Washington is still irrelevant, but … (January 9)

I survived the bomb cyclone but having left New York on Sunday morning I concluded two things.

Washington is still irrelevant, but …

I survived the bomb cyclone but having left New York on Sunday morning I concluded two things. Firstly, that New York has the infrastructure of a third world country and that is probably an insult to many developing economies. Secondly, after binge reading Fire and Fury, Michael Wolfe’s brutal book about the inner workings of the Trump administration, the chance of a significant infrastructure spending program looks very remote indeed. The circus that is the presidency of Donald Trump is poised to dominate the global narrative again in 2018 and not in a positive way.

While the return of inflationary pressures is the ultimate threat to this euphoric environment for risky assets, Washington dysfunction remains on the list of potential headwinds for asset markets in 2018. North Korea, US / China trade relations, the Russia inquiry, and NAFTA are concerns we should have, but will continue to be ignored until they materialize into circumstances that truly hurt sentiment and begin to affect corporate profitability. Currently, there is nothing on the horizon that should prompt investors to take down risk. If we learnt anything in 2017, it was that just because we have mayhem in the White House, doesn’t mean that markets care. The global economy is on fire and I see no signs of it slowing. Negative political sentiment is not going to change this.

Data matters, especially on prices and nothing is more important than the inflation data in the US and China that are both released this week. A benign outcome that keeps US 10-year yields sub 2.50% and it is hard not to see equities galloping higher during the second week of the year. Longer term, I am convinced we will see quality equities trade more like bonds. The current economic environment, the robustness of profits and record low default rates means that corporate cash flows are probably as reliable as they have been in years. Stable cash flows and a global shortage of quality yield will see equities continue to re-rate higher. Purists won’t want to hear this, but as quality equities look like bonds and act like bonds then equity valuations should resemble fixed income. I am a huge believer in this bond proxy equity argument.

Malaise in Washington will not change this, but the threats cannot be ignored. A desperate President Trump could well use anti-trade, anti-China rhetoric to inspire his base. That said, the political annihilation of the protectionist Steve Bannon implies that the globalist agenda may prevail. This is one true positive in all this.

There will be a lot of negative political news this week and none of this will matter. USD weakness should continue as high yielding EM currencies continue to benefit. Further Euro strength may prompt dovish commentary from the ECB. I just cannot get excited about selling the dollar against the Euro, or other G10 currencies for that matter. While commodity strength could see the AUD grind towards 0.8000 over the next couple of weeks, there are just too many cross currents to sell the USD against the developed world.

Monday, Germany releases Factory Orders. On Tuesday, Australian Building Approvals. China prints CPI and PPI and the UK reports on Industrial Production on Wednesday. On Thursday, Australian Retail Sales. On Friday, US CPI and Retail Sales, and Indian Industrial Production.

Paul Krake

Founder, View from the Peak

IND-X Advisors Limited

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