Interesting times we're living now. Not the first not the last time someone has used this phrase to convey the level amusement and surprise about the current status quo world wide. It's my intention in this post to focus on the current U.S. stock market and dollar rally as well as the December Federal Open Members Committee (FOMC) meeting and decision of raising the rate
back in November of this year before U.S. election's day, all the sentiment towards Donald "The apprentice" Trump, as possible president, was the worst, that the world would end, markets would fail, collapse, doom and gloom, the end of the world (again).
During the first hours of election day, precious metals and other currencies started to appreciate but when Trump's victory became evident, markets didn't behave like speculators and the general population were expecting. Trump won in the end so, where's the market collapse?
On Wednesday the 14th of December 2016, the Federal Reserve Bank decided to increase the Federal Funds Rate a measly 0.25% from 0.5% to 0.75% and what did we get as result? An upward explosion of the U.S. dollar, mainly on the USDJPY from 115.00 to 118.00 (300 PIPS) and USDCAD from 1.3127 to 1.3332 (200 PIPS) exchange rate pairs. The dollar index is sitting at 103.00. And what about stocks, another higher high.
The level of exuberance is extreme at this point but many of you may be wondering when it's this going to reverse course, that I'm afraid no one can respond but it is fundamental to understand that there is no ground, nothing that is sustaining this rally, it's pure speculation , in my opinion.
When Trump gave his initial speeches of what his economic views are, he mentioned the following:
1.- One trillion dollars infrastructure investment across the board in the U.S. Where is that money going to come from?
2.- Corporate tax cuts as incentive for businesses. This is less taxes on companies but guess who's is going to offset this, yes you guessed right, the U.S. people, the individual contributor.
3.- Economic protectionism: Nullify free trade agreements and threats to U.S. companies if they continue sending jobs abroad. What does this mean? Please, we live in a global economy, imports and exports are critical for the U.S.
4.- Energy. He wants to support the oil industry, this is good for oil.
5.- U.S. safety: Spending on defense will continue, this is not surprise.
The above points are very superficial, even the one trillion spenditure plan. He hasn't mentioned how much, where and when so the speculators and this rally is fuelled in part based on all these.
The other situation that's pushing this rally is the perception that the Federal Reserve is now behind the "curve" in bonds and inflation by forecasting not two but three interest rate increases in 2017. This is utterly ridicuoulous. During this 2016 there was an expectation or raising rates on practically every FOMC meeting and now all of a sudden increasing the odds of rate hikes by one on the following year means that the stock markets has to go higher before rates are greater and the cost of lending is more, again pure speculation.
I been reading that some people compare Trump with Reagan, it is clear that Trump wants to spend in infrastructure which yes it's going to give a boost to many industrial sectors, mainly construction and all satellite businesses that surround it but, is this going to create a abundant and permanent source of employment? No, but it's true that building roads, bridges, skyscrapers, theme parks, etc, create lots of jobs but when the projects are finished, the number of jobs will decrease. In the same token, raw materials such as iron, fuel, plastic, copper are used hence their price will go up.
His plan of making the U.S. great again is correct, in principle, but at the same time it screams bearishness on the U.S. dollar and bulishness on commodities.
Now, what about precious metals? If Trump and the U.S. government go ahead with this plan of infrastructure spending, where's the money going to come from? well, you guessed right, more debt, more dollars supply, more inflation. Where do investors run when they see any kind of threat? They'll run to the dollar but what about if the dollar is not a "safe haven" well, most likely they'll run to precious metals. Bear in mind, regardless of this spenditure plan goes ahead or not, the Federal Reserve has increased the interest rate and the last inflation rate came as expected, this is bear for the dollar.
I want to finish this post by saying that the dollar rally as well as the stocks is nearly ending in my opinion, we're nearly at the end of the year and the general consensus is "we'll see how the new year is going to look like", I believe the human is a creature of habits but in all honesty, the market doesn't care if it's Christmas, New Years Eve, public holidays, it's all in the speculators' minds but again I don't think we'll see a major reversal on what's left for the year, on the contrary I see this rally continuing but with less fury.
Super post
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