3 Reasons I am Bullish on Markets Amid Trump Impeachment Rumours
Trump sagas continue the dramas-prone presidency, with few signs of improvement. If Trump gets impeached, it will rattle markets considerably… and offer amazing buying opportunities! Here is why.
1 No inflation
Market corrections and crashes generally happen with specific “ingredients” and one of those is inflation, which causes a central bank tightening and downward pressure on capital asset prices (because capital asset prices and interest rates go in opposite direction). This inflation-induced monetary tightening also happens typically when credit growth has been huge.
Along with these, you generally get a trigger that causes a selloff. Geopolitical tensions, oil price surge, domestic politics drama, etc.
We have the drama for sure, but there are no significant inflationary pressures, as seen in wage growth and core PCE, along with a generally dovish Fed that will increase rates perhaps another 2 times this year — nothing to cause a major market correction.
Inflation is currently nothing to call home about and is even popinting down…
Core PCE inflation, 1999–01 to 2017–03:
Although wages are now finally growing at a decent clip, pressure on inflation remains contained and there is no scenario of a fast and brutal monetary tightening, so an inflation-and-interest-rate-shock seems improbable. That settles that.
2 Good or improving domestic and global outlook
Profits and wages are growing, unemployment is low, and the employment rate is finally picking up. Global conditions are steadily improving, with Euro political risk essentially gone (for now and I think for 2017–2018). All major economies are in a generally improving context and the USA, Japan, Germany, and the UK are close to or at full potential, with one or 2 years before a turnaround becomes a possibility due to inflation and monetary tightening.
Consumer spending is holding on the back of good or improving labor market conditions, corporate investments are picking up after a flat 2015–2016, major negative fiscal shocks are not on the horizon, trade wars seem improbable after Trump backed off from his protectionist rhetoric, and although there are always ups and downs in global geopolitics, everything seems under control, with no major showdown on the horizon.
Macro policies in all major countries remain expansionary and will remain that way for at least another year, if not more. Global markets are bullish, with solid risk appetite as seen in low yield spreads and vix.
That settles the current context and the general market outlook.
3 Japan’s yield curve manipulation and global yield convergence
Although I think Japan is a long run risk for global markets, the short run outlook is bullish. The central bank stands ready to buy any amount of bonds to keep 10-year rates at zero. This creates capital outflows from Japan (and jpy depreciation) by seekers of better yields… which creates global demand for bonds by Japanese investors and by global bond market traders looking at low downside price risk due to this special context, hence higher prices and lower yields, thus causing a global convergence in long-maturity yields and mortgage rates. Low yield long term bonds and mortgage rates are fuel to the fire of capital markets and corporate investments.
As long as there is no inflation, this will continue to add demand to global market assets and keep a lid on interest rates at all maturities.
Trump sagas and stocks
Trump could be impeached. There could be a great deal of other sagas, but this will not change the overall backdrop, so I think that any stock market correction will offer great bargains… buy the dips! I remain generally upbeat for the USA and the global economy for 2017–2018. The USA even had e fall in private sector credit relative to GDP between 2007 and 2017, so there is plenty of room for credit expansion and spending…
Currencies
On a macro level, the USA is more “advanced” in the expansion cycle and there has been already a lot of bullish news and expectations priced in, which may have brought the USD to overpriced territory, while EUR and GBP are behind the cyclical timing and have increasing inflation and good or improving fundamentals.
JPY appreciates when sagas come to the surface due to safe haven “risk off” mode, but the BOJ plans to hit 2% inflation within 12–18 months, which means incredible printing and trend depreciation.
CAD has record shorts, which could signal the end of the bear run, but I never “anticipate” these things, I “follow”… so I remain cad bearish until I “see” a market turnaround in a clear reduction in aggregate shorts in the COT.
AUD is still hit hard by plunging iron ore and also being a bit like the USD: further down the cyclical timing path, and showing signs of cooling, while the little neighbour NZD shows signs of inflation and still-strong labor market conditions and immigration flows, thus perhaps signalling an end of the NZD selloff.
Although the Swiss central bank keeps complaining of the “overvalued” CHF, the reality is that the country has a HUGE current account surplus and HUGE net international investment position, while having low and stable unemployment and generally solid fundamentals that point to long run appreciation. The central bank is trying its best to prevent CHF appreciation with massive buying of foreign currencies, but it seems they might some day be forced to go for another “shock and awe” appreciation, because the pressure will not let up.
Conclusion
Barring a major political scandal that creates global panic or geopolitical shocks or other impossible-to-foresee events, I am bullish on US and global markets and I even think a Trump impeachment would offer great buying opportunities once a turnaround becomes visible. All fundamentals and macro policies point to continued expansion and there are no foreseeable shocks that would change this assessment at this moment. Please like and follow Street Smart for ongoing useful and actionable insights!
Pascal Bedard
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