The investment world is horribly out of position.
That is my harsh conclusion after speaking to dozens of portfolio managers, financial advisors, and hedge fund traders around the world.
Virtually ALL are overweight bonds, or fixed income instruments of endless description.
American high net worth individuals are up to their ears in tax free municipal bonds. Many loaded the boat expecting a Clinton win which would lead to higher tax rates and boost the value of tax free investments.
Instead, we got a Trump win. This dramatically chops the value of any tax free instrument, especially muni bonds. If you don’t believe me, look at the chart below showing the sharpest selloff since the Great Crash.
The last time muni bonds fell this fast, analyst Meredith Whitney predicted that the number of local government defaults would explode to 2,000. In the end, I think, we only got two defaults, both in California.
I have spent the last half century watching professional money managers overweight market tops and underweight the bottoms. And you wonder why I manage my own money.
This is why global bond market losses since the November 8th presidential election now exceed $2 trillion. Next year they will grow exponentially.
So when the Trump euphoria runs out of gas, or at least takes a break, ten-year Treasury bonds (TLT) should rally five points. When that happens, sell the daylights out of them. It may be your last chance to do so with yields at the 2% handle.
Trump is certainly living up to his reputation as The Great Debt Destroyer right out of the gate.
And here is the big question for 2017.
Trump’s gargantuan tax cuts and monster spending increases should boost the Federal budget deficit from $400 billion this year to $1.0-$1.5 trillion next year.
How is Trump going to launch a trade war against China when he needs them to buy up to $750 billion of our new government debt?
This dilemma should certainly put his much vaunted negotiating skills to the test.
Less than three weeks after the election, Trump is already adopting Hillary Clinton’s business, trade, foreign policy, and trade strategies, one by one. He is, in effect, turning into Hillary Clinton.
But Wait! It gets worse.
Not only do investors lack adequate weightings in equities, they own the wrong ones.
They are loaded to the gills with high growth technology stocks, and almost completely lacking the shares of companies that were pariahs only three weeks ago, like financials, health care, construction, commodities, energy, and defense.
Call it the double underweight.
It will take many months, if not years, for institutions to rebalance their portfolios into the right asset classes and industry selections.
The good news is that the net push on the major stock indexes will be to the upside. That’s because managers will be selling stocks at seven-year tops and replacing them with those at five-year bottoms.
Technology is not dead for good. It is just resting. It will come roaring back after a long overdue three-six month correction.
Don’t throw away stocks today that you may have to buy back ten times higher in a decade.
Having said all that, all asset classes are now sitting on top of extreme moves, both to the upside and the downside, and are far overdue for corrections.
While stocks have been rising, so has the Volatility Index (VIX), (VXX) for the past two days which is never a good sign.
As they used to say on the eighties TV show, Hill Street Blues, “Be careful out there.”
As for the week’s data releases:
Monday, November 28th at 10:30 AM EST, we get the Dallas Fed Manufacturing Survey.
On Tuesday, November 29th at 10:00 AM EST, we get a new update on the Q3 GDP Growth. We’ll see if the previously reported hot 2.9% annual rate can be sustained. November Consumer Confidence follows at 10:00 AM.
On Wednesday, November 30th at 2:00 PM, the Fed releases its Beige Book, the most current look at the state of the US economy. The three Fed speakers on Wednesday should all tilt hawkish.
It is also month end, so the window dressers will be out in full force, probably taking markets up to higher all time highs.
Thursday, December 1st, we learn the Weekly Jobless Claims at 8:30 AM EST. The PMI Manufacturing Index follows at 9:45 AM EST.
On Friday, December 2nd, we get the big number of the week, the November Non Farm Payroll Report. This month will be especially important, as it may give the first hint of real post election business activity. This could be our one shot at volatility for the week.
At 1:00 PM we get the Baker Hughes Rig Count. We’ll see if falling oil production puts a dent in US oil production.
Keep in mind that virtually all economic indicators will be useless for the next two months because they will only reflect spending and investment conditions prior to the November 8th presidential election, and will be for a world that no longer exists.
Will the economy improve, reflecting a new optimism for the pro-business administration?
Or will it get worse, showing the rise of uncertainty pending a 180-degree change in US economic policies and a massive expansion of the national debt?
We shall see.