NO FEELING, NO RISK
On waking, most mornings recently, one is faced by a plethora of ever increasing Trump ‘triumphs’ gazumping the previous one, with ever more gallish bravado.
However, the press and market commentary is being wayward in its interpretation of these pronouncements. They surmise: “You voted for him, he told you what he was going to do, so don’t be surprised now that he’s doing it.”
I do not believe that most people are surprised at what he is doing, the only surprise is how he is doing it. His apparent downgrading of the US judiciary system, for example, is not what we expected, the Muslim travel ban and the Mexican wall building, we did but we are genuinely shocked at the vehement, dictatorial manner he now seems intent on using in achieving his aims.
This is important to markets.
Many would assume that we should have more of a risk premium built into asset prices because of the intensity of Trump’s implementation. Should we also add a higher risk premium because of Marine Le Pen, in France, and the European elections? Perhaps further still because of the Brexit execution risk?
In reality, these are emotional displays of nervousness. They are impossible to quantify in today’s mathematical algorithmic world. We can factor in what Trump is doing readily, but not the manner in which he is doing it. Modern markets are computer dominated and they operate on a diagnostic basis of the numbers input into them. There is little room in the ‘mainframe’ for emotional value. Computers cannot easily calculate the viability of risk premia as their inputs need to definitive/ binary. This is confusing to more traditional non computer-driven market participants.
Chart 1
Computers also struggle with over-zealous positioning, as well as the interpretation of human emotion. If a position is crowded it does not matter to a computer. It is still correct ‘logically’ to hold that position. We have done fairly well this year with our assessment of crowded trades. The principle scenarios we spotted at the beginning of the year, were a crowded dollar long, a crowded US Treasuries short and a crowded oil long. In mid-January we added to that an overzealous mining sector long.
Although some of these have started to unwind, the positioning remains strident in its level. Crude oil’s speculative long has been added to since New Year. The long is now considerably higher than it was in mid 2014, before the oil price collapsed. Meanwhile the rig count is climbing.
The dollar, remains a consensus long, but we sense that the consensus view is wavering. Although the long position has been somewhat cut, it is still elevated. For traders to be long of the dollar to such a degree was understandable. The yield differential against other major currencies, and a much more growth-orientated economy, was historic. However, Goldman Sachs has recently observed how the dollar chart has broken through the differential chart. On a very leveraged basis (which is always the case), the dollar’s downward move is surely starting to eat into any profit that the yield differential offers. DXY is down 3% this year... any further weakening will become painful and might spread contagiously to other asset classes.
MR TRUMP HAS INHERITED A LOT OF DEBT AND IT IS FORTUNATE THAT HE FEARS IT NOT.
Source: Bloomburg
20 | ADMISI - The Ghost In The Machine | January/February 2017
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