January 2025 DDD

[ducati916]

Good for my btc portfolio

Clearly yes it will.

To a point.

Currently (absent any issues with Tether etc) the correct strategy has been to buy and hold. That will continue to be the correct strategy until the correct strategy is to be the first to sell.

Then it returns to zero as it will all be owned by a very small group or even a single person.



Credit spreads are insanely tight. As such, the risk is incredibly high.



Pretty high multipliers being accorded to earnings. Again, risk increases.

jog on
duc

 

[ducati916]

May finally un-invert.

This has been written off as an indicator worth watching, simply I think because of the length of time that it has remained inverted. Big mistake. This has a good track record.

jog on
duc

 

[ducati916]

Musk wants his crusade to radically slash federal spending to resemble what is underway in Argentina, where the leader's name is now synonymous with drastic budget cuts.

Why it matters: Musk previewed last month how influential he might be on Trump-era fiscal matters.

• His admiration of the "chainsaw-like" approach in Argentina shows how hard he could push to axe the size of America's government — maybe with some success.

What they're saying: "The example you are setting with Argentina will be a helpful model for the rest of the world," Musk told Argentine President Javier Milei in an exchange on social media platform X.

• Vivek Ramaswamy, tapped by Trump to lead the Department of Government Efficiency (DOGE) alongside Musk, said late last year: "A reasonable formula to fix the U.S. government: Milei-style cuts, on steroids."

The big picture: The U.S. fiscal situation is starkly different from that of Argentina, a nation prone to financial and economic crises stemming from government overspending and sovereign debt defaults.

• Milei, a self-described "anarcho-capitalist," has been cheered by U.S. right-wing politicians who see his rise as an example of Trump-like populism spreading beyond America's shores.
• Most appealing to Musk and others might be how the eccentric economist — known to pose with a chainsaw to signal his affinity for spending cuts — has defied global naysayers with unconventional policies that look successful.

"Milei has changed the conversation about economic policy — not only in Argentina, but I think maybe a little bit more generally, too," Steve Hanke, a Johns Hopkins University professor who advised Argentina's economic officials in the 1990s, tells Axios.

• "But there is a tremendous amount of low-hanging fruit to pick in Argentina — it's just a different system," Hanke adds.

Between the lines: Milei cut government spending by about 30%, roughly in line with the share of spending DOGE wants to eliminate in the U.S.

• But spending cuts in Argentina happened in a very different context. Milei's austerity measures aimed to arrest double-digit inflation after years of failed economic reforms.

"There's a real sense of urgency in Argentina, that something dramatic has to be done to save them from the abyss," Cato Institute's Johan Norberg, who interviewed Musk and Milei in Buenos Aires last year, tells Axios.

• "Musk almost single-handedly has shifted the debate in the U.S. — suddenly there is a discussion about spending and whether things can be reformed," Norberg says.
• "That doesn't mean there is a popular mandate to do it, because I'm not sure that sense of urgency is there."

Milei laid off thousands of federal workers, scrapped many of the subsidies supporting Argentinians, eliminated government agencies and halted public works projects.

• Inflation has plunged as a result of Milei's shock therapy: In November, it was 2.4%, well below the 25% when he took office.

Yes, but: Milei's shock therapy comes at a steep cost to the real economy. Poverty rates last year soared to the highest in 20 years, according to the government's statistics agency.

Before DOGE is implemented, US debt must be restructured. You cut GDP before you restructure debt, you collapse revenues, you increase defaults.

Debt:




Which would drive a stronger USD...exactly what we don't want. Stronger USD causes selling of US assets (outlined above by foreign holders).



Very choppy market.

I've made a few trades today but mostly sitting tight waiting for a trend to develop. It will likely remain choppy until Trump takes over and the chump Biden is relegated to the history books.

US markets are closed for Jimmy Carter's funeral on Thursday.

jog on
duc

 

[divs4ever]

View attachment 190552

May finally un-invert.

This has been written off as an indicator worth watching, simply I think because of the length of time that it has remained inverted. Big mistake. This has a good track record.

jog on
duc

yes i want to see IF the normalizing of the yield curve is a 'nothing-burger ' ( although it should be a leading indicator , not an immediate trigger ) before dismissing it's relevance .

what we should also consider is the yield curve this time has been massively manipulated ( and has little to do with 'free market ' forces , currently )

 

[ducati916]

yes i want to see IF the normalizing of the yield curve is a 'nothing-burger ' ( although it should be a leading indicator , not an immediate trigger ) before dismissing it's relevance .

what we should also consider is the yield curve this time has been massively manipulated ( and has little to do with 'free market ' forces , currently )

Obviously the Fed control the FFR which essentially follows the 2yr.

The Fed (unless they return to QE and effective YCC) do not control the long end.

Therefore 'currently' the curve is not manipulated.

Of course whether that remains the case is the question. With $7 Trillion rolling over this year, $2.5 Trillion in deficits and possibly a lot higher, I would say unlikely. The only way this does not blow-up is that the Fed returns to effective QE and devalues the USD via much higher inflation. Which means that the 10yr must come way back lower in yield.



ATM we are at 4.5%.

The consensus has the breaking point at 5%.

USD



My view is that the USD drives this process, not the 10yr. However, whichever it is, it needs to calm the f*ck down otherwise stocks are going to have a moment.

Trump with his tariffs, taxes, DOGE and BTC policies will not be driving a weakening of the USD, although he is aware (or his Treasury chap Bessent is) that the USD is an issue. Before all the above, debt needs to be restructured via a devaluation. The best way would be via gold, but, Trump is suggesting possibly via BTC, which is IMO driving the current price action in BTC (along with price insensitive buyers like MSTR).

jog on
duc

 

[ducati916]

Oil News:

Winter Storm Blair has hit the US Midwest, Plains, and Atlantic Coast with snowstorms and freezing temperatures, canceling nearly 2,000 flights across the country and sending oil and gas prices climbing.

- Wholesale electricity prices across the US Northeast skyrocketed into triple-digit territory as the cold snap ratcheted up demand for power with ISO New England Massachusetts hitting $120 per MWh in intra-day trading.

- There has been limited impact on refining so far, but the NYMEX ULSD futures contract rose to its highest since early October and settled at $2.35 per gallon on Monday thanks to rising demand for heating oil.

- The freezing cold has also reached Texas where the Permian’s Waha gas trading hub saw prices rise to a one-year high of $3.67 per mmBtu, having traded in negative territory as recently as November 2024.

Market Movers

- In a long-awaited move, Italy’s oil major ENI (BIT:ENI) said it would resume drilling at Egypt’s giant Zohr gas field this month as the Saipem 10000 drillship is set to arrive in Egypt within several weeks.

- US refining giant Phillips66 (NYSESX) announced it would acquire various midstream assets from pipeline operator EPIC NGL in an all-cash deal worth $2.2 billion, boosting its portfolio in natural gas liquids.

- One of the best-performing oil companies of 2024, Portugal’s Galp Energia (ELI:GALP) launched a probe into an alleged conflict of interest regarding CEO Filipe Silva, potentially leading to his dismissal.

Tuesday, January 07, 2025

Sanctions have become the main news in 2025 so far, with this week seeing a tightening of US sanctions against China as the Pentagon targeted state-backed oil and shipping firms. Rumors are circulating that the outgoing Biden administration will slap further sanctions on Russia and Iran, inadvertently lifting oil prices before Donald Trump takes office on January 20. For the time being, ICE Brent futures are hovering around $77 per barrel, with a potential spike above $80 per barrel becoming an increasingly likely outcome.

US Sanctions China’s Top Offshore Producer. The US Defense Department has sanctioned China’s offshore oil producer CNOOC (SHA:600938) and largest shipping firm Cosco over alleged links to the People’s Liberation Army, less than a month after the former sold its assets in the US Gulf of Mexico.

Exxon Strikes Back at California. US oil major ExxonMobil (NYSE:XOM) filed a lawsuit against California Attorney General Rob Bonta and several environmental groups for alleged defamation, claiming Bonta has been acting in concert with a law firm that has ties to billionaire Andrew Forrest.

Sudan Lifts Force Majeure on Oil Exports. Sudan has withdrawn a force majeure on transportation and exports of crude from Port Sudan, ending an almost year-long blockade of its own production as well as South Sudan’s output, repairing damages caused by the insurgent militia RSF.

Italy Calls for EU Gas Price Cap. Italy’s Energy Minister Gilberto Fratin suggested the European Union extend its emergency cap on gas prices and set an upper limit of €60 per MWh to limit speculative trading in TTF futures as Ukraine’s transit halt and cold weather keep gas prices around €47-48/MWh.

Germany’s Gas Withdrawals Speed Up. The speed of natural gas withdrawals in Germany doubled in the first week of January as the ongoing cold snap increased heating demand, with net withdrawals averaging 1.23 TWh per day compared to 0.56 TWh per day the week before.

US, Nippon Steel Sue the US Government. US Steel (NYSE:X) and its Japanese peer Nippon Steel filed a lawsuit in a federal appeals court against the Biden administration, claiming their blocked $15 billion merger was scuttled by the White House through a sham national security review.

India Seeks Investors for SPR Expansion. India has issued a tender to build and operate a strategic petroleum reserves site with a capacity of 2.5 million tonnes at Padur in the southern Karnataka state, boosting the South Asian country’s SPR reserves that currently only wield 5.3 million tonnes.

Canada’s Midstream Giant Wants More Pipelines. Canada’s leading pipeline firm Enbridge (TSE:ENB) signed a letter of intent with the Alberta government to boost pipeline capacity amidst rising oil sands output, potentially expanding the US-bound 3.1 million b/d Mainline system.

Namibia Eyes Chinese Nuclear Investment. Namibia is seeking investment from Beijing to build on its vast reserves on uranium and develop nuclear power in the African country, with China’s Foreign Minister Wang Yi visiting Windhoek this week, building on last year’s $3 billion desalination deal.

UK Becomes Europe’s Largest EV Market. The United Kingdom has become Europe’s largest market for electric vehicles as new EV registrations rose to 381,970 last year, up 21% year-over-year and 1,300 units more than in Germany, greatly boosted by its stringent EV sales mandate.

Deindustrialization Helps German Emissions Fall. According to climate analysts, Germany’s greenhouse gas emissions fell by 3% year-over-year to 656 million metric tonnes of CO2eq., undershooting Berlin’s own cap by more than 5% as industrial activity keeps on contracting.

China Churns Out Record Amounts of Cobalt. China’s cobalt giant CMOC (SHA:603993) posted all-time high production figures of the transition metal in 2024, mining 114,165 metric tonnes and doubling the 2023 total of 55,526 tonnes, overperforming its own production guidance by a hefty 63%.

Weak China Prompts Iron Ore Slump. Iron ore futures continued their decline to an almost two-month low as the May futures contract on China’s Dalian Exchange dropped to ¥751 per metric tonne ($102/mt), driven by the ongoing slowdown in Chinese smelting ahead of the Lunar New Year.

NVDA:

• The bull market's poster child, Nvidia ($NVDA), closed at an all-time high for the first time in two months today, rising +3.4%. It's nearly the largest in the S&P 500 again, closing slightly below $AAPL's market cap.
  
• $NVDA has surged +11.3% over the past three sessions, marking its best three-day rally since September. Today's breakout invalidates a three-month Head & Shoulders Top. It's often bullish when bearish patterns fail.
  
• If $NVDA rallies, the major averages (Dow, S&P 500, Nasdaq) will likely follow to all-time highs. However, this could turn into a nasty Bull Trap if $NVDA violates its post-election highs ($148) on a closing basis this week.

Lots of insider selling.







Market still choppy, trendless



Off to work.

jog on
duc

 

[ducati916]

Politics:

Yesterday's decision by the Federal Reserve's top bank regulator to step down from his job — but not from the Fed entirely — is simultaneously less and more than meets the eye.

Why it matters: Michael Barr's self-demotion clears the way for President-elect Trump to appoint a vice chair for supervision. It is no radical departure from past precedent: Fed governors have, in the past, stepped aside on the principle that a new president should get to appoint their own chief financial regulator.

Historically, the Fed's regulatory side pays greater deference to the wishes of the president and Congress, in contrast to monetary policy, in which political independence is fiercely guarded.

• Barr's move was intended to get ahead of Trump possibly demoting him, which would have created a disruptive legal battle.
• Indeed, Barr's decision to remain a Fed governor — which limits Trump's options in appointing a new vice chair for supervision — is in some ways more of a break with precedent.

Flashback: Randall Kroszner, a President George W. Bush-appointed Fed governor who focused on bank supervision, stepped aside in January 2009, making way for Dan Tarullo, President Obama's appointee to the comparable role.

• In January 2017, Tarullo resigned, allowing Trump to eventually appoint Randal Quarles to the equivalent job.
• Quarles hung around through the first 11 months of the Biden administration then resigned from the Fed in December 2021, opening up the slot now occupied by Barr.

Between the lines: The common thread is that these top bank supervision officials view their role as more explicitly carrying out the regulatory agenda of the president who appointed them — and that a new president is entitled, in reasonable time, to their own choices.

• In monetary policy, there's a deep institutional tradition of Fed governors seeking to adjust interest rate policy in the best interest of the economy, regardless of who is in the Oval Office.
• With Barr remaining at the Fed as a governor, Trump will either have to wait until there is a vacant governor slot to choose a chief regulator or elevate a current governor, likely Michelle Bowman, whom he first appointed in 2018.

Yes, but: One difference now, compared to the Kroszner and Tarullo cases, is that neither held the title of vice chair of supervision, which was only created as part of the Dodd-Frank Act.

• Barr's term in that role wasn't scheduled to expire until July 2026.

What they're saying: "It is unfortunate in terms of Fed independence that Barr has stepped down before the end of his term as vice-chair in July 2026 at a time when he was subject to external pressure," wrote Krishna Guha and Marco Casiraghi of Evercore ISI in a note.

• "But we thought it would be unfeasible for him to remain in [that] seat for a year and a half," they add.
• "The problem lies in the way the term of vice-chair for supervision became badly misaligned with the election cycle when the Fed accepts the administration sets the direction on regulation, as opposed to rates."

US 10yr

• The US 10-Year Treasury Yield ($TNX) closed at an eight-month high today, reaching a potential inflection point of around 4.7%.
  
  
• After peaking at 5.0% in Oct. 2023, 4.7% has acted as resistance several times. The 10-year yield could revisit 5.0% if it clears this well-defined resistance level.
  
  
• A breakout would likely pressure risk assets, while another rejection would likely be positive for risk assets.

The Takeaway: The 10-year Treasury Yield is testing a potential inflection point at 4.7%. Clearing this hurdle would likely put pressure on risk assets, while another rejection would likely be bullish.










At what level of inflation?
All stocks?

Those stocks that provide inelastic goods, services, sure they are good inflation hedges. Highly elastic ones, not so good.

JC on stocks:

Here's one thing we know for a fact about the market:

In order to have a bear market, or a correction of any kind, you need the prices of stocks to be falling.

Fact.

Without the prices of stocks falling, you cannot possibly have a bear market, or any kind of correction at all.

That's just how math works.

So if one would take the time to count how many stocks are actually going down in price, one would have a better understanding as to whether or not stocks are correcting.

See how that works?

And while the list of new 52-week lows is still nonexistent, that doesn't mean stock prices aren't falling. So we want to look at shorter-term time horizons to see if we're seeing an increase in the number of stocks falling in price.

Currently, we are not seeing any expansion at all in the number of stocks whose prices are falling. Here are Large-caps, Mid-caps and Small-caps all within the same range of new lows that they've been in throughout this bull market:


We'll know if we're in a correction. You'll be able to just count and see for yourself.

And you'll see the list of new 1-month lows expanding, new 3-month lows, and then new 6-month lows, before you ultimately see those big surges in new 12-month lows.

It's a process, not a single event.

You'll see breadth deterioration, and then well after the fact, they'll announce that stocks are in what gossip columnists call, "Correction Territory". The worst offenders wait even longer and then proclaim that stocks are in "Bear Market Territory".

These are all made up fairytales about arbitrary numbers without any statistical significance whatsoever. It just gives the gossip columnists something to gossip about.

Whether an index is down 10% or 20% or 9% or 20.5% doesn't matter. It's what the components underneath the surface are doing. We know. We've actually taken the time to look. I would encourage you to do the same.

Also, individual stocks don't go into "Bear Markets". You see, corrections and bear markets are a function of the overall environment. But they don't teach them those sorts of things in gossip column writing school, because, well, why would they?

Let's remember. We're investors. We're traders. They are not. We don't have to make things up. They do (or think they do). We can just focus on the math itself. They have to tell stories for a living.

You see the difference?



Stocks are close to the most overvalued against corporate credit and Treasuries in about two decades. The earnings yield on S&P 500 shares, the inverse of the price-earnings ratio, is at its lowest level compared with Treasury yields since 2002, signaling that equities are at their most expensive relative to fixed income in decades.

For company debt, the S&P 500’s earnings yield, at 3.7%, is close to the lowest relative to the 5.6% yield of BBB rated dollar corporate bonds since 2008.

The equity profit yield is usually above the BBB figure, because stocks are riskier. Since the turn of the century, when the gap between the two figures has been negative, as it is now, it tends to spell trouble for the stock market. Over that period, such a negative read has only ever occurred when the economy was experiencing a bubble or soaring credit risk, Bloomberg’s Ven Ram wrote last month.

“When you look at BBB yields, and any of the other benchmark ones — the 10-year, the 2-year — there’s a very significant gap between them and equity profit yields,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “Historically that’s often preceded a pretty significant drawdown.”


A correction isn’t necessarily coming in the near term: the spread between the S&P’s profit yield and BBBs has been negative for about two years, and the difference can persist for long periods of time.

But the current relationship between earnings and bond yields is yet another worrying sign of just how expensive shares are, and how fragile the post-US election rally in the stock market really is. Morgan Stanley strategists including Michael Wilson cautioned on Monday that higher yields and a strong dollar could weigh on equity valuations and corporate profits, hitting equities.

Investors got a sense of the risk when the Federal Reserve said on Dec. 18 that it was planning to cut rates at a slower pace than previously expected. Fears that the Fed was keeping rates higher for longer than the market previously expected helped push US stocks down nearly 3% that day, their worst Fed day since 2001, although shares have since clawed back much of that loss.

Even with a potential correction brewing at some point, investors are content to take the risk for now, said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors – whether that’s pouring into equities at sky-high prices or putting money into crypto. Equities are trading at about 27 times their earnings for the last 12 months, compared with an average of about 18.7 times for the last two decades.




Article on crypto full:https://www.theatlantic.com/ideas/a...opy-link&utm_medium=social&utm_campaign=share

Supposedly. In the spring of 2022, the widely used stablecoin TerraUSD collapsed, its price falling to just 23 cents. The company had been using an algorithm to keep TerraUSD’s price moored; all it took was enough people pulling their money out for the stablecoin to break the buck. Tether, the world’s most-traded crypto asset, claims to be fully backed by safe deposits. The U.S. government found that it was not, as of 2021; moreover, the Treasury Department is contemplating sanctioning the company behind tether for its role as a cash funnel for the “North Korean nuclear-weapons program, Mexican drug cartels, Russian arms companies, Middle Eastern terrorist groups and Chinese manufacturers of chemicals used to make fentanyl,” The Wall Street Journal has reported. (“To suggest that Tether is somehow involved in aiding criminal actors or sidestepping sanctions is outrageous,” the company responded.)

Were tether or another big stablecoin to falter, financial chaos could instantly spread beyond the crypto markets. Worried investors would dump the stablecoin, instigating “a self-fulfilling panic run,” in the words of three academics who modeled this eventuality. The stablecoin issuer would dump Treasury bills and other safe assets to provide redemptions; the falling price of safe assets would affect thousands of non-crypto firms. The economists put the risk of a run on tether at 2.5 percent as of late 2021—not so stable!

Already, Wall Street is talking up “tokenization,” meaning putting assets on a programmable digital ledger. The putative justification is capital efficiency: Tokenization could make it easier to move money around. Another justification is regulatory arbitrage: Investments on a blockchain would move out of the SEC’s purview, and likely be subject to fewer disclosure, reporting, accounting, tax, consumer-protection, anti-money-laundering, and capital requirements. Risk would build up in the system; the government would have fewer ways to rein firms in.

We have seen this movie before, not long ago. In 2000, shortly before leaving office, Bill Clinton signed the Commodity Futures Modernization Act. The law put strictures on derivatives traded on an exchange, but left over-the-counter derivatives unregulated. So Wall Street ginned up trillions of dollars of financial products, many backed by the income streams from home loans, and traded them over the counter. It packaged subprime loans with prime loans, obscuring a given financial instrument’s real risk. Then consumers strained under rising interest rates, crummy wage growth, and climbing unemployment. The mortgage-default rate went up. Home prices fell, first in the Sun Belt and then nationwide. Investors panicked. Nobody even knew what was in all of those credit-default swaps and mortgage-backed securities. Nobody was sure what anything was worth. Uncertainty, opacity, leverage, and mispricing spurred the global financial crisis that caused the Great Recession.

And the next iteration:

Meme coins with a chat bot attached — AI agent coins — have been blowing up, at least among the most risk-hungry crypto traders.
Why it matters: On the surface, it's all very silly, but it's a real (ish)-world experiment with giving AI agents actual responsibilities.
How it works: With an AI large language model, a digital coin can be attached to a character or a mood, and it can seem to be alive, responding to its fans on social media or in Telegram chats — in character.

• This enables an idea to grow. Even if the idea is just: The emoji is funny.

In a way, all cryptocurrencies are memes (just like all currencies), but AI agents aren't for every coin.

• Asking bitcoin what flavor of ice cream it might like seems a bit ridiculous. But asking pepecoin? You could have that conversation, because pepecoin has a vibe.

And meme coins that had vibes were the hotness last year. While outsiders caught vapors over the silliness masked as "investing," insiders saw it differently: of course it was silly — it was a game.

• It was a massive multiplayer game of Apples to Apples (only everyone is a player and everyone is also a judge, and there are no turns, but there is money on the line.)

The inflection point for AI coins came when large language model's, or LLMs, allowed a token or coin to interact with fans. A bespoke LLM created around a particular character or vibe could keep being inventive about its core idea, keep pumping out content and interacting with its community in real time.

• And that's the heart of any meme coin: If an idea takes up more mind share, then it becomes more valuable.

State of play: AI agent coins represent a small subset of the market, with just a $16.6 billion collective market cap, according to CoinGecko.

• A few driving the hype include goatseus maximus (GOAT), aixbt (AIXBT) and ai16z (AI16Z).

What they're saying: "They are the thing because there is nothing else to do," Matti of Zee Prime Capital, an investor who specializes in investing based on what people are talking about, tells Axios.

• "But it does open a new design space and people tinker."

• (Matti described the larger meme game in detail back in ancient times: 2020.)

Our thought bubble: Go search around for news on AI meme coins and the like, and you'll be barraged by coverage of what's up and what's down.

• All of that is nonsense unless you're a degen trader who measures profits in hours. Scroll past it.
• Price charts in crypto are only really informative on the scale of years if you want to assess the value of a given concept, unless you're gambling to make money today.

The big picture: Crypto traders are always trading a "meta" or "narrative." These things are often years out from their true usefulness. AI agents are the meta of the moment.

• Decentralized finance (DeFi) was the top meta of 2020. NFTs were the meta leader of 2021. Last year, it was meme coins.
• Yet we're still at the point where, globally, bitcoin and stablecoins remain the only blockchain products with stable product-market fit.

What's next: Some AI agents are actually going a step further than chatting already and making crypto trades. It's too early to say how it's going and so far valuations have exploded wildly beyond performance (surprise, surprise).

• Yes, but: "They could evolve into something truly valuable, something unexpected," Matti says.

META:https://www.theverge.com/2025/1/7/24338062/facebook-instagram-threads-meta-abandon-fact-checking


Passive Investing full:https://www.institutionalinvestor.c...s-known-as-the-cassandra-of-passive-investing

“It’s not like I was born from the brow of Zeus preaching about passive. I had no reason to really suspect this,” Green insists. But he saw other sophisticated investors, like Stanley Druckenmiller, noting that “the markets started acting weird. They just weren’t conforming to the behavioral set that I had experienced post-1999, which was largely around people doing fundamental analysis and really digging in and trying to understand companies. All that behavior started to change pretty significantly between 2012 and 2016. Things were just very, very different,” Green says. What happened was that value investing — selling stocks that are overvalued by traditional metrics and buying those that are cheap — was losing money.

And because passive strategies buy in proportion to the market capitalization of the companies in the indices, they “buy more of stuff that went up since I bought last. And so that reinforces the momentum characteristics of the market,” Green explains. As passive becomes a bigger proportion of the stock market, it leads to increased concentration and correlation.

More draconian is Green’s argument that the markets are headed off a demographic cliff because younger people are bigger passive investors than their elders. Only 25 percent of investors over 70 are in passive strategies, whereas 95 percent of those under 40 are invested in passive vehicles, including target-date funds, which have become the default for many workers, he says.

“Every single day people are employed, they’re making their contributions to their 401(k)s,” Green explains. But, he cautions, “if people lose their jobs and stop contributing to their 401(k)s, the passive flows would decrease.”

Adds McMurtrie, “It’s not at all clear who would buy the shares because you purged all the people that would normally step in and buy.” That potential problem is exacerbated by the fact that, unlike traditional active managers who typically have at least 5 percent of their assets in cash to buy stocks if markets tumble, passive buyers are required to invest all their assets and don’t have spare cash in case of an emergency.

The rise of passive is also cited as a reason that value investors have been sidelined, creating what Einhorn and others call a broken market. As Einhorn said at a recent conference, “We are such marginal players in terms of the amount of trading that’s going on, so the price discovery from professional people who have a valuation framework, not as the dominant part of their process but as any part of their process, is much, much smaller than it used to be. And so effectively, instead of the valuation becoming the signal, the valuation people were just noise and everybody else is sort of the signal. And this is why I think we have a structurally dysfunctional market, a bit of a broken market.”

Companies are also learning how to play the game. For example, Thiel-backed Palantir went public through a 2020 direct listing, which gave it fast-track status to be included in the S&P 500 Index in September. Now 22 percent of its stock is owned by the big three indexers: BlackRock, Vanguard, and State Street. The software maker recently moved its listing to the Nasdaq from the New York Stock Exchange, which included it in an index popular with momentum investors: the Nasdaq 100.

jog on
duc

 

[ducati916]

Calamos Investments is targeting two of the most popular ETF themes with a new fund that offers 100% downside protection on bitcoin investing.

Slated to launch later this month, the Calamos Bitcoin Structured Alt Protection ETF (CBOJ) builds on the Chicago area firm's suite of exchange-traded funds that offer 100% downside protection on the S&P 500 Index, the Russell 2000 Index, and the Nasdaq Composite Index.

Those buffered strategies have taken in more than $500 million since launching last May.

Anticipating a strong appetite for buffered bitcoin exposure among financial advisors, Calamos has also filed for ETFs offering varying levels of downside protection of bitcoin.

“What we’re seeing is massive adoption of bitcoin, but a lot of folks have watched from the sidelines,” said Matt Kaufman, head of ETFs at Calamos.

Downside Protection for Upside Performance Cap​

“People have seen the potential of bitcoin, but a lot of them are worried about the risk,” he added. “This strategy is allowing people a chance to participate and preserve their wealth at the same time.”

Like all buffered strategies, the downside protection, which is gross of a 0.68% expense ratio, is provided in exchange for a cap on upside performance.

The specific cap, which is based on options pricing, will be announced closer to the Jan. 22 launch of the ETF, but Kaufman said the cap over the 12-month outcome period will be in the 10% range.

Kaufman envisions CBOJ will be used by financial advisors to help clients tiptoe into the crypto investing space.

He suggested blending the 100% downside protection with a spot bitcoin ETF to increase the upside potential while protecting a portion of the downside.

Stuart Chaussee, who runs the Beverly Hills, California-based financial advisory firm Stuart Chaussee & Associates, described the new Calamos strategy as a “fascinating offering that may encourage advisors and investors who have avoided the crypto space to reconsider it.”
“The key consideration will be what the upside cap looks like on the launch date and whether it competes well with upside caps in other risk assets, most notably stocks,” he added. “Still, for investors and advisors looking to diversify a portfolio into the crypto space, this a very conservative and compelling way to do so.”

According to filings with the Securities and Exchange Commission, Calamos plans to tweak the downside protection with buffer strategies that limit the bitcoin losses over 12 months to 10% and 20%.

“We saw massive adoption of spot bitcoin ETFs, and I think there’s a lot of money on the sidelines looking to access bitcoin but in a more risk-adjusted way,” Kaufman said.
Jeff Benjamin





jog on
duc

 

[qldfrog]

Calamos Investments is targeting two of the most popular ETF themes with a new fund that offers 100% downside protection on bitcoin investing.

Slated to launch later this month, the Calamos Bitcoin Structured Alt Protection ETF (CBOJ) builds on the Chicago area firm's suite of exchange-traded funds that offer 100% downside protection on the S&P 500 Index, the Russell 2000 Index, and the Nasdaq Composite Index.

Those buffered strategies have taken in more than $500 million since launching last May.

Anticipating a strong appetite for buffered bitcoin exposure among financial advisors, Calamos has also filed for ETFs offering varying levels of downside protection of bitcoin.

“What we’re seeing is massive adoption of bitcoin, but a lot of folks have watched from the sidelines,” said Matt Kaufman, head of ETFs at Calamos.

Downside Protection for Upside Performance Cap​

“People have seen the potential of bitcoin, but a lot of them are worried about the risk,” he added. “This strategy is allowing people a chance to participate and preserve their wealth at the same time.”

Like all buffered strategies, the downside protection, which is gross of a 0.68% expense ratio, is provided in exchange for a cap on upside performance.

The specific cap, which is based on options pricing, will be announced closer to the Jan. 22 launch of the ETF, but Kaufman said the cap over the 12-month outcome period will be in the 10% range.

Kaufman envisions CBOJ will be used by financial advisors to help clients tiptoe into the crypto investing space.

He suggested blending the 100% downside protection with a spot bitcoin ETF to increase the upside potential while protecting a portion of the downside.

Stuart Chaussee, who runs the Beverly Hills, California-based financial advisory firm Stuart Chaussee & Associates, described the new Calamos strategy as a “fascinating offering that may encourage advisors and investors who have avoided the crypto space to reconsider it.”
“The key consideration will be what the upside cap looks like on the launch date and whether it competes well with upside caps in other risk assets, most notably stocks,” he added. “Still, for investors and advisors looking to diversify a portfolio into the crypto space, this a very conservative and compelling way to do so.”

According to filings with the Securities and Exchange Commission, Calamos plans to tweak the downside protection with buffer strategies that limit the bitcoin losses over 12 months to 10% and 20%.

“We saw massive adoption of spot bitcoin ETFs, and I think there’s a lot of money on the sidelines looking to access bitcoin but in a more risk-adjusted way,” Kaufman said.
Jeff Benjamin


View attachment 190751


jog on
duc

This could boost btc, but increase the option market on these.
Next for a small owner, can i sell option on my btc..lease...

 

[ducati916]

• The S&P 500 ($SPY) closed slightly higher today (+0.16%) after successfully testing its post-election gap earlier in the session.
  
• This level also represents the neckline of a potential Head & Shoulders Top. However, buyers have defended this level several times since the election.
  
• Momentum has remained strong during this two-month consolidation, with RSI refusing to reach oversold territory (below 30) while printing higher lows recently.
  

The Takeaway: The S&P 500 ($SPY) successfully tested its post-election gap today. Tension is growing at this key battleground, as are the implications of a break or bounce.

US Rates:

1 big thing: The bond market's warning

Data: Federal Reserve; Chart: Axios Visuals The multitrillion-dollar bond market is sending a message to President-elect Trump and the new Congress: There is no fiscal free lunch to be had. Why it matters: A surge in longer-term borrowing costs over the last couple of months may reflect deepening concern about high fiscal deficits among global investors who buy U.S. government debt. Regardless of the cause, it implies that as Republicans seek to extend Trump's tax cuts beyond this year, markets will pressure them to find spending cuts or other deficit-reducing offsets. Driving the news: The yield on 10-year U.S. Treasury notes reached 4.71% this morning, up from 3.62% in mid-September. Bloomberg cites evidence from futures markets that traders are positioning themselves for protection if rates were to rise further, to north of 5%. The intrigue: This upward shift in longer-term rates has come despite a full percentage point of Fed interest rate cuts since September — with most Fed officials expecting a couple more rate cuts this year. It is a reminder that while the Fed controls short-term interest rates, longer-term rates are set in the bond market based on the outlook for inflation, growth, deficits and more. The details of why long-term rates are on the rise are important. This surge in rates has mostly not been driven by a changing inflation outlook, at least based on the relative prices of inflation-protected bonds. What appears to be happening is a rise in the "term premium," the compensation investors demand for the risk of buying longer-term debt. State of play: It is impossible to know for sure why the term premium moves as it does, and technical factors around supply and demand for bonds are likely in play. But investor wariness of looming deficits is a textbook reason. Asked about the rise in yields at an event in Paris this morning, Fed governor Christopher Waller noted "more and more attention, concern about fiscal deficits." Waller also affirmed that he expects further Fed rate cuts to be justified this year, and said he doesn't expect tariffs to have a "significant or persistent effect on inflation." What they're saying: "The market is telling us something, and it is very important for investors to have a view on why long rates are going up when the Fed is cutting," writes Apollo's Torsten Slok, noting it is a "highly unusual" situation. Between the lines: Regardless of exactly why yields have surged, the fact that they have points to a very different macroeconomic environment than the nation faced eight years ago, when Republicans passed sweeping tax cuts in the first Trump term. In January 2017, the 10-year yield was a mere 2.4%. Borrowing costs are now meaningfully higher than forecast in the Congressional Budget Office's most recent projections. CBO's June budget forecasts assumed the 10-year yield would be 4.1% in 2025 and lower thereafter. The bottom line: With rates higher, any given deficit-expanding policy will come at a higher cost — in terms of interest expense and higher rates — than it did when Trump was last in the Oval Office.

Soros' Imperial Circle no longer works with (-70%) NIIP.



Foreign capital can flow in and it can flow out again.



SPX




jog on
duc

 

[ducati916]

With Jimmy Carter's state funeral today, markets are closed.

Politics:

But while we think the policy environment will be favorable, it is also not without risks. In fact, much of the risk is just from the opportunities failing to materialize. Keeping that in mind, here’s our survey some of the key policy risks markets may face in the year ahead.

Risk 1: The Federal Reserve Keeps Policy Too Tight​

The first risk is not related to the Trump administration or Congress at all, but rather the possibility that the Federal Reserve keeps monetary policy too tight. The Fed is currently in a rate cutting regime, but expectations of the pace of rate cuts have slowed quite a bit. Shifting expectations is mostly due to improved growth expectations, which is a positive, but also a significant rise in inflation expectations, which we think is misplaced. (Sonu covered this at length in his analysis of the Federal Reserve’s recent decision, “The Fed Pulls a Grinch.”) The Fed’s perception of both inflation uncertainty and the direction of risks changed substantially from their survey of FOMC participants in September, as shown below, and that has led to greater caution around rate cuts.





Remember, a fed funds rate target of just 2.25 – 2.50% nearly broke the economy in 2018 – 2019, something President Trump correctly pointed out at the time, and low rates, even after some tightening, were still a major tailwind. Well, right now the target fed funds rate target is 4.25 – 4.50%, two full percentage point higher. The economy has been incredibly resilient despite high rates, but cyclical sectors, including housing, small businesses, and manufacturing, have been under pressure and the labor market, while still strong, has exhibited some underlying risk, although it remains quite stable for now. Productivity growth, which is supported by a tight labor market and has been an important contributor to recent growth, may also be damaged by policy that is too tight if it leads to a rise in layoffs.

We think the current expected slower path of rate cuts is very unlikely to push the economy into a recession on its own, but it will make the economy more sensitive to other shocks. A slower path of cuts also means the incoming Trump administration will need to be more careful about policies that would raise concerns about inflation.

Risk 2: Tariffs Push Inflation Higher​

There has been a lot of speculation about tariff policy but we expect the Trump administration will have some sensitivity to the potential impact on inflation and will keep tariffs at least somewhat targeted. A strong dollar, partly in anticipation of tariffs but also due to growth rate differentials between the US and other developed economies, can also acts as an inflation buffer. For now, we think the concerns about tariffs and their impact on inflation are being overplayed. Nevertheless, even expectations of higher inflation can actually cause inflation and the Trump administration will have to be careful about how it communicates policy. As a result, credible saber rattling to strengthen the US negotiating position on tariffs could be damaging even if followed by more sensible actual policy. At this point, inflation expectations remain well anchored, but it’s a delicate balancing act. While we are suspending judgment on tariffs until we see what actually gets implemented and tilt moderately optimistic on the actual inflation impact, the potential for a policy mistake is there.

The S&P 500 fell over 6% in 2018 as the Fed tightened policy, and the trade war was raging. We’re still optimistic about markets in 2025, but the path of interest rates and uncertainty around tariffs are risks, and they are not the only ones.

Risk 3: Internal Division within the Republican Party Delays or Limits Policy Implementation​

This is a policy risk that has a positive side. We noted during the election that markets tend to like mixed government. The spirit of compromise tends to get us better policy and helps avoid the ideological excesses of both parties. But we won’t have mixed government in 2025. When the new Congress is sworn in today, Republicans will hold narrow majorities in both the House and Senate. As of inauguration day on January 20, we’ll also have a Republican president in the Oval Office.

The majorities will be narrow. Republicans will hold a 53-47 majority in the Senate, as well as the tie-breaking vote by the vice president after January 20. Republicans would have held a 220-215 majority in the House, but Florida Republican Matt Gaetz resigned (he’ll have to do it again for the new Congress) and two Republican House members will take positions in the Trump administration. That will make the Republican majority 219-215 until the members assuming new roles resign and then 217-215 until special elections can be held. (Unlike the Senate, replacements in the House can’t be appointed, only elected.) There is no tie breaker in the House, so at that point Republicans will not be able to lose even a single vote in the House when a vote is along party lines.

We did not get divided government, but there are ways in which narrow majorities keep at least some of the spirit of divided government. Republicans will need their own moderates AND their most hardline conservatives to vote yes to pass policy. There could be a cushion if Freedom Caucus members hold up a bill. Some Democrats could potentially be pulled on board to support a bill if they believe it is in their interest, but would require some compromise.

We saw this in action with the current House’s recent efforts to fund the government. Republicans needed some Democrats to support the bill. Trump intervened using the bully pulpit as president-elect to object to the initial bipartisan continuing resolution (CR). But 38 Republicans rejected Trump’s alternative. A somewhat stripped down version of the original CR was finally passed with more Democratic votes than Republican. Trump’s interventions did lead to some changes, but the overall effect was small. From the perspective of the current House, a narrow majority led to compromise, although things will be somewhat different once Republicans control the Senate and Trump has been inaugurated.

Narrow majorities keep more checks and balances in place, but they also increase the possibility of legislative chaos and will make it more difficult to pass any bill that doesn’t have broad consensus among Republicans. Significant delays that disappoint policy expectations could lead markets to become impatient with congressional infighting. Keep in mind that Congress will have to deal with raising the debt ceiling and government funding in Q1 2025, let alone avoid the fiscal cliff associated with expiring individual tax cuts at the end of 2025.

Risk 4: Deregulation Clashes with the Supreme Court’s Chevron Reversal​

One issue receiving relatively little attention is the Supreme Court’s decision in July 2024 to overturn Chevron v. Natural Resources Defense Council. The Chevron decision gave agencies more scope to interpret the laws under which the operate. The decision to overturn Chevron was an extraordinary flip-flop in conservative jurisprudence. In 1984 the Reagan administration was an advocate of Chevron because it made deregulation easier. The Supreme Court decision in Chevron was unanimous, representing a consensus between liberal and conservative justices on how the Constitution should be interpreted. Over time, conservatives became critics of Chevron because they believed it had the unintended consequences of giving the agencies too much leeway. Undesirable political outcomes should not change the Constitution, but even among conservatives fashions change.

Overturning Chevron was great (from a Republican perspective) when Democrats are in power, but it also makes deregulation more difficult, which is why the original Chevron case went to the Supreme Court in the first place. When it comes to deregulation efforts, Republicans may have hoisted themselves on their own Chevron petard. With the decision newly minted, some efforts to lighten regulatory requirements are likely to be met with waves of litigation that may take years to work their way through the court system. We are worse off than the Reagan administration was before the Chevron ruling, because courts will be drawn into the messy process of delineating exactly what the new ruling means. We don’t think there are major risks here, but it may make deregulation under the new Trump administration less robust than markets expect in places.

Risk 5: Immigration Policy Stunts Economic Growth​

In my view, this is the most underrated risk but still secondary to tariffs and monetary policy when it comes to the absolute level of risk. Clearly there are some genuine problems with current immigration policy. But the extent to which the resilience of the US economy depends on its ability to attract and absorb global labor is often underestimated. In fact, I would say the two key factors that have led to the structural advantage the US has over other developed economies is a more business-friendly overall policy environment, including labor market flexibility, and its history of acting as a destination of choice for immigrants.

It’s hard to determine the level at which tighter immigration policy becomes a genuine risk, and before it becomes a risk there certainly may be areas where reforms would provide benefits. The aim here is not to determine what the right immigration policy should be, but just to highlight that at some point tight policy can become a significant risk.

Here are just a few of the reasons why I believe immigration policy could pose a risk from an economic perspective:

-If the current level of flow of earners falls due to immigration policy and the chilling effect on new immigration, there’s a direct impact on GDP. A dollar of income lost is a dollar of GDP lost. Policy that leads working immigrants to leave the US, or choose not to come in the first place, is the economic equivalent of exporting U.S. GDP growth to the rest of the world.

-There is a steep implicit regulatory burden on business from tight immigration policy, both by restricting their access to workers and making the cost of labor higher.

-A more restricted labor pool also has the potential to drive wages higher, posing some additional risk for inflation. This effect may be stronger with the prime age participation rate already near a record high. I think this risk is fairly small, but not non-existent.

-Demographics are destiny. Immigration has been the US’s best defense against the challenges of an aging population. According to United Nations data, the old-age to working-age dependency ration in the US in 2022 was 29.4 (29.4 people aged 65 or older for every person aged 20-64). This ratio is important because current workers pay for the Social Security and Medicare benefits of current retirees. For comparison, the dependency ratio in 2022 was 38.0 in Germany and 55.4 in Japan. For the US, that number was 14.9 in 1952. In 2052 it’s expected to be 49.1 The US fertility rate in 2022 was 1.8, a level at which immigration becomes a larger factor in changes in the dependency ratio.

-There are certain areas of the economy that are hit particularly hard by tighter immigration policy. Since the election, housing stocks have fallen considerably despite overall strength in the consumer discretionary sector. This is largely due to higher rates but expected immigration policy is likely also a factor. At the same time, prices of agricultural commodities have been rising, again with multiple factors in play.

Immigration reform is a positive goal, but also comes with some risks. How high those risks are depends on actual policy. It would take a fairly large mistake to have enough of an impact on the economy to weigh on markets, but the potential for a large mistake is non-trivial.

Risk 6: Unpredictability Restrains Animal Spirits​

Unpredictability is part of Trump’s MO and he is capable of deploying it very effectively. But while unpredictability can be powerful when negotiating, it can create a difficult environment for businesses. Companies put a lot of capital at risk based on expectations of future profits, and generally want policy clarity. (Of course, if the risk is a better policy environment, the risk associated with uncertainty is lower.) Businesses do not want a president who interferes with capital markets in a fit of pique. An uncertain policy environment can make it harder to do business, although sometimes it does also present opportunities. I would only view this is a small risk. Every policy environment has its element of unpredictability. But with the last Trump administration, for example, we did see tariff policy uncertainty weighed heavily on business investment in 2018-2019 and put a dent in the expected supply-side impact of the Tax Cuts and Jobs Act.

Risk 7: Fed Independence​

I would consider this a very small risk, but with the consequences of a misstep potentially large. Trump will try to put pressure on the Federal Reserve to lower rates as soon as he takes office. That in and of itself isn’t a problem. There are mechanisms that help maintain Fed independence. But if there is an effort to overstep or to appoint a loyal and partisan Fed chair when Jerome Powell (himself a Trump appointee) steps down in May 2026, markets will respond. This one is unlikely to be a slow burn. If Trump oversteps, I would expect the market response to be unmistakable. If Trump floats test balloons that cause market jitters but can easily be stepped back, it’s not an issue. But a genuine threat to Fed independence that cannot be walked back could be a problem.

There you have it, seven policy risks that we’ll be watching for in 2025, with tariff unpredictability and the Fed’s rate decisions the most meaningful, but a few others to keep an eye on as well. Our view remains squarely in the camp that policy remains a tailwind, but Donald Trump was elected to be a disruptor, and while disruption can be valuable, it also can often come with unintended consequences.

The UK

Gilts Near Fearful Truss Moments​

The global bond selloff is unnerving for many reasons, but perhaps most because of the burden rising yields place on governments’ fiscal operations. The pain inflicted by rapidly rising borrowing costs is hardest to mask for countries like the UK with razor-thin spending buffers. And so it really hurts that long-dated gilt yields spiked to the highest levels since the late 2000s — or, in the case of the 30-year gilt, since 1998.

Capital Economics estimates that the recent move has added almost £9 billion ($11 billion) to the UKs borrowing costs — and that will virtually wipe out Chancellor Rachel Reeves’ spending buffer of £9.9 billion. Plugging that gap will require tax hikes, spending cuts, or both. The scale of fiscal consolidation required will depend on how far the bond market's rout goes. The combination of rising gilt yields relative to Treasuries with a weakening pound is concerning. Still, the comparison with Liz Truss’ self-inflicted 2022 gilt crisis is overblown:


Truss’ ill-fated tax-cutting budget pushed the 10-year gilt spread over Treasuries to its highest in over a decade. To date, this mess is far less extreme, but needs urgent sorting. The UK’s current and capital account deficit leave it vulnerable to foreign investors who might demand higher yields and a cheaper pound before they’re prepared to buy gilts. The country is “dependent on foreigners,” as one investment banker put it. The surge in the 30-year gilt back at levels not seen since before the financial crisis caused by the little-remembered Russian default of 1998 shows that the situation is serious:


While Truss-style deficit spending may not be revisited, Reeves has an uncomfortable decision. Ahead of the UK’s Office of Budget Responsibility forecast in March, Nico FitzRoy and David Pagliaro of Signum Global Advisors argue that the government could declare a breach of its own fiscal rules if the buffer evaporates further:

In our view, further tax hikes remain unlikely in 1H this year, despite much commentary to the contrary, with spending controls instead more probable... The sizable tax hikes enacted in the recent budget are at least partly responsible for the recent worsening of business sentiment — the government will likely fear triggering a recession through another round of tax hikes so soon.

None of this is at all welcome for a new government that has had a rocky start. On the other side of the Atlantic, the rise in Treasury yields is as painful, but far from tragic. The 10-year benchmark yield is on a four-day rising streak — gliding past 4.7%, its most since April. Inescapable reasons for this surge include a change in fundamentals and the strong dollar. Joseph Lavorgna of SMBC Nikko Securities (and an adviser to Donald Trump in his first presidential term) attributes the currency’s strength to the strong inflows to US financial markets generated by equity performance and expectations that Trump’s pro-growth agenda can raise productivity.

In trade-weighted terms, the greenback benefited from the US election and the recent repricing of the Fed’s likely trajectory to gain 6.4% in the last quarter, according to Bank of America. With such dominance, there is speculation about whether a version of the 1985 Plaza Accord that devalued the dollar against its peers would be needed. Using the Fed’s own measure, the dollar looks far less overextended now:


Bannockburn Global FX's Marc Chandler argues that all else equal, the Fed’s relative hawkishness in their December meeting will keep the world’s reserve currency strong. While Trump’s tariff agenda poses an inflation risk, Chandler argues that it will ultimately hurt far more in other countries, such as Canada and Mexico, which export 80% or more of their products to the US. That would mean a stronger dollar.

The currency’s strength could wane as and when we have clarity on Trump’s trade policy, according to Bank of America’s analysts. They expect the dollar to stay strong in the short term thanks to worries about inflation and particularly tariffs, but to weaken later in the year as these policies take a toll on the US economy the rest of the world responds. That would relieve pressure on the rest of the world, but is unlikely to come in time to relieve Rachel Reeves from some difficult decisions.

Animal Spirits

Of Irrational Exuberance and Animal Spirits​

When all else fails, and you cannot explain why markets are so high, John Maynard Keynes and Alan Greenspan have some concepts to help. You can blame “animal spirits” (Keynes) or “irrational exuberance (Greenspan). The question is whether they really explain anything.

Greenspan gave us the concept of irrational exuberance in December 1996. Bill Clinton had just been reelected and stocks were motoring along. In a speech, Greenspan asked this question:

How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…? And how do we factor that assessment into monetary policy?

Markets took him to mean that he thought asset prices too high and was intending to do something about it. Stocks fell. Three months later, he followed up with a 25 basis-point hike, driving a correction in the S&P 500 of nearly 10%. But rates didn’t move again for 18 months.

Greenspan tells Congress what he means in 1999. Photographer: Linda Spillers/Bloomberg
To explain why he was worried, we can use another Greenspan concept, the Fed Model. Testifying to Congress, he often compared the earnings yield (inverse of price/earnings) for stocks with bond yields. The higher equity yields reached compared to bonds, the cheaper stocks were. And vice versa. High bond yields made stretched equity valuations harder to justify.

We can illustrate this with the spread of the S&P earnings yield over the 10-year Treasury. When it drops, or falls below zero, stocks are expensive. This simple model (there are more sophisticated versions, but this captures Greenspan’s concept) showed that stocks were way too expensive:


For current purposes, this measure now says that stocks are their most expensive since 2002 — and coincidentally at exactly the level on Dec. 5, 1996, that prompted Greenspan to sound his warning. So concerns about irrational exuberance seem justified. There is also something of a morality tale in what happened in the autumn of 1998. Following the Russian default and the meltdown of the Long-Term Capital Management hedge fund, the spread went positive again — stocks yielded slightly more than bonds. But the corporate credit market was becalmed, and Greenspan decided to cut the fed funds rate between meetings, launching the most extreme phase of the dot-com boom. We cannot know what would have happened if the Fed had held its nerve after LTCM, but with hindsight it looks like a mistake.

Some six decades before Greenspan, Keynes offered the concept of animal spirits in his General Theory. This is how he introduced it:

A large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation… Most, probably, of our decisions to do something positive, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Most of the time, Keynes’ cost-benefit analysis will satisfactorily explain asset price moves, but sometimes it won’t. When we can’t understand what’s going on, we tend to cite “animal spirits” as a get-out clause. Use of the term might therefore offer a guide to when valuations have become inexplicable (or, as Greenspan would have it, irrationally exuberant). Ian Harnett of Absolute Strategy Research tried using it this way, and produced the following search of English language articles on the Factiva database. It goes back to 2001, and shows that invocations of animal spirits ended last year at an extreme:


If there are animal spirits at work, Harnett warns, “then investors might want to be wary of what kind of ‘spirits’ they really are!” In his experience, “they tend to be capricious little things with a nasty bite.”

Personally, I think that this is a pretty incredible/scary chart. To my mind, “animal spirits” tend to be what people rely on to explain things when markets are completely out of whack with underlying fundamentals and valuations can no longer be justified, but people still expect markets to go higher!

I delved further into this with a Bloomberg News Trends search, which counted all references to animal spirits in stories published on the Bloomberg terminal from all sources. This goes back to only 2015, but might have the advantage of being drawn more exclusively from stories aimed at people in finance. Using this version confirms a surge in excitement about animal spirits, but suggests they were causing even more excitement in early 2017, when Trump was taking office the first time:


There was a second surge in the term in January 2018 when the Trump tax cuts went into effect, much against widespread expectation. Their passage had looked unlikely until late in 2017, so this was a positive surprise. Harnett’s Factiva chart also shows a rise in animal spirits after Trump’s first election.

Where does this leave us? It’s hard to explain current asset prices without invoking a woolly concept like animal spirits. Trump is the best explanation for their resurgence. Stocks are riding on potent optimism that Trump 2.0 will be good for the market. Should he disappoint in the months ahead, the exuberance will fade, and we would be left with a stock market that looks way too expensive.


Trump and the Fed:

President-elect Trump says interest rates are far too high, but his own economic agenda might play a key role in keeping them elevated for longer. Why it matters: Fed chair Jerome Powell has been hesitant to directly comment on the incoming administration's policies, but it's clear some of his colleagues on the Fed's policy-setting committee see huge tariffs and restrictive immigration policy as inflationary. With Trump's election came the potential for huge shifts in policy that risk making price pressures more persistent, pushing off plans to cut rates further. Driving the news: Fed officials plan to tread carefully in considering when (or whether) to continue its rate-cutting cycle, minutes from its Dec. 17-18 closed-door policy meeting show. It was less certain, until now, the extent to which Trump shocks factored into expectations for stickier inflation and fewer rate cuts in 2025. "[P]articipants expected that inflation would continue to move toward 2 percent, although they noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated," according to the minutes. The intrigue: Powell has called out the difficulty in projecting how Trump's policies will impact the economy, with little clarity about what such policies will ultimately look like. Fed economists, however, took a shot and modeled out how Trump policies might shake out with a "preliminary placeholder assumption." Stalled progress in cooling price pressures would keep inflation higher in 2024, the staff said — and inflation would not decline much further this year. "Inflation in 2025 was expected to remain at about the same rate as in 2024, as the effects of the staff's placeholder trade policy assumptions held inflation up," according to the minutes. "The risks around the inflation forecast were seen as tilted to the upside, as core inflation had not come down as much as expected in 2024 and the effects of trade policy changes could be larger than the staff had assumed." The big picture: The Fed has slashed interest rates by 1 percentage point since September, including the quarter-point cut last month — a decision that was "finely balanced," with some agreeing there was merit in keeping rates on hold, the minutes said. In making a case to take a more gradual approach to cutting rates — that is, moving away from rate cuts at consecutive meetings — many officials cited "the current high degree of uncertainty," a possible nod to Trump policies. The bottom line: The Fed minutes don't mention Trump by name, but the possible fallout from his policies has already shifted assumptions about the economy in 2025. JC and the first five days: The S&P500 is less than 3% away from making new all-time highs, but investors are losing their minds. You notice how everyone is now a "breadth expert"? One by one, they're all out there mansplaining breadth deterioration to anyone who will listen. The odd thing about these johnny-come-lately breadth "experts", is that none of them include sector rotation into their weak attempts at describing the current market breadth. Sector Rotation is the lifeblood of a bull market. You see Airlines? You see Medical Devices? How about the new all-time lows for Consumer Staples relative to S&Ps? Sector rotation IS market breadth. To ignore this rotation in favor of some arbitrary calculation of the weighting of the top 10 stocks in one index is foolish. Trust me, I know. I used to do stupid **** like that too when I was a lot younger. Anyway, the market is closed today, but not before it completed the first 5 days of the new year. This is the 2nd big indicator of the now-famous January Trifecta, which includes the Santa Claus Rally, First 5 days, and the January Barometer. The S&P500 and other large-cap indexes did NOT rally during this year's Santa Claus Rally period. Small-caps and Micro-cap Indexes did. So mixed results there. The First 5 Days Indicator, however, was in fact positive. According to the Stock Trader's Almanac, the last 48 up First Five Days were followed by full-year gains 40 times, for an 83.3% accuracy ratio and a 14.2% average gain in all 48 years. ​ The market has a great track record of performance after the first 5 days of the year are positive. But in my experience, and also according to Jeff Hirsch, editor of the Stock Trader's Almanac, it's the January Barometer that is the most powerful of the Trifecta. "As January goes, so goes the rest of the Year", is how I learned it. But more importantly than all of these seasonal studies, it's the sector rotation and the actual breadth of the market. And when I say breadth, I'm not talking about these silly superlatives they share on the internet to try and boost their page views. We don't write glorified gossip columns here, nor are we whoring ourselves out on twitter looking for attention. Facts only around here. It's the sector rotation and the broad participation that I'm most interested in. And at this point, it's really the lack of stocks going down that really stands out the most. If there is going to be a correction, expect to see an expansion in the number of stocks that are actually going down in price. So far, this has yet to happen. Also, look for the defensive Consumer Staples to show some signs of life, if markets are going to correct. We haven't seen that at all. Just new relative lows week after week. This week, we all got together, took a step back and zoomed out on markets to really understand where we are in the current cycle.

A couple of interesting ETFs




jog on
duc

 

[qldfrog]

With Jimmy Carter's state funeral today, markets are closed.

Politics:

But while we think the policy environment will be favorable, it is also not without risks. In fact, much of the risk is just from the opportunities failing to materialize. Keeping that in mind, here’s our survey some of the key policy risks markets may face in the year ahead.

Risk 1: The Federal Reserve Keeps Policy Too Tight​

The first risk is not related to the Trump administration or Congress at all, but rather the possibility that the Federal Reserve keeps monetary policy too tight. The Fed is currently in a rate cutting regime, but expectations of the pace of rate cuts have slowed quite a bit. Shifting expectations is mostly due to improved growth expectations, which is a positive, but also a significant rise in inflation expectations, which we think is misplaced. (Sonu covered this at length in his analysis of the Federal Reserve’s recent decision, “The Fed Pulls a Grinch.”) The Fed’s perception of both inflation uncertainty and the direction of risks changed substantially from their survey of FOMC participants in September, as shown below, and that has led to greater caution around rate cuts.

View attachment 190842



Remember, a fed funds rate target of just 2.25 – 2.50% nearly broke the economy in 2018 – 2019, something President Trump correctly pointed out at the time, and low rates, even after some tightening, were still a major tailwind. Well, right now the target fed funds rate target is 4.25 – 4.50%, two full percentage point higher. The economy has been incredibly resilient despite high rates, but cyclical sectors, including housing, small businesses, and manufacturing, have been under pressure and the labor market, while still strong, has exhibited some underlying risk, although it remains quite stable for now. Productivity growth, which is supported by a tight labor market and has been an important contributor to recent growth, may also be damaged by policy that is too tight if it leads to a rise in layoffs.

We think the current expected slower path of rate cuts is very unlikely to push the economy into a recession on its own, but it will make the economy more sensitive to other shocks. A slower path of cuts also means the incoming Trump administration will need to be more careful about policies that would raise concerns about inflation.

Risk 2: Tariffs Push Inflation Higher​

There has been a lot of speculation about tariff policy but we expect the Trump administration will have some sensitivity to the potential impact on inflation and will keep tariffs at least somewhat targeted. A strong dollar, partly in anticipation of tariffs but also due to growth rate differentials between the US and other developed economies, can also acts as an inflation buffer. For now, we think the concerns about tariffs and their impact on inflation are being overplayed. Nevertheless, even expectations of higher inflation can actually cause inflation and the Trump administration will have to be careful about how it communicates policy. As a result, credible saber rattling to strengthen the US negotiating position on tariffs could be damaging even if followed by more sensible actual policy. At this point, inflation expectations remain well anchored, but it’s a delicate balancing act. While we are suspending judgment on tariffs until we see what actually gets implemented and tilt moderately optimistic on the actual inflation impact, the potential for a policy mistake is there.

The S&P 500 fell over 6% in 2018 as the Fed tightened policy, and the trade war was raging. We’re still optimistic about markets in 2025, but the path of interest rates and uncertainty around tariffs are risks, and they are not the only ones.

Risk 3: Internal Division within the Republican Party Delays or Limits Policy Implementation​

This is a policy risk that has a positive side. We noted during the election that markets tend to like mixed government. The spirit of compromise tends to get us better policy and helps avoid the ideological excesses of both parties. But we won’t have mixed government in 2025. When the new Congress is sworn in today, Republicans will hold narrow majorities in both the House and Senate. As of inauguration day on January 20, we’ll also have a Republican president in the Oval Office.

The majorities will be narrow. Republicans will hold a 53-47 majority in the Senate, as well as the tie-breaking vote by the vice president after January 20. Republicans would have held a 220-215 majority in the House, but Florida Republican Matt Gaetz resigned (he’ll have to do it again for the new Congress) and two Republican House members will take positions in the Trump administration. That will make the Republican majority 219-215 until the members assuming new roles resign and then 217-215 until special elections can be held. (Unlike the Senate, replacements in the House can’t be appointed, only elected.) There is no tie breaker in the House, so at that point Republicans will not be able to lose even a single vote in the House when a vote is along party lines.

We did not get divided government, but there are ways in which narrow majorities keep at least some of the spirit of divided government. Republicans will need their own moderates AND their most hardline conservatives to vote yes to pass policy. There could be a cushion if Freedom Caucus members hold up a bill. Some Democrats could potentially be pulled on board to support a bill if they believe it is in their interest, but would require some compromise.

We saw this in action with the current House’s recent efforts to fund the government. Republicans needed some Democrats to support the bill. Trump intervened using the bully pulpit as president-elect to object to the initial bipartisan continuing resolution (CR). But 38 Republicans rejected Trump’s alternative. A somewhat stripped down version of the original CR was finally passed with more Democratic votes than Republican. Trump’s interventions did lead to some changes, but the overall effect was small. From the perspective of the current House, a narrow majority led to compromise, although things will be somewhat different once Republicans control the Senate and Trump has been inaugurated.

Narrow majorities keep more checks and balances in place, but they also increase the possibility of legislative chaos and will make it more difficult to pass any bill that doesn’t have broad consensus among Republicans. Significant delays that disappoint policy expectations could lead markets to become impatient with congressional infighting. Keep in mind that Congress will have to deal with raising the debt ceiling and government funding in Q1 2025, let alone avoid the fiscal cliff associated with expiring individual tax cuts at the end of 2025.

Risk 4: Deregulation Clashes with the Supreme Court’s Chevron Reversal​

One issue receiving relatively little attention is the Supreme Court’s decision in July 2024 to overturn Chevron v. Natural Resources Defense Council. The Chevron decision gave agencies more scope to interpret the laws under which the operate. The decision to overturn Chevron was an extraordinary flip-flop in conservative jurisprudence. In 1984 the Reagan administration was an advocate of Chevron because it made deregulation easier. The Supreme Court decision in Chevron was unanimous, representing a consensus between liberal and conservative justices on how the Constitution should be interpreted. Over time, conservatives became critics of Chevron because they believed it had the unintended consequences of giving the agencies too much leeway. Undesirable political outcomes should not change the Constitution, but even among conservatives fashions change.

Overturning Chevron was great (from a Republican perspective) when Democrats are in power, but it also makes deregulation more difficult, which is why the original Chevron case went to the Supreme Court in the first place. When it comes to deregulation efforts, Republicans may have hoisted themselves on their own Chevron petard. With the decision newly minted, some efforts to lighten regulatory requirements are likely to be met with waves of litigation that may take years to work their way through the court system. We are worse off than the Reagan administration was before the Chevron ruling, because courts will be drawn into the messy process of delineating exactly what the new ruling means. We don’t think there are major risks here, but it may make deregulation under the new Trump administration less robust than markets expect in places.

Risk 5: Immigration Policy Stunts Economic Growth​

In my view, this is the most underrated risk but still secondary to tariffs and monetary policy when it comes to the absolute level of risk. Clearly there are some genuine problems with current immigration policy. But the extent to which the resilience of the US economy depends on its ability to attract and absorb global labor is often underestimated. In fact, I would say the two key factors that have led to the structural advantage the US has over other developed economies is a more business-friendly overall policy environment, including labor market flexibility, and its history of acting as a destination of choice for immigrants.

It’s hard to determine the level at which tighter immigration policy becomes a genuine risk, and before it becomes a risk there certainly may be areas where reforms would provide benefits. The aim here is not to determine what the right immigration policy should be, but just to highlight that at some point tight policy can become a significant risk.

Here are just a few of the reasons why I believe immigration policy could pose a risk from an economic perspective:

-If the current level of flow of earners falls due to immigration policy and the chilling effect on new immigration, there’s a direct impact on GDP. A dollar of income lost is a dollar of GDP lost. Policy that leads working immigrants to leave the US, or choose not to come in the first place, is the economic equivalent of exporting U.S. GDP growth to the rest of the world.

-There is a steep implicit regulatory burden on business from tight immigration policy, both by restricting their access to workers and making the cost of labor higher.

-A more restricted labor pool also has the potential to drive wages higher, posing some additional risk for inflation. This effect may be stronger with the prime age participation rate already near a record high. I think this risk is fairly small, but not non-existent.

-Demographics are destiny. Immigration has been the US’s best defense against the challenges of an aging population. According to United Nations data, the old-age to working-age dependency ration in the US in 2022 was 29.4 (29.4 people aged 65 or older for every person aged 20-64). This ratio is important because current workers pay for the Social Security and Medicare benefits of current retirees. For comparison, the dependency ratio in 2022 was 38.0 in Germany and 55.4 in Japan. For the US, that number was 14.9 in 1952. In 2052 it’s expected to be 49.1 The US fertility rate in 2022 was 1.8, a level at which immigration becomes a larger factor in changes in the dependency ratio.

-There are certain areas of the economy that are hit particularly hard by tighter immigration policy. Since the election, housing stocks have fallen considerably despite overall strength in the consumer discretionary sector. This is largely due to higher rates but expected immigration policy is likely also a factor. At the same time, prices of agricultural commodities have been rising, again with multiple factors in play.

Immigration reform is a positive goal, but also comes with some risks. How high those risks are depends on actual policy. It would take a fairly large mistake to have enough of an impact on the economy to weigh on markets, but the potential for a large mistake is non-trivial.

Risk 6: Unpredictability Restrains Animal Spirits​

Unpredictability is part of Trump’s MO and he is capable of deploying it very effectively. But while unpredictability can be powerful when negotiating, it can create a difficult environment for businesses. Companies put a lot of capital at risk based on expectations of future profits, and generally want policy clarity. (Of course, if the risk is a better policy environment, the risk associated with uncertainty is lower.) Businesses do not want a president who interferes with capital markets in a fit of pique. An uncertain policy environment can make it harder to do business, although sometimes it does also present opportunities. I would only view this is a small risk. Every policy environment has its element of unpredictability. But with the last Trump administration, for example, we did see tariff policy uncertainty weighed heavily on business investment in 2018-2019 and put a dent in the expected supply-side impact of the Tax Cuts and Jobs Act.

Risk 7: Fed Independence​

I would consider this a very small risk, but with the consequences of a misstep potentially large. Trump will try to put pressure on the Federal Reserve to lower rates as soon as he takes office. That in and of itself isn’t a problem. There are mechanisms that help maintain Fed independence. But if there is an effort to overstep or to appoint a loyal and partisan Fed chair when Jerome Powell (himself a Trump appointee) steps down in May 2026, markets will respond. This one is unlikely to be a slow burn. If Trump oversteps, I would expect the market response to be unmistakable. If Trump floats test balloons that cause market jitters but can easily be stepped back, it’s not an issue. But a genuine threat to Fed independence that cannot be walked back could be a problem.

There you have it, seven policy risks that we’ll be watching for in 2025, with tariff unpredictability and the Fed’s rate decisions the most meaningful, but a few others to keep an eye on as well. Our view remains squarely in the camp that policy remains a tailwind, but Donald Trump was elected to be a disruptor, and while disruption can be valuable, it also can often come with unintended consequences.

The UK

Gilts Near Fearful Truss Moments​

The global bond selloff is unnerving for many reasons, but perhaps most because of the burden rising yields place on governments’ fiscal operations. The pain inflicted by rapidly rising borrowing costs is hardest to mask for countries like the UK with razor-thin spending buffers. And so it really hurts that long-dated gilt yields spiked to the highest levels since the late 2000s — or, in the case of the 30-year gilt, since 1998.

Capital Economics estimates that the recent move has added almost £9 billion ($11 billion) to the UKs borrowing costs — and that will virtually wipe out Chancellor Rachel Reeves’ spending buffer of £9.9 billion. Plugging that gap will require tax hikes, spending cuts, or both. The scale of fiscal consolidation required will depend on how far the bond market's rout goes. The combination of rising gilt yields relative to Treasuries with a weakening pound is concerning. Still, the comparison with Liz Truss’ self-inflicted 2022 gilt crisis is overblown:

View attachment 190843
Truss’ ill-fated tax-cutting budget pushed the 10-year gilt spread over Treasuries to its highest in over a decade. To date, this mess is far less extreme, but needs urgent sorting. The UK’s current and capital account deficit leave it vulnerable to foreign investors who might demand higher yields and a cheaper pound before they’re prepared to buy gilts. The country is “dependent on foreigners,” as one investment banker put it. The surge in the 30-year gilt back at levels not seen since before the financial crisis caused by the little-remembered Russian default of 1998 shows that the situation is serious:

View attachment 190844
While Truss-style deficit spending may not be revisited, Reeves has an uncomfortable decision. Ahead of the UK’s Office of Budget Responsibility forecast in March, Nico FitzRoy and David Pagliaro of Signum Global Advisors argue that the government could declare a breach of its own fiscal rules if the buffer evaporates further:


None of this is at all welcome for a new government that has had a rocky start. On the other side of the Atlantic, the rise in Treasury yields is as painful, but far from tragic. The 10-year benchmark yield is on a four-day rising streak — gliding past 4.7%, its most since April. Inescapable reasons for this surge include a change in fundamentals and the strong dollar. Joseph Lavorgna of SMBC Nikko Securities (and an adviser to Donald Trump in his first presidential term) attributes the currency’s strength to the strong inflows to US financial markets generated by equity performance and expectations that Trump’s pro-growth agenda can raise productivity.

In trade-weighted terms, the greenback benefited from the US election and the recent repricing of the Fed’s likely trajectory to gain 6.4% in the last quarter, according to Bank of America. With such dominance, there is speculation about whether a version of the 1985 Plaza Accord that devalued the dollar against its peers would be needed. Using the Fed’s own measure, the dollar looks far less overextended now:

View attachment 190845
Bannockburn Global FX's Marc Chandler argues that all else equal, the Fed’s relative hawkishness in their December meeting will keep the world’s reserve currency strong. While Trump’s tariff agenda poses an inflation risk, Chandler argues that it will ultimately hurt far more in other countries, such as Canada and Mexico, which export 80% or more of their products to the US. That would mean a stronger dollar.

The currency’s strength could wane as and when we have clarity on Trump’s trade policy, according to Bank of America’s analysts. They expect the dollar to stay strong in the short term thanks to worries about inflation and particularly tariffs, but to weaken later in the year as these policies take a toll on the US economy the rest of the world responds. That would relieve pressure on the rest of the world, but is unlikely to come in time to relieve Rachel Reeves from some difficult decisions.

Animal Spirits

Of Irrational Exuberance and Animal Spirits​

When all else fails, and you cannot explain why markets are so high, John Maynard Keynes and Alan Greenspan have some concepts to help. You can blame “animal spirits” (Keynes) or “irrational exuberance (Greenspan). The question is whether they really explain anything.

Greenspan gave us the concept of irrational exuberance in December 1996. Bill Clinton had just been reelected and stocks were motoring along. In a speech, Greenspan asked this question:


Markets took him to mean that he thought asset prices too high and was intending to do something about it. Stocks fell. Three months later, he followed up with a 25 basis-point hike, driving a correction in the S&P 500 of nearly 10%. But rates didn’t move again for 18 months.

Greenspan tells Congress what he means in 1999. Photographer: Linda Spillers/Bloomberg
To explain why he was worried, we can use another Greenspan concept, the Fed Model. Testifying to Congress, he often compared the earnings yield (inverse of price/earnings) for stocks with bond yields. The higher equity yields reached compared to bonds, the cheaper stocks were. And vice versa. High bond yields made stretched equity valuations harder to justify.

We can illustrate this with the spread of the S&P earnings yield over the 10-year Treasury. When it drops, or falls below zero, stocks are expensive. This simple model (there are more sophisticated versions, but this captures Greenspan’s concept) showed that stocks were way too expensive:

View attachment 190846
For current purposes, this measure now says that stocks are their most expensive since 2002 — and coincidentally at exactly the level on Dec. 5, 1996, that prompted Greenspan to sound his warning. So concerns about irrational exuberance seem justified. There is also something of a morality tale in what happened in the autumn of 1998. Following the Russian default and the meltdown of the Long-Term Capital Management hedge fund, the spread went positive again — stocks yielded slightly more than bonds. But the corporate credit market was becalmed, and Greenspan decided to cut the fed funds rate between meetings, launching the most extreme phase of the dot-com boom. We cannot know what would have happened if the Fed had held its nerve after LTCM, but with hindsight it looks like a mistake.

Some six decades before Greenspan, Keynes offered the concept of animal spirits in his General Theory. This is how he introduced it:


Most of the time, Keynes’ cost-benefit analysis will satisfactorily explain asset price moves, but sometimes it won’t. When we can’t understand what’s going on, we tend to cite “animal spirits” as a get-out clause. Use of the term might therefore offer a guide to when valuations have become inexplicable (or, as Greenspan would have it, irrationally exuberant). Ian Harnett of Absolute Strategy Research tried using it this way, and produced the following search of English language articles on the Factiva database. It goes back to 2001, and shows that invocations of animal spirits ended last year at an extreme:

View attachment 190847
If there are animal spirits at work, Harnett warns, “then investors might want to be wary of what kind of ‘spirits’ they really are!” In his experience, “they tend to be capricious little things with a nasty bite.”


I delved further into this with a Bloomberg News Trends search, which counted all references to animal spirits in stories published on the Bloomberg terminal from all sources. This goes back to only 2015, but might have the advantage of being drawn more exclusively from stories aimed at people in finance. Using this version confirms a surge in excitement about animal spirits, but suggests they were causing even more excitement in early 2017, when Trump was taking office the first time:

View attachment 190848
There was a second surge in the term in January 2018 when the Trump tax cuts went into effect, much against widespread expectation. Their passage had looked unlikely until late in 2017, so this was a positive surprise. Harnett’s Factiva chart also shows a rise in animal spirits after Trump’s first election.

Where does this leave us? It’s hard to explain current asset prices without invoking a woolly concept like animal spirits. Trump is the best explanation for their resurgence. Stocks are riding on potent optimism that Trump 2.0 will be good for the market. Should he disappoint in the months ahead, the exuberance will fade, and we would be left with a stock market that looks way too expensive.


Trump and the Fed:

President-elect Trump says interest rates are far too high, but his own economic agenda might play a key role in keeping them elevated for longer. Why it matters: Fed chair Jerome Powell has been hesitant to directly comment on the incoming administration's policies, but it's clear some of his colleagues on the Fed's policy-setting committee see huge tariffs and restrictive immigration policy as inflationary. With Trump's election came the potential for huge shifts in policy that risk making price pressures more persistent, pushing off plans to cut rates further. Driving the news: Fed officials plan to tread carefully in considering when (or whether) to continue its rate-cutting cycle, minutes from its Dec. 17-18 closed-door policy meeting show. It was less certain, until now, the extent to which Trump shocks factored into expectations for stickier inflation and fewer rate cuts in 2025. "[P]articipants expected that inflation would continue to move toward 2 percent, although they noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated," according to the minutes. The intrigue: Powell has called out the difficulty in projecting how Trump's policies will impact the economy, with little clarity about what such policies will ultimately look like. Fed economists, however, took a shot and modeled out how Trump policies might shake out with a "preliminary placeholder assumption." Stalled progress in cooling price pressures would keep inflation higher in 2024, the staff said — and inflation would not decline much further this year. "Inflation in 2025 was expected to remain at about the same rate as in 2024, as the effects of the staff's placeholder trade policy assumptions held inflation up," according to the minutes. "The risks around the inflation forecast were seen as tilted to the upside, as core inflation had not come down as much as expected in 2024 and the effects of trade policy changes could be larger than the staff had assumed." The big picture: The Fed has slashed interest rates by 1 percentage point since September, including the quarter-point cut last month — a decision that was "finely balanced," with some agreeing there was merit in keeping rates on hold, the minutes said. In making a case to take a more gradual approach to cutting rates — that is, moving away from rate cuts at consecutive meetings — many officials cited "the current high degree of uncertainty," a possible nod to Trump policies. The bottom line: The Fed minutes don't mention Trump by name, but the possible fallout from his policies has already shifted assumptions about the economy in 2025. JC and the first five days: The S&P500 is less than 3% away from making new all-time highs, but investors are losing their minds. You notice how everyone is now a "breadth expert"? One by one, they're all out there mansplaining breadth deterioration to anyone who will listen. The odd thing about these johnny-come-lately breadth "experts", is that none of them include sector rotation into their weak attempts at describing the current market breadth. Sector Rotation is the lifeblood of a bull market. You see Airlines? You see Medical Devices? How about the new all-time lows for Consumer Staples relative to S&Ps? Sector rotation IS market breadth. To ignore this rotation in favor of some arbitrary calculation of the weighting of the top 10 stocks in one index is foolish. Trust me, I know. I used to do stupid **** like that too when I was a lot younger. Anyway, the market is closed today, but not before it completed the first 5 days of the new year. This is the 2nd big indicator of the now-famous January Trifecta, which includes the Santa Claus Rally, First 5 days, and the January Barometer. The S&P500 and other large-cap indexes did NOT rally during this year's Santa Claus Rally period. Small-caps and Micro-cap Indexes did. So mixed results there. The First 5 Days Indicator, however, was in fact positive. According to the Stock Trader's Almanac, the last 48 up First Five Days were followed by full-year gains 40 times, for an 83.3% accuracy ratio and a 14.2% average gain in all 48 years. View attachment 190849​ The market has a great track record of performance after the first 5 days of the year are positive. But in my experience, and also according to Jeff Hirsch, editor of the Stock Trader's Almanac, it's the January Barometer that is the most powerful of the Trifecta. "As January goes, so goes the rest of the Year", is how I learned it. But more importantly than all of these seasonal studies, it's the sector rotation and the actual breadth of the market. And when I say breadth, I'm not talking about these silly superlatives they share on the internet to try and boost their page views. We don't write glorified gossip columns here, nor are we whoring ourselves out on twitter looking for attention. Facts only around here. It's the sector rotation and the broad participation that I'm most interested in. And at this point, it's really the lack of stocks going down that really stands out the most. If there is going to be a correction, expect to see an expansion in the number of stocks that are actually going down in price. So far, this has yet to happen. Also, look for the defensive Consumer Staples to show some signs of life, if markets are going to correct. We haven't seen that at all. Just new relative lows week after week. This week, we all got together, took a step back and zoomed out on markets to really understand where we are in the current cycle.

A couple of interesting ETFs


View attachment 190841View attachment 190840View attachment 190839View attachment 190838

jog on
duc

A lot ..of good rational reading on Trump effect analysis from now on
Thanks Mr Duc

 

[divs4ever]

now the question is how much and where , will Trump place his tariffs

... and how will the tariffed nations respond .. they just might start selective export restrictions/limits ( not lower prices to the US , but to other 'friendly nations ' )

also ( please double-check ) Indonesia seems to have joined BRICS ( + )

 

[ducati916]

Full:https://mishtalk.com/economics/insu...billion-uninsured-losses-perhaps-100-billion/

jog on
duc

 

[divs4ever]

that sounds like a LOT of denied claims ( assuming most of the elite 'self-insured ' )

 

[ducati916]

that sounds like a LOT of denied claims ( assuming most of the elite 'self-insured ' )

List by market cap:



Might be worth a look tomorrow.

jog on
duc

 

[qldfrog]

List by market cap:

View attachment 190887

Might be worth a look tomorrow.

jog on
duc

A side note:
None of the PE of the first 12 are above 18, most below 15...
Not sure if US market is that overheated vs our Australian market

 

[divs4ever]

A side note:
None of the PE of the first 12 are above 18, most below 15...
Not sure if US market is that overheated vs our Australian market

some suggest only a small number of ( US ) stocks are significantly/massively over-heated , but the punters/managers seem to avoid those at good value

 

[peter2]

Thanks for the list Duc. Insurance opening gap down approx 4%. There are some anomalies. MCY -40%
Insurance ETF - IAK only -1.5%

Is -4% enough or are they likely to go lower as the claims come in.

Edit: Homebuilders are up. TOL, PHM, XHB

 

[divs4ever]

Thanks for the list Duc. Insurance opening gap down approx 4%. There are some anomalies. MCY -40%
Insurance ETF - IAK only -1.5%

Is -4% enough or are they likely to go lower as the claims come in.

i think lower , because chances are other disasters ( like the winter storm season ) are likely to piggy-back

but sadly my insurance plays are all more than 20% above my target prices ( to top up )