Some things I think, I think - Post-Brexit edition

- Donald Trump will (continue?) to do better than expected

Yes, in many ways he’s a very flawed candidate and he’s exceptionally unpopular one.  His opportunity lies in Secretary Clinton’s weaknesses as a flawed campaigner with her trust/honesty issues (whether they’re perception or real, is irrelevant) and a popularity level that’s in the Trumpian realm.  They’re literally the most unpopular candidates to run for President – they key for each, might just be avoiding appearing in the press in the final week!  In all likelihood, the favorable demographics and Mr. Trump’s weaknesses should be enough for Secretary Clinton to win, assuming she gets enough of those young voters who stubbornly only turnout to vote for President Obama, to the polls! That said, I wouldn’t expect a majority in the popular vote or much of a mandate despite the claims otherwise. 

- Limits of monetary policy and R*

One of the more thought provoking things that Our Man has read recently is this essay from San Francisco Fed’s John Williams that came out just before the staff of various Central Banks met at Jackson Hole.  In it, he argues the world has changed (and the neutral rate of interest is lower), thus monetary policy needs to change and that monetary policy is not the only answer.  Suggested changes on the monetary policy side include a higher inflation target, or replacing inflation targeting with a flexible price-level or nominal GDP targeting framework.  Both of these suggest a lower-for-longer (maybe forever) since with inflation (and GDP) undershooting existing targets (and thus increasing the distance to future targets) the pressure to increase rates diminishes further.  As for what lower-for-longer/ever means…well, there are some thoughts on that below. 

- People’s QE

It may go by a different name, and under many different guises, but it’s coming to a country near you…soon!   With monetary policy at close to its limits, and rising populist sentiment in numerous countries around the globe, the stage is being set for “People’s QE”.  What does Our Man mean by “People’s QE” – think massive fiscal spending, supported (directly, but possibly indirectly to get around legal issues) by an aggressive Central Bank QE program.   It will be done differently across countries, but the most successful will by those countries that realize “infrastructure spending” in the 21^st century while not yet well defined likely doesn’t mean the same as it did in the post-World War 2 period!   Our Man’s sneaking suspicion is that Britain, with the readymade excuse of Brexit and seeking global competitiveness, will do it best with a mixture of old school infrastructure spending (bridges, roads, etc), new-style infrastructure spending (start with internet/cellular connectivity, but who knows what else, maybe it’s drones, etc), education (especially in very pro-Brexit areas) and healthcare (updating hospitals, from the bricks and mortar to processes/etc). 

- Regulation 

 Despite all the talk in the political realm, Our Man rather suspects that increased scrutiny on Banks and Financials (post-08) was the start of a trend rather than a one-off, and wouldn’t be surprised to see Technology and Healthcare cos next in the regulatory firing line. 

- The market will either be much higher or much lower within the next 12mos

Our Man just can’t tell you which but is pretty sure it ain’t going to hang around here.  The downside case is the clearest with investors able to take their pick of potential issues, including China, slow growth, falling Earnings/high valuations, Europe and the Euro, Brexit, etc.  The upside case is more complicated, but linked to negative rates (and the prospect of negative or low rates for some time).  At a certain level negative rates make sense; it’s an acceptance that we can’t afford our debts, and thus pricing the interest rate at the level at which we can amortize them.  If this is true, and as yields turn negative and assets fall in real terms (with central banks adding money to prevent nominal falls), then the answer is to buy duration, and stocks are exceptionally long duration instruments.  So if you think negative yields are here for the long-haul, you want to be buying stocks…hand over fist.


Portfolio Update 
Our Man’s felt that the market is sitting at the edge of the binary path for a couple of months now, and so he made some changes to the portfolio earlier in the third quarter.  Out have gone all the commodity-related positions (Gold, Silver, and Gold Miners) which have generated exceptional profits year-to-date, but are stretched following their strong runs and vulnerable to dollar-strength.  Into the portfolio have come some (levered) market equity positions, in particular as Our Man’s Technical book saw a tentative buy signal – expect to see more, if the market’s price action suggests much higher highs ahead.  The Currency and International positions remain unchanged, though the Argentinean equities are nearing the end of their (so far successful) investment horizon.  Our Man full expects to sit here, not doing much, and let price determine whether some of these positions are sold or are joined by substantially more equities.