The financial markets think President-elect Donald Trump is in fact two different people.
I?ll use my baseball analogies here.
The stock market thinks he is Babe Ruth, the Home Run King of the 1920s. Stocks (SPY) have blasted through to new all time highs almost every day since he has been elected, with some shares up a heady 35%.
The bond market thinks he is the worst strike out king in history, not even worthy of a little league slot. US Treasury bonds have collapsed in the past three weeks.
Never mind that these two market trends are diametrically opposed to each other. In the real world, sharply rising interest rates bring stocks market crashes, not booms.
So which Donald Trump are we going to get?
And here is what even Donald Trump almost certainly doesn?t know: How is he going to deal with two huge dilemmas?
I?ll start with dilemma number one.
A key part of Trump?s economic program is for the US government to borrow up to $1 trillion to spend on infrastructure. Who is America?s largest lender?
China, which over the past decade has purchased nearly half of the US Treasury bonds issued. The Middle Kingdom now owns just short of $1 trillion in American government bonds.
Do countries embroiled in trade wars with us lend us money?
No, they don?t.
So for Trump to finance his expansion he needs to cozy up to the Chinese.
My bet is that he will slap some token punitive import duties on a few selective items, like President Obama did with Chinese tires and chicken feet and declare victory. These will be little more than photo ops.
The remaining bilateral trade between the US and China will continue as it has done for years.
That totaled an enormous $416 billion during the first nine months of 2016, $337 billion in Chinese exports to the US (we love those iPhones!), and $79 billion in US exports to China (they love those Buicks and Boeings!).
The Chinese already know this which is why they laughed throughout the presidential campaign, not taking any threats of trade wars seriously.
When forced to chose between a boom and a trade war, the former will win every time, as Trump is about to find out.
As for dilemma number two, it is far more perplexing. The mere prospect of Trump?s economic program has triggered one of the sharpest selloffs in bond market history.
This is why a double short position in US Treasury bonds (TLT), (TBT), has been quite profitably at the core of my trading book since November 8th.
What happens when governments cut taxes and increase spending? Deficits and interest rates explode, crowding private borrowers out of the market (i.e. you and me).
This fuels a stronger US dollar (UUP) which, with higher rates, will act as a major drag on the economy.
It gets worse.
You are not the only one who has been feasting on ultra low interest rates for the past seven years. So has the US government.
Take overnight rates from 25 basis points now to as much as 6% in three years, and the cost of the debt service of the federal government soars.
That takes it very quickly up from $23 billion for fiscal 2017 to as high as $100 billion a year by 2020. That will negate a significant portion of Trump's economic stimulus.
Of course, the other guaranteed outcome of these policies is the return of high inflation. This will prompt the Federal Reserve to greatly accelerate their pace of interest rates hikes.
So how do we trade around all of this?
I believe that it will be totally ?RISK ON? for the next several months, as the optimists and permabulls run the table. Then, reality will set in, once congress decides how much The Donald really gets to spend.
Remember, the majority of congressmen cut their teeth on fighting deficit spending. The budget deficit is about to balloon from $400 billion to $1.50 trillion.
That?s when we find out what kind of negotiator Trump really is.
I went through all of this with President Ronald Reagan 35 years ago and guess what happened? He promised to cut taxes, increase defense spending, and balance the budget.
He certainly cut taxes and increased defense spending in a big way. But the national debt rose 400%, from $1 trillion to $4 trillion. We are STILL paying for it.
The bottom line here is that the deficits ALWAYS win!
One thing you can say about Donald Trump, for sure, is that he will be God?s gift to traders.
Asset prices around the world are already trading at levels undreamed of only a few weeks ago.
BUY STOCKS AND THE US DOLLAR AND SELL SHORT BONDS OF EVERY FLAVOR. IT DOESN?T GET MORE CLEAR THAN THIS.
Just keep discipline and wait for the right entry points. But then that?s my job.
And we are now only three weeks into trends that could have another three years to run.
Trump is God?s gift to financial newsletters for that matter, as we will have plenty to write about and explain going forward.
My BS detector has been refined for 50 years now, and it is about to get a serious workout for your benefit.
