Global Macro Reassessment Triggered by Stephen Duneier
“If we learned anything from the previous eras it is that the only thing that can be as disruptive as a leap in technological innovation is a decisive shift in political will.” The Coming Seismic Shift in American Politics (Bija Advisors Macro Radar - March 30, 2015)
I’ll be honest, I haven’t checked the markets post-election. What happens in the first hours, days or even weeks isn’t nearly as important as understanding what has changed and what it means for the next iteration of behavior patterns as they relate to policy, economics and market price action over the coming years.
What Changed It has been my thesis that the environment in which we have existed until last night had begun roughly 6 years earlier, repeating itself seasonally. The key drivers have been the end of the Chinese urbanization project, extreme risk aversion, impotent monetary policy instruments and nonexistent fiscal policy, all of which are a function of the leap forward in the evolution of technology that we’re experiencing. The result of which has been weak commodities, low interest rates, strengthening equities that few participated in, low inflation, slow growth, widening wealth and income disparity, and a fairly regular ebb and flow between euphoria and despair that has generated an awful lot of pain and confusion along the way.
Based on long-term historical patterns, the key reassessment trigger for this thesis has been a decisive shift in political will. Although that shift began globally with the Arab Spring, as it relates to America and the global macro landscape, I believe that shift was cemented last night with the election of Donald Trump. As significant as that may appear on the surface, when combined with a republican controlled legislative branch and the coming control of the judicial branch as well, it would appear a sixth party system is about to take hold in America.
As an investor, I don’t care whether it should or shouldn’t have occurred, or who is responsible for it. It is also irrelevant whether or not it’s “best” for the country, and indeed the world. Proper decision making simply requires that we objectively define the problem we are attempting to solve, the result we are trying to achieve and all of the factors that will affect our ability to do both, but which we do not control. In other words, if we are going to generate alpha going forward, we must understand the environment in which we exist. Period.
So, what has changed and what will remain in place? Behavioral norms have likely just shifted quite significantly. We should anticipate more protectionism, more fiscal spending, lower taxes, higher interest rates, less independence for policymaking institutions such as the federal reserve, a buildup in military spending, and increased uncertainty. Why? Because that is what the candidate told us to expect. To discount his candidacy platform simply because you think it too extreme or counterproductive, is to inject cognitive bias into your analysis. A bias similar in nature to what led so many investors to get China wrong for the last 15 years. It is cultural.
Donald Trump campaigned differently, behaved differently, spoke differently and interacted with the establishment differently. And he won. He has no incentive whatsoever to amend his platform. To build an investment thesis on the fundamental expectation that he will “reel it in” or “tone it down” now is, in my opinion, irrational. After all, he didn’t do so when most believed that he needed the permission of others, why then would he do so now that he clearly doesn’t require it?
Updated Views and Expectations Before I go into the specifics, let’s put what follows into perspective. Up until this moment, nothing was known with absolute certainty. We had a set of expectations with associated probabilities. What occurs in moments like these is that those probabilities and expectations are adjusted. It’s really that simple. In order to do so, requires that you did the work to define those expectations previously. Then, when you properly define what has just changed, you can identify which assumptions remain intact, and which require an adjustment.
OIL: I remain bearish commodities, particularly energy related, for he has made it clear that he will open every spigot available. Fracking, offshore oil drilling and any other option for extracting energy, increasing supply and making the US more independent is now wide open. I’d be careful about playing WTI versus Brent though, for we don’t know whether he will block imports or allow unfettered exports. Either could be considered logically consistent with his platform. In addition, his comments re: the Iran deal are likely to raise concern on their end that an embargo may be back in play. In light of that, it would make sense for the Iranians to ramp up production in order to earn as much as possible in the meantime.
VOLATILITY: I expect markets to become even more vulnerable to wild swings in expectations as consensus ebbs and flows from “he’s just a typical Republican” to “he’s a loose cannon”. If interest rates go up (see below), fewer vol dampening products will be utilized, which shifts the range of vol expectations higher.
RATES: Owners of capital have been clamoring for higher interest rates so that they can earn a decent return without having to take risk for quite some time. The fed has been hinting that they are more open to the idea in recent months. So long as they remained independent, I believed the odds of higher rates were quite low, because fundamentals do not warrant it. I now see the potential for higher interest rates and a steeper curve as far more likely, for it would serve Trump well. I also see the potential for very negative yields in the US as having gone down significantly. In other words, my range for yield expectations on fixed income products has just shifted higher.
GROWTH: Protectionism is bad for growth. There is no getting around that. Global growth had significant headwinds before. This only serves to fortify my low growth expectations. Having said that, growth expectations haven’t been a significant factor in price action, and I don’t see that changing.
EQUITIES: I’ve been unabashedly bullish equities for the past 6 years, seeing the risk being in favor of an outlier move higher rather than lower. I’m now reducing the probability of an outlier move to the upside, but that should not be taken to mean that I see stocks collapsing any time soon. Growth expectations won’t help, but as I stated above, my thesis prior to now was agnostic about growth anyway. I believed that higher stock prices were a function of the extraordinary level of risk aversion among the owners of the world’s capital, particularly Americans. That hasn’t changed. However, given that much of the uncertainty is now America-centric and interest rates expectations are now higher, it gives me pause. Having said that, I believe the tax holiday is imminent. After all, it is such a simple way to deliver the appearance of confidence in his leadership, and he won't receive any resistance from congress. In other words, it is perhaps the lowest hanging fruit. Huge bang for the effort. And that is bullish for US equities.
US DOLLAR: I’m now quite bullish on the USD. Nothing that I’ve laid out above argues for anything but strength in the dollar, at least in the medium term. Higher interest rates, a tax holiday that will unleash a massive wave of inflows and the threat of protectionist policies should all be supportive of the US currency, particularly against commodity producing emerging markets. Politically, a strong dollar will be very appealing to Trump’s base. It can be spun as a reflection of the country’s growing power and global standing under his leadership. As a result, I see this as a high probability outcome.
INFLATION: This is a tricky one. Technological advancements will continue to push us toward deflation, but protectionism, perhaps even capital controls at some point, provides the first potential inflation driver in years. As a result, the balance of risk is now less skewed to the downside than I’ve seen in quite some time. GOLD: My expectations for both its price and volatility are now higher.
About the Author For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis and Behavioral Investing in the College of Engineering at the University of California. His book, AlphaBrain, is due to be published in early 2017 (Wiley & Sons).
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management. As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
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