincidentally, the Volatility Index ("VIX") – the market's "fear gauge" – is still trading near record lows... as if nobody suspects any surprises during Trump's first 100 days in office.
A rising VIX, of course, is great news for Stansberry's Big Trade subscribers. If you haven't yet signed up, you can learn more here without sitting through a long promotional video.
The market's winners...
From November 8 through last Friday, bank stocks have rallied more than 15%. Biotech is up nearly 9%. The S&P Industrials (companies like GE and Boeing) are up 8%.
Russian stocks are up almost 5% – a bet that Trump and Russian President Vladimir Putin's friendship will blossom into something economically beneficial for the European nation. Copper, an industrial metal, is up 32% on Trump's infrastructure-spending plans. Natural gas is up 18%.
CoreCivic (CXW) – formerly Corrections Corp. of America – is a publicly traded prison stock. It's up 55% on the Trump rally.
The market's losers...
On the flip side, gold miners are down 14%. Emerging markets are down 6%. (A stronger dollar, paired with Trump's protectionist policies, is a headwind for emerging market stocks.) The Mexican peso is down 11% (a huge move for a currency). For some reason, markets don't think Mexico will fare well under Trump...
Yields on the 10-year Treasury are up 50 basis points, meaning bonds sold off. (More on this in a moment.)
With the scorecard out of the way, let me explain something about the financial markets...
They have a tendency to inflict the maximum amount of pain on the maximum number of people.
And right now, the pain trade is: short U.S. stocks, long bonds.
Or maybe short the U.S. dollar. "King Dollar" has been on a massive rally...
>
But Trump should want a weaker dollar to spur exports and boost American businesses.
I am willing to make one call today...
The 40-year bond bull market we've enjoyed has come to an end. Over the coming years, we'll see higher and higher interest rates.
Already, yields on 10-year Treasurys have jumped from 1.82% on November 8 to 2.33% today. That's an astounding move in such a short period...
But it's just getting started...
Interest-rate cycles are long...
They take 40 to 50 years to play out. We could see rates bounce around the bottom before officially taking off... First we see the "guillotine" (the initial crash)... then the "sandpaper" (an extended period of grinding sideways).
The traditional argument says stock prices and interest rates are inversely correlated. As interest rates rise, bonds become more attractive relative to stocks, and vice versa.
But rising interest rates are a good thing for stock prices – up to a point.
According to JPMorgan Asset Management, rising rates are typically good, assuming the 10-year yield is below 5%. But once rates cross the 5% threshold, that higher yield acts as a magnet to pull money out of stocks.
Our colleague Steve Sjuggerud ran a similar study back in 2014. He wanted to know what happens to stocks when the Federal Reserve raises interest rates. As he explained in the September 30, 2014 DailyWealth...
I expect stocks to rally in the months before the rate hike. After the first rate hike, we could see a correction in the 7% range. Then, stocks will surprise everybody, taking off as they enter the ninth inning of this great bull market.
You can see how our script could play out, based on the last three major cycles of rising interest rates, in the chart below:
Yes, interest rates will rise in 2015. But that doesn't mean the end of this bull market in stocks. It actually gives us a great opportunity to make money, based on history.
Anyone who took Steve's advice to buy stocks in 2014 has made a fortune...
And with the odds of a December rate hike at nearly 100%, Steve's study is equally important today.
"Bond God" Jeffrey Gundlach, founder of DoubleLine Capital, has been one of the most prescient interest-rate forecasters of the modern age. He turned maximum bearish on bonds on July 6, two days before 10-year yields hit a low of 1.37%.
Now, Gundlach says yields on the 10-year could hit 6% in the next five years.
Like us, Gundlach said he wouldn't be surprised with a sharp rally in bonds (meaning lower rates). But higher rates are coming... "The idea that inflation and interest rates can never go up is a very tired narrative, born of years of stability in both," he told financial-news outlet Barron's.
For now, the trend is up...
Stocks are at all-time highs. Markets are optimistic. We don't want to stand in the way of that.
So stay long. But be hedged.
Porter likes the idea of buying long-dated puts on some of the world's worst corporate credits. That's the thesis behind his new service, Stansberry's Big Trade. It's a way to buy dirt-cheap insurance on your portfolio, with the potential for gains of 10-20 times your initial investment.
You could also take advantage of gold trading below $1,200 an ounce and add to your position.
Whatever Trump ultimately does, we're certain that by printing more money and increasing the deficit, he will only make the latest default cycle worse.
I'll leave you today with my friend Doug Casey's favorite joke...
Albert Einstein dies and goes to Heaven. When he arrives at the gates, Saint Peter informs him that his room isn't ready. To kill time, Peter introduces Einstein to some of Heaven's other inhabitants...
"Here is your first roommate. He has an IQ of 180."
"Wonderful!" Einstein says. "We can discuss mathematics."
"And here is your second roommate. He has an IQ of 150."
"That's great... We can discuss astrophysics," says Einstein.
Another walks up to shake hands with Einstein. "I'm your third roommate. But my IQ is only 80."
Einstein smiles and responds, "So, where do you think interest rates are headed?"
New 52-week highs (as of 11/25/16): China Vanke (2202.HK), Automatic Data Processing (ADP), American Financial (AFG), Altius Minerals (ALS.TO), Boeing (BA), WisdomTree SmallCap Dividend Fund (DES), iShares Select Dividend Fund (DVY), BlackRock Floating Rate Income Strategies Fund (FRA), iShares Core S&P Small-Cap Fund (IJR), PureFunds ISE Mobile Payments Fund (IPAY), Nuveen Floating Rate Income Opportunity Fund (JRO), PowerShares S&P 500 BuyWrite Portfolio Fund (PBP), PowerShares High Yield Equity Dividend Achievers Fund (PEY), iShares MSCI Global Metals & Mining Producers Fund (PICK), PNC Financial Warrants (PNC-WT), Gibraltar Industries (ROCK), and W.R. Berkley (WRB).
As you can see, lots of Stansberry Research recommendations are hitting new highs. How is your portfolio holding up today? Let us know at feedback@stansberryresearch.com.
Regards,
Sean Goldsmith
Baltimore, Maryland
November 28, 2016