Inside Thought

Peter Navarro said it. "It's over".

Yes, he is now walking back the 'inside thought' comments made last night on FOX News, that the trade deal with China is effectively dead. But what he really was implying said more about the Trump Presidency than deteriorating bilateral relations. The era of Trump is quickly drawing to a close and he knows it.

Descending from the Presidential chopper on Saturday night after returning from the weekend rally in Tulsa, a disheveled Donald seemed dejected and worn-out. No wonder, given the tepid turnout of his once proud army of 'deplorables'. Shocked advisors (including soon to be fired re-election chief, Brad Parscale) had been duped into thinking demand for the event was sky high by a clever viral registration drive by anti-Trump TikTok users. Parscale was the brains behind Trump's 2016 victory through his use of savvy social marketing and data-driven campaigning. Too bad Brad, you live by the sword, you die by the sword.

I know what your thinking. Not so fast. We wrote Trump off as a reality show buffoon in 2016. After the riots at the DNC in 1968, we wrote Nixon off due to a sweaty upper lip problem. Heck we even wrote off Doug Ford until Patrick Brown was "me too-ed".

Yah, I get it. Those guys all won big. But they hadn't screwed up yet. It's always harder to get re-elected if you blow up the economy. And tell me that America doesn't need someone to blame right now. Desperate to deflect his domestic failings, Trump in his speech tried to put the racially insensitive label of "Kung Flu" on the coronavirus. It's a horrific tactic, but one that follows his play-book. "Crooked Hillary" 2.0.

Unfortunately the 'Donald', by refusing to wear a mask, symbolizes he is a willing accomplice to the crisis. Trump's irrational promise, uttered in late March, that the virus "will just go away" is now threatening to turn the table on it's originator. He will soon go away.

Sleepy Joe, on the other hand is winning by not losing. Staying out of the limelight and always seen masked, he is viewed as prudent and health conscious. As the kindly Grampa, he seems innocuous enough. Even better that he keeps quiet, hidden behind a cloth cloaking device.

In 1976, Jimmy Carter won by being a nice guy. Voters back then wanted to expunge the Republicans after Watergate. Seems like history will repeat after Covidgate.

What does this have to do with the markets? This year, as the bulls talk endlessly about things like "the Fed Put", "TINA" and "Financial Repression", it might be time to consider the fiscal reckoning that will follow a change in tone should we see a Democratic held U.S. Congress circa 2021.

Corporate taxes - up or down?

Wealth/Capital Gains taxes - up or down?

Buy Backs, Regulation, Wages & Benefits - up or down?

Many unanswered questions. But after years of tailwinds, corporate America has only one way to go. And that isn't priced into the current forward PE in the low twenties, I can tell you that.

But for now we have the Fed to backstop any worries. Even the threat of a second wave (is it still a second wave if it just is getting around to areas that never had it?) doesn't faze the markets. This morning's PMI rebound data in Europe is strong enough to generate a new rally. Don't fight the tape.

We could see another short-term peak shortly on the back of the quarter-end FOMO trade. Windows are being dressed as we speak. But the downside is cushioned. Trillions of unrisk, zero yielding dollars are itching to play the recovery. The ratio of stock values to the monetary aggregates (M2) is still within normal bounds. The system remains flush and risk premia are elevated.

Soon the vaccine trade could be front page again. 'Less-bad news' is all we need to buy any asset that yields over 70 bps.

Duke Powell

The recent debate around U.S. Civil War history after the renewed racial tensions is long overdue. In the late 1970's there was an anachronistic sitcom - 'The Dukes of Hazzard' - that glorified the sons of southern rebels. Now that show seems like a gross whitewashing of a shameful history. Once while driving through Georgia, on Martin Luther King Day of all days, I witnessed rednecks waving a Confederate flag from an overpass. The backlash against that cultural perversion was long overdue.

Jerome Powell is now what I believe is the new "Duke of Moral Hazzard" using QE Infinity as his 'Charger' for the economy. But there will be a crash somewhere down this dusty rural monetary road once the liquidity engine stops.

You can't blame the Fed though, they're just doing what they're told. If you give a man a hammer, pretty soon everything looks like a nail.

But you'd better lose that flag Jay.

Risk Model: 4/5 - Risk On

I can now be rightfully accused of talking out of both sides of my mouth. Yes, I have always said: "stocks are a monetary phenomenon", "don't fight the Fed', "don't confuse a bull market with brains". But it seems there are a lot of skeptics - me included -with lots of cash still on the sidelines. The one element of the model left to 'go positive' is the AAII Sentiment indicator. (below)

AAII BULL/BEAR RATIO

Like a senior that's fallen and can't seem to get up, these AAII players are sitting out the rally. Stands to reason that the bifurcation of bulls and bears is age related. Most AAII members don't use Robinhood accounts.

But playing a market is not the same as liking a market. It like all bull markets, it's always a greater fool game until you end up being one. But how do we know when the rally is over?

When the recovery is sufficiently strong to create a disincentive for the fed to continue easing - is the short answer. Taper tantrum redux. At some point, good news will be bad news. Until then, the current melt-up bias will can continue. I'm watching for bond yields to rise and the curve to steepen further. Until yields on fixed income get more attractive you keep playing the game and don't overthink it.

Yield to Temptation

The yield on U.S. stocks, now multiples of the prior 'normal' range, continues to attract TINA bids on any weakness. Below, I show the ratio of S&P yields to the 10yr Treasury yield. I believe this is holding valuations up as we look over the enormous earnings valley. Dividend cuts in Energy and Financials notwithstanding, stocks will continue to attract investment flows so long as financial repression from the Fed exists.

S&P 500/10yr Treasury Yield Ratio