Vox Populi, Vox Dei

Q: What borders on insanity?

A: Canada and Mexico.

I get why the U.S. would do what it has done. It has always been a house divided. The embedded philosophy of 'Life, Liberty, and the Pursuit of Happiness' has always guided the American psyche. They don't like being told what to do and when to do it. So, of course, they would go against the grain and revisit the 2016-20 chaos by re-electing its progenitor.

But be careful of leaping to the conclusion that because "the people have spoken," we should resign ourselves to accepting the outcome. As Thomas Carlyle said: "I don't believe in the collective wisdom of individual ignorance." Indeed.

But our job here is to anticipate the anticipations of others - not to proscribe them, so back to work.

So we have seen the typical pattern of a euphoric rally on a decisive outcome removes uncertainty - (remember what I said last week: "tanks at the border"). And today, we should see the sober second thoughts that come from too much of a good thing. Pausing to analyse the makeup of the Trump team and its policy implications will be an excellent excuse.

So far, it doesn't bode well for the global economy's smooth transition into the first part of 2025. But what do you expect when, so far, we have seen proposals for an election denier as Chief of Staff, a science sceptic as Health Advisor, and a puppy killer in charge of Homeland Security? What's next, Hulk Hogan for Secretary of Defense? With so many washed-up celebrities getting plum jobs, it's like watching re-runs of The Apprentice.

Stock prices have reacted positively to the proffered Republican fiscal and regulatory agenda. We should look at the choice of the Treasury Secretary, Council of Economic Advisors, and Fed appointees for confirmation. The deregulation and tax reduction goodies promised by the GOP will run through these posts. Markets have 'paid' for the benefits of these initiatives, and there could be slippage in the agenda that would cool investors' currently elevated level of ardour.

As I like to say, the tariff and immigration side of the policy ledger is fraught with risk. Look no further than the Treasury market's reaction to Trump 2.0 to indicate the likely path for inflation expectations. A higher bond yield regime under Trump is a certainty. The message hasn't filtered down to the stock market yet, as the momentum players in equities held sway over the few remaining bearish punters.

Valuations at the index level are nose-bleed-inducing. Small caps out-performed as the trickle-down effects of Index new highs filtered through. Compression of the equity risk premium will persist as long as bullish sentiment towards equities dominates the investment narrative.

Meanwhile, back at the Fed, Chair Powell stifled any hopes for the monetary libertarians who have been jonesing for control over interest rate policies. If this unthinkable meddling occurs, and Trump succeeds in controlling the Fed somehow, U.S. dollar strength will suffer a colossal reversal. Trump already tried this once, only to be shot down. But he does love a fight, even if his arguments are irrational and self-defeating.

So, the bull market is not over despite our discomfort with Trump and his Magat's unassailed stewardship of the economic narrative. We are now in the 'suspension of disbelief ' phase of the markets, meaning each advance brings new risks. The interplay of risk-taking and capital preservation impulses will become more random and volatile. We are in the final phase of the market cycle as earnings, not interest rates, drive stocks higher. Over to you, stock pickers.

Ultimately, it will end with a reversal of the Fed's direction in response to inflation's reacceleration. There is no sign of that yet, as they are still on the lower rate bandwagon for now. Unfortunately, this Fed has elevated being 'behind the curve' to an art form. Eventually, they should experience a "come to Jesus" moment. Or maybe I should say a "come to Volker" moment but don't hold your breath.

Roaring Twenties 2.0, as Ed Yardeni has coined it, keeps on roaring. The people have spoken.

Risk Model: 1/5 - Risk Off

Having become so quickly over-extended on the VIX and VXV election hedge unwind and without a fresh reading of AAII sentiment, the Model has missed the bounce here. The Copper/Gold relationship is groping for a bottom as both succumb to the U.S. dollar surge. Bitcoin is the obvious choice in the "hard asset" space.

Tesla has soared in the last bit of short-covering, especially now that Dark Maga has taken up residence at Mar-a-Lago. Musk seems like a strange bedfellow for Trump, given the latter's disdain for all things ESG. Keeping your friends close and your enemies closer seems like his plan.