James Bianco, president of Bianco Research, cautions about big bets on the return of inflation after Donald Trump's surprising win and sees the long term bull market at risk.
Things rarely turn out the way you expect: The blowout victory of Donald Trump not only took the world by surprise, but also the stock market is welcoming the president-elect with unexpected cheers. The Dow Jones climbed to a record high and the Dollar rallied. Wall Street is betting that Mr. Trump will tack to the political middle and get the US economy humming. «We will see if that’s what they get», says Jim Bianco. The influential market strategist from Chicago who is highly regarded among institutional investors cautions that Mr. Trump is no regular politician and that risks with respect to global trade remain high.Mr. Bianco, Donald Trump gets a warm reception on Wall Street. What’s your take on the financial markets?
The markets are trading schizophrenically. During election night futures on the S&P 500 tanked to a 5% loss limit only to recover all of that by the beginning of the next morning and then go on to have a strong up day. Futures overnight trading started in 1988 and this is the first time ever that we saw a swing like that. Also, bonds had the biggest one day sell off in four years. So that’s somewhat epic, too.
Originally, the consensus was that a Trump presidency would crash the stock market. What’s your explanation that the reaction turned out to be exactly the opposite?
The market is banking on the idea that the Trump presidency is going to be a giant reflation trade : A bet on higher equity prices, rising interest rates and a stronger dollar. The expectation is that Trump is going to get rid of tons of regulations. He’s going to push through a massive fiscal stimulus either through tax cuts or infrastructure rebuilding or all of the above. And that is going to lead to something we haven’t seen in a decade: economic growth of 3 or maybe even 4%. That would also mean higher interest rates because the deflation mindset is gone. That’s what the market is banking on, at least initially right now.Do you think that’s a good bet?
I’m a little bit skeptical. First, I want to see how this whole thing plays out in the next couple of weeks. I’m hearing from a lot of people that when candidates win they tend to center: They say things to get elected and then they do other things when they get elected. Trump has already set history. Every President that we have elected in America was either a previous politician or a general who had won a war like Ulysses Grant or Dwight Eisenhower. Donald Trump was neither. So he has already broken that mode. That’s why I think to assign to him all of those traits that you would assign to a typical politician would be dangerous.What should investors watch out for now?
At this point, we just have to wait and see how the Trump presidency will impact the economy. Is he going to appoint people that he knows and punish those that weren’t with him? Or will he allow people like Mitch McConnell or Paul Ryan to say: »Here’s a couple of people for some posts that might work very well.» That was the hope after Trump gave a very conciliatory acceptance speech. He didn’t come out and say: »We will build a wall and put Hillary in jail». But there is always a risk that he could fall back to that in the next couple of weeks and the markets might have a toxic reaction.How serious is that risk?
This idea that he’s going to tend to the center could be misguided because he’s unlike any politician we’ve ever seen. He has won the only office he’s ever going to win: the Presidency of the United States. At most, he’s going to run for another political office one more time in his life and that is going to be in four years. He won on everything he said defying all odds. So why should he tack to the middle? What benefit does he get from not doing exactly what he said? I have no reason to believe that he is going to change. He may not do everything he said on day one. But he’s going to do a lot: He’s going to declare China a currency manipulator, he’s going to repeal Obamacare, there’s going to be a wall and there’s going to be an effort to make Mexico pay for it. So it’s going to be rather interesting.What does that mean for the Federal Reserve? Will it stick to its plan to raise interest rates next month?
The Fed has lost control of rate hikes. The market is in control. If the market prices a rate hike in, it will happen. If the market prices it out, it won’t happen. The Fed follows the market. With that said, we’ve been all over the place: We were at an 82% chance of a rate hike right before the election. Then during election night, we went down to 46%. Now we’re back at 80%. So it looks like the market is still going to let the Fed raise rates by pricing it in.If the Fed really raises interest rates at its next meeting it would be almost exactly one year after the first hike.
In fact, this is the longest time between rate hike one and rate hike two ever in a cycle. That just underscores the glacial pace at which the Fed is moving. And the reason for that is that the Fed needs to get the market on board and that’s very hard and it takes time for them to do it....MOREThe two lines highlighted in red are the most important in the whole interview.
Anyone who tells you what, politically, is going to happen next and from that extracts the first derivative, how it will affect the economy and then the second derivative how markets will react to that effect is either guessing without saying so, lying or delusional.
But of course if there are enough guesses someone will get it right and I'm sure we'll hear about it.
In the meantime we have a lot of computer runs looking at a giant range of possibilities but.....