Bern Baby, Bern!

Republicans sell nightmares, Democrats sell dreams. Reality, and the middle ground on which it rests, always takes a back seat. Welcome to the next two years of U.S. politics. But does the market care?

The increasingly polarized political climate doesn't bode well for the shape of economic policymaking over the next two years. The two party system that prevails in the U.S almost guarantees a policy stalemate until the next election. With the FED effectively neutered by an equity market prone to risk purging hissy-fits, the heavy lifting for pro-growth policy construction is now up to a China trade deal.

Trump's three pronged domestic policy initiatives, deregulation, taxes and infrastructure, is only two thirds done. But given the political backdrop, I think we can safely take infrastructure spending off the table. If the President has to invoke a national emergency just to build a useless wall in the Mexican desert, how can he get congress to agree on funding anything substantial? Oh, yah, don't forget, they have the small matter of a trillion dollar budget deficit to contend with for the foreseeable future.

As to China, Trump is now on the 2020 election shot clock and Xi has the rest of his life to do a deal. The ball is firmly in Bejing's hands, as if it ever wasn't. The word on the street has shifted to talk of a watered-down deal that punts the troubling issues of IP theft and forced technology transfer down the road, presumably to the WTO. But if the Chinese buy $100Bn of wheat, soybeans and LNG ( they were already going to anyway) the Trump team can then wave the trade flag as a 'huuuge' victory and dismiss any contrary opinions as the biased ramblings of the Fake News MSM.

But China actually has some incentive for improved IP protection, given that it works works both ways. With their increasingly massive investments in technologies of the future involving AI and Big Data, China will need such safeguards as much as America. Huawei, one of their corporate champions needs a level playing field if it hopes to prosper. Self interest dictates they give on this issue. Advantage Trump, as long as the hold Meng Wanzhou as a pawn.

In an effort to deflect negative reaction to a watered-down deal, Trump's favourite flying-monkey henchman, Commerce Secretary Wilbur Ross, has begun trying to shift attention to European auto imports. Apparently "national security" hinges on whether Americans drive p.o.s. Buicks instead of BMW M5s. Can somebody help me with this? But Trump needs a new scapegoat issue on which to stump in MAGA-land.

Back on stock market land (what, dear reader, we really care about) the market is hovering, drone-like, over a set inflated hopes. But the market, having relearned the important lesson "don't fight the FED" is justifiable in its move up from the lows. With the 180 in FED thinking and the implementation of a Powell Put, just the removal of a downside risk factor is enough to cause investors to buy. Especially in this environment of ultra-low interest rates. Remember TINA? At a 2.65% Treasury 10Y, Bund yields at 10 cents and JGBs at minus 4, she's back with a vengeance. So a China trade deal, any deal, will be enough to generate upside in the risk markets, despite the lack of confirming fundamentals.

We are now left to 'look over the valley' of weakening data and diminished earnings expectations. But that's what markets do best. They do the thing that makes the most people wrong. And most people, including me, are cashed-up, defensive and 'wrong' lately by not fully participating. I'm a bit chagrined that I didn't see through Trump more. He needs a strong stock market much more that he needs comprehensive and fundamentally transformative trade reform. As for Powell, I didn't expect him to backtrack so completely. Well, he's only human I guess.

Global recession fears have been just that - fear over reason. The U.S. Retail Sales miss last week seems to be simply a case of a bad data point. Walmart, Amazon, Costco and Best Buy all had decent Q4s and that doesn't jive with a weak print in the data. The consumer and investor surveys were taken during a period of maximum duress, with the twin threats of a punitive Powell and bellicose Trump weighing on sentiment. This morning's NAHB index is bullish. Cooler heads are now prevailing.

The weakness in Europe seems to be bottoming as well, with the reports of a less bearish ZEW survey and a recent positive inflection in the European Citi Economic Surprise indicator. Credit markets are back to normal reversing the head-fake plunge experienced during the year-end liquidity vacuum. China credit growth is looking higher as per Friday's huge bank lending data surge. Surprisingly, this tired old bull is still on its feet.

With the market very over-bought, it is prudent here to pause and be a bit cautious, but not to get bearish. The 10YR yield is the single biggest non-confirmation of the risk-on move, but, as we saw most of last year, it is a compromised indicator, given the artificially low rate structure globally. The zero-to-negative 'yield sink' in Europe and Japan that is sucking U.S. rates lower is probably to blame. Thankfully the flat yield curve is actually a governor on the FED as they fear an inversion. It gives them further incentive to remain on an extended 'pause, especially' given existing muted inflation concerns.

Going forward, we should now focus on the rotation trade from the crowded growth trade to unloved old economy stocks. The tech trade is challenged by potential regulatory overreach in the era of privacy breeches, especially in this social climate of income inequality. Amazon has put a bullseye on its back with the Brooklyn HQ decision. The flood of tech related IPOs will temporarily suck up liquidity from that sector, slowing any broad based rally and promoting a rotational shift.

Keep an eye on Bund yields, the Euro, KOSPI and especially copper prices on the announcement of a "deal" on trade. The rotation will only follow if they confirm the shift to a more cyclical posture. I can wait a bit more for that trade as I while away my time in sunny Fla!

Sorry to my frozen Canadian friends, I'm feeling the burn!

Risk Model 4/5 - Risk On

A collapse in volatility and hoped-for trade deal positivity is creating a cushion of comfort for stock market bulls. AAII sentiment and Copper/Gold are in sych with the positive vibe.

Only an overbought condition is signaling caution as the RSI is above 70.