What have we learned?
Markets are no predictors of politics, that’s one thing. Markets are no predictors of markets either. That’s another. Donald Trump’s election has caused gold to fall, equities to rise, commodities to rise, and the dollar to rise too.
Wait… commodities and the currency that’s used to buy them both rising at the same time? Can this be possible?
Can it still be said that for every reaction there is an equal and opposite reaction? - or do the laws of physics no longer apply when reality is viewed through the lens of a Trump victory?
Although there’s no doubt we are in a different world now, the answer is there is still rationality in market behaviour, even if it isn’t all pervasive.
The missing opposite reaction can be found in the fall of gold, in the collapse of emerging market currencies, but mostly in the bond market.
Immediately after Trump’s reaction, commentators it the bond markets talked of a “bloodbath.”
The reason is simple. Bonds are just like any other high-end product – the more of them there are around, the less valued they are by buyers. Prices drop. Trump plans to borrow more, so there will be more bonds around. This goes against recent convention, which has urged a reduction in borrowing and an increase instead in the money supply.
But it’s also expected that this spending, combined with planned tax cuts, will fuel inflation. This will further reduce the value of bonds already held.
American debt is now cheaper on the international markets. Or to put it another way, it’s already going to cost Trump more to borrow the money he wants than it would have cost Obama.
That, in effect, is the equal and opposite reaction to dollar and commodity strength, and may perhaps serve at least to steady the ship for anyone who’s faith that there is any kind of rationality at in markets has been shaken over the past couple of weeks.
It’s also a scenario that offers opportunity. For those who think the threat of Trump is overblown, the answer is: buy US debt. For those who think that the equity and currency markets are seriously underrating the threat posed by Trump, the answer is: buy gold.
What’s different now is that the steer from markets is not obvious. There is no clear consensus about what’s going to happen next. Given the track record of market consensus in previous predictions this is probably a positive development.
But it does mean that investors will increasingly now have to fall back on their own judgments in making big investment decisions, their own readings of the mood of nations, their own political nous.
What is clear is that the US is coming home. Trump claims that he has a plan to defeat ISIS are nonsense. Trump’s best plan would be to back Vladimir Putin as a regional proxy and clear out of that war altogether. And given other statements he’s made, that may be what happens.
Because note that the oil price was not among the major movers following the Trump victory. Trump doesn’t need the Middle East the way Nixon, Reagan or Bush did. For that, he can thank technologies developed by his despised elites.
And the US is coming home in other ways. US capital is returning. It may be a buyer’s market for debt, but it’s a seller’s market for dollars - because all those dollars are going to get spent right in the heart of the good old US of A.
Short-term, all eyes will now be on the Fed and what decision it makes on rates at the December FOMC meeting. That will have a bearing on inflation and, potentially, the price of gold.
But the interesting thing now is that for the first time in a long time, the short-term view isn’t what matters. The all-too-valid critique of markets that they can only look ahead quarter-by-quarter will have to be jettisoned.
That may mean that Western capitalism starts to move closer towards the Chinese model, where investment strategy and planning is famously done on a twenty-to-fifty year view. If it can maintain traditional freedoms in the process, then paradoxically that could mean that the liberal left ends up getting what it wants, and Donald Trump delivers it.