Stocks continued on last Friday’s monentum with the S&P gaining 1%, supported by W.Buffett’s thank you to D. Trump’s tax cut in his annual investment letter. He also cautioned that he was funding it difficult to make acquisitions at current prices. Russia’s ruble appreciated the most in emerging markets after S&P Global Ratings boosted its credit score to investment grade. Gold climbed and European sovereign bonds were mixed. The record levels of short positioning in Treasury futures exposes it to some form of a squeeze. It might be worth mentioning over the near term because the Fed might not deliver the four or even the three rate hikes that the market anticipates based on Fed talk, in our view. We have just witnessed what a rate fear can bring to the stock market. Nobody wants that, not even those at the Fed opining they do not care one bit about short term stock market gyrations. They do care of course and there was a distinct taste of systemic panic in the last 10% stock market correction which forced the action of God on the s&p future to bring back calm. The US economy needs a lower dollar, the US President wants a lower dollar (and low borrowing rates!), the US Treasurer promised nearly as much in Davos (before having to awkwardly retract, leaving his thoughts and intentions most likely unchanged .. just like the Mexican Wall...unacceptable by the other party but never to be abandonned by the current administration) and there should be no doubt as who the Masters are. It will be hard enough to fund those extraordinary USD1trn deficits for the Fed not to want to precipitate the pricking of the debt bubble. This means it might slow down adjusting rates, still tightening one (last?) time this year in March with more dollar weakness ahead possible if not likely. Treasury Secretary S. Mnuchin brushed aside signs that investors are nervous about inflation and criticism that growing debt will hurt US economic security, saying that President Trump's policies won't cause inflation. With the Davos episode in mind, it is not entirely clear if that is what he hopes, thinks or wants. But it is not what will happen in our view. This also means that 2018 might be the year to own inflation hedges and therefore some gold as well, irrespective of the number of ‘100 tons of paper gold selling at market’ episodes we will get that will create short term noise on that chart. It has never been the case that a huge fiscal stimulus was given to the US economy at the time it already operated near full employment (capacity) with a central bank likely (in our view) to back off from normalizing by fear of causing a stock market accident. We have to prepare for higher inflation and be very mindful of what we look at to assess it. That is good for stocks (currency hedged..) near term, even better for gold, silver and bombed out gold shares, in our view.
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