Steen’s Chronicle: Back to the past - when change is not a change

Steen's Chronicle: Back to the past - when change is not a change

 

I have spent the last month on the road around Europe meeting with clients and investors. It has led to some interesting discussions and conclusions for me.

 

President Trump remains an enigma even for people who have met him - his personality is at best erratic and at worst compulsive, having said that his ability to "keep the ball rolling..." impresses me and in the process he has been able to convince many of the investors I respect the most to buy the concept of 'an animal spirit', the very concept instilled in us economist' from Adam Smith and his laissez faire economy concept, which was the only "model" pre Karl Marx definition of Capitalism and Marxism.

 

One problem, if you haven't noticed, "Laissez faire" is the exactly opposite of what Trump believes in! His idea of animal spirit is forcing companies (and that's put diplomatically) to keep jobs in the US despite it's hurting earnings, productivity and long term growth.

 

It's also interesting how Trump wants to "create jobs..." in an economy where Fed and others is concerned about the heated labor market - US today have an unemployment below its historic average, and just a bit of advice to Trump: It's not per se jobs you need more of but more a productive US. A higher productivity will force wages up and increase jobs quality.

 

https://fred.stlouisfed.org/graph/fredgraph.png?g=cC7i

 

 

There is an almost perfect correlation between GDP growth and productivity and here Trump's policy is countering the "preferred" solution which should be massive investment in basic research, more competition and most importantly a big upgrade of the educational system.

 

Instead President Trump will force jobs to remain in the US, the quality of those jobs will be driven by a mistaken concept of "keeping industries alive" - favoring manufacturing at a higher marginal cost over a conversion to a more competitive and productive set ups. A desperate attempt by Trump to go back to the manufacturing base of the US in the 1950s and 1960s

 

https://fred.stlouisfed.org/graph/fredgraph.png?g=cEcS

 

Nixon

 

I have long argued that the best way to see Trump is to look back at Nixon's Presidency, where a disengagement on foreign policy (the Nixon Doctrine), a weak Dollar policy (Treasury Secretary Connally's famous 1971 quote: "It's our dollar, but your problem" comes to mind"), a very nationalistic agenda, a "in your face President attitude" and a White House constantly at war with Fed (The then Fed Chairman Burns ultimately caved in) is but a few of the similarities.

 

I got semi confirmation for this idea when I learned that one of the personal things Trump will bring to the Oval Office is a letter from former President Nixon (LINK) - on this trip I was further confirmed in the idea of Trump admiring Nixon, but as I received this information under Chatham Rules, you will have to take my word for it, but confirmed it is.

 

So here we are three weeks of The Donald and what have we learned?

 

He has been able to reconfirm the narrative on US reflation but on the "actuals" – i.e: What has he done relative to what he has promised he is tallying up major loss':

 

-       The travel bank is now heading for Supreme Court ruling

-       Affordable Care Act, Obamacare, look more likely to the replaced than repealed & only in 2018

-       The foreign policy side has been a mess with The Donald playing tough but backing down faster than you can count to three: Point in case, after making China the main target of all things evil, the Donald overnight suddenly acknowledged decades of US foreign policy by nodding to One-China (i.e: No Taiwain recognition) …..

-       NATO is useless…. Now attending May NATO Summit (which is really not a summit but a highly charged political house warming party (NATO is moving HQ!)

-       Then yesterday The Donald promised a "phenomenal tax plan" and market was off to the race again…

 

The point? Don't judge or trade on what The Donald says but on what he does! This is critical – ignore the tweets but look at what is executed done relative to the empty promises.

 

 

He does more and more look like Obama on foreign policy and his momentum domestically will now be on the "phenomenal tax" plan – a tax plan which so far have left more question than answers: When Trump Press Secretary Spicer was asked if the promised proposal would meld with the one suggested by House Republican – then answer came back:

 

"I don't want to get any further ahead of it, but I will tell you it is going to be the first time that this nation's seen a full, comprehensive tax reform in a long, long time,"  I think Tidwell from Jerry Maguire should give have last word: The Donald – my response

 

Enough about the Donald.

 

In the real world the market is more than confused – even seasoned multi-decade veterans iare struggling to make sense of direction but it's fair to say that the consensus remains:

 

Equity: Reflation, TINA (There is no alternative), momentum, deregulation rules

 

Fixed Income: The present sell-off in yield is temporary – either The Donald delivers and or Fed gets behind in raising rates.

 

FX: The US Dollar will fly – border tax could mean 25% one-off increase in its value.

 

Economics: Small impact on growth this year- Consensus survey says GDP in 2017 & 2018 will be 2.3% and CPI will be 2.4-2.5%

 

My take however remains the same, which of course is really more function of me being old and not able to adjust:

 

My general model is the good old "permanent portfolio" which means 25% allocation to each of four asset class': Commodities, Equity, Fixed Income and Cash(or real estate) – this is then rebalanced yearly back to 25% the modern version is risk parity. This is chart of Risk Parity vs. S&P500 – yes same return but……. Significant less volatile:

 

 

But right now my allocation is:

 

Equity: 25%

Fixed income: 50%

Commodities: 25%

Cash: Zero

 

Equity - Respecting the momentum

Fixed Income – See attached internal memo

Commodities - Overweight gold + silver

 

The ratio of equity to fixed income is stretched:

 

 

 

Finally,

 

Here is quick overview of view and direction from our simple chart model:

 

US Dollar Index – Short - Weekly – Still offered but daily shows consolidation - CHART

US Dollar Index -  Long – Daily – The Donald changed direction on big dollar… CHART

WTI Crude – Long -  Good reaction to data this week, but tech starts to look tired/offered - CHART

Gold – Long -  CHART

US 30YR – Long – Weekly – despite tax plan promises - CHART

 

SPX – Long – valuation stretched – but momentum strong - CHART

China – Short, but some support from Trump backing down on harsh China trash talk - CHART

Japan– Long, but big risk next week - CHART

EMG – Long – big momentum upside - CHART

 

Finally,

 

I beg you an excellent weekend with a Donald joke:  "how do you know you are reading a Trump book?" – "It's starts at Chapter 11"

 

Safe travels,

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

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