Financial markets do not normally reward uncertainty. However, an optimistic view toward possible pro-growth policies fueled the market rally after the election, discounting the risk of Trump’s unpredictable nature. Predicting the geopolitical and economic impact of the flurry of activity since Trump was sworn into office may prove more challenging moving ahead. Consider just a sampling of recent headline news:
- Trump issues executive order banning seven countries from entering the US
- Acting US Attorney General is fired for not supporting immigration ban
- Iran put “On Notice” and new sanctions imposed in response to missile test
- Mexico threatened with a tax on imports to pay for “THE WALL”
- Trump’s call to Australian PM abruptly ends after discussing a prior agreement to accept 1250 refugees, fraying diplomatic relations with ally
- Trump accuses Japan and Germany (and China) of currency manipulation
- Trump’s defense secretary warns North Korea it would face “effective and overwhelming” response from US if it used nuclear weapons
- Federal District Court Judge issues restraining order on immigration ban.
- White House appeals order claiming Judge second-guessed president’s national security determinations, setting a course for a Supreme Court show down.
- Trump compares US actions to that of Putin being a killer on FOX news before Super Bowl, putting US on same moral equivalency as Russia.
- Trump tweets so-called Judge and court system should be blamed for any terrorist attacks
- Federal Appeals Panel unanimously rejected Trump’s bid to reinstate travel ban
To date, financial markets have absorbed this information with apparent ease. The VIX fear index is at all-time lows, equity markets are at all-time highs, rates are relatively stable and FX markets appear calm.
IS THIS THE CALM BEFORE THE STORM?
The Feb 6 Bloomberg article, “Five Charts that Say All Is Not Well in Markets,” pointed out the following indicators:
- News stories containing word “uncertainty” are at a record level
- Spread between Global Economic Policy Uncertainty Index and VIX Index is at an all time high.
- CBOE skew index is spiking – indicating an increase in the price of protection
- Inflows into gold funds is surging
If that does not give you pause, consider views of Seth Klarman who runs $30b Blaupost Group. According to the Feb 7th article in the NYT: “A Quiet Giant of Investing Weighs in on Trump,” Klarman “believes investors have become hypnotized by all the talk of pro-growth policies, without considering the full ramifications. He worries that Mr. Trump’s stimulus efforts could prove quite inflationary, which would likely shock investors. The big picture for investors is this: Trump is high volatility, and investors abhor volatility and shun uncertainty. Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.”
Finally, domestic protests have reached a height not seen since the 1960’s. Perhaps more alarming, state lawmakers are working quickly to make protesting illegal. From Bloomberg Feb 3 article “Republicans in statehouses across the U.S. are devising legal tools to regulate public dissent as demonstrators take to the streets to protest President Donald Trump in waves not seen since the Vietnam War.”
The combination of building domestic protests and demonstrations, geopolitical risks, policy confusion, “fake news” and “alternative facts” further adds to uncertainty. If this is the gathering storm, how might it manifest itself? We explore potential stress scenarios in Part 2 of this series…
today for a demonstration