What's up Trumponomics?

From 2016 until now, investors have learned a valuable lesson: Don't bet against the house AKA Don't bet against Trump. With his administrations' tax reform, numerous trade deals, deregulation, tariffs on the EU, control over the Feds, etc.; his words and his actions have kept the market screaming higher. With his first term due to end soon and with his campaign for reelection, a market correction would be terrible for his chances. With this in mind, expect the stock market to continue to make new highs even if there is a terrible epidemic or other crises. 


Dear Reader,

The Market.

• Treasuries make up more than half of all global haven assets.
• Analysts may have started speculating that the market is overbought.
  
• Macroproudential Policies- “financial policies aimed at ensuring the stability of the financial system as a whole to prevent substantial disruptions in credit and other vital financial services necessary for stable economic growth”
  • In an ever-expanding economy with high asset prices and low-interest rates, regulating the loan-to-value ratios or debt service-to-income ratios or requiring the countercyclical capital buffer on banks (which requires banks to increase their capital cushions during economic expansion when systemic risks are rising) are used to stabilize an economy from the risk of collapse.
• OPEC is in talks with Russia in approving a cut in the supply of oil produced due to the demand of oil decreasing significantly. Global oil demand growth for 2019 is revised lower by 0.05 Millions of barrels/day to 0.93 mb/d, while global oil supply is estimated at 1.86 mb/d.
  • Oil demand and appetite have been crushed due to firms divesting away from non-ESG (Blackrock) or becoming zero-carbon (BP) + macro events in Iran and China this year. Supply is in surplus, oil prices are at extreme lows, and the OPEC delegates that represent countries that rely on oil as key components of their GDP are refusing to cut supply to stabilize oil prices because 
• The Federal Reserve has two mandates: maximize employment and price stability.
• With interest rates so low, the Feds lose out on a key monetary policy tool when a contraction occurs. 
  

The Reason For No Recession. A yield inversion happens when a long-term interest rate crosses with a short-term interest rate. Example: 10-year Treasury with 90-day Treasury. The inversion of the short and long term yields have always been an indicator of a recession 6-9 months later. When the long-rate is dropping, businesses pull back on investments and reduce spending on CapEx. They stop borrowing and banks have less demand for lending, so they lower the interest rates to make the rates more attractive. Businesses indicate that the economy is slowing, and this may lead to a recession. BUT, in this global economy, foreign 10-year T-bonds are 0% or negative. All of these global investors want to be liquid, safe and returning positive returns. So they all buy US bonds, increasing the prices of bonds, and lowering the interest rates of these bonds. This is why the yield inversion may not indicate a recession.
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Correlation Between Major Assets. Finding patterns in data has always been something that humans have tried to do to game the market. Usually, traders will throw up the two normalized data sets on a graph, and try to eye if they see correlation or not. This will usually end up with an erroneous outcome. Take Gold/Oil for example, although it seems these assets usually move in the same direction, and the graph shows a semi-consistent correlation, its R^2 (which is the % of the dependent variable explained by the independent variable) is 7.2%, with its R (correlation when using only 1 independent variable) is .268, which shows a weak correlation. When adding the USD into the equation, we see the r^2 and correlation jump up. This is explained by an error with multicollinearity, or the addition of the USD, which strongly influences both gold and oil, due to both assets being dollar-denominated. This means that when the dollar goes up, oil and gold will both follow inversely.

Checks and Balances. A set of organizations that split sovereign power among them in order to prevent dominance by a single individual or group of individuals. This can be as simple as having an independent board of review for a public company but generally refers to the distribution of power in a government. Checks and balances have existed as long as independent states have, but their widespread use only came with the advent of modern republican democracy, where the people, through their representatives, sought to prevent the reestablishment of autocracy within their lands. Generally, governments are split between an executive, legislative, and judicial body, each with separate priorities, and, importantly, largely independent. In the United States, this split is extremely formalized, with contradicting powers given to the different branches, including Congress’ power over the budget, the President’s power over actually spending government money, and the Supreme Court’s power of judicial review over the whole process.

Presidential interference in Stone Sentencing. Roger Stone, a long time confidant, and advisor of President Trump was found guilty of witness tampering and lying to congress in November 2019. His crimes had been discovered in the course of the Mueller investigation, as it had been found that he had cooperated with Julian Assange in the course of the WikiLeaks hacks of the Democratic National Party during the 2016 election. As a result of these crimes, an assistant US attorney followed the guidelines of the Department of Justice and recommended to the judge that he be sentenced to seven to nine years in federal jail. However, President Trump tweeted earlier this week that this sentence was inappropriately long, and, following this, the Department of Justice intervened in the case and recommended a far more lenient sentence. The four prosecutors involved in the case resigned, and the DoJ has received widespread condemnation for what has been termed “political interference in the judicial process.” Technically, what President Trump did is not technically illegal. However, it does greatly delegitimize the Department of Justice, as one could now view the department that is supposed to enforce and prosecute federal crimes as a political tool of the presidency, rendering investigations it pursues vulnerable to allegations of political bias.
 
Keep Climbing,


The Alchanati Campbell and Associates Team