The Swamp

The Swamp, as you know, is a metaphor for all that is wrong with the incompetence that Washington politicians continue to offer us year in and year out. The President says he wants to drain the Swamp while some say the Swamp is draining the President.

I suspect most Americans are exhausted with Swamp fatigue, fake news, the Fed and low interest rates.

Speaking of fake news, we saw two stories in the Wall Street Journal recently that caught our attention:

“Two of Wall Street’s most powerful financial CEOs — Larry Fink and Jamie Dimon — are raising warning flags over the nation’s economy.

BlackRock Inc.’s Fink said Thursday that U.S. growth is slowing on concern whether the Trump administration’s agenda will get through Congress. Dimon lamented that “it is clear that something is wrong” with the nation in a letter to investors Tuesday. Both CEOs are part of a group of business leaders that advise President Donald Trump.”

Yet, this week, Morgan Stanley’s Chief Investment Officer of Wealth Management, writes, “although optimism is a late cycle phenomenon, history tells us the best returns often come at the end. It has taken eight long years to get here, but Wall and Main Street are finally starting to feel a bit better about the future.” “the end of the cycle is often the best.” Morgan Stanley is calling for a possible 30% rise in the S&P 500 by the end of the year. “Think 1999 or 2006-07. In a low-return world, investors cannot afford to miss it.” Cannot afford to miss it??

I’ll side with Mr. Dimon’s and Mr. Fink’s cautiousness rather than Morgan Stanley’s exuberance for now.

Ciovacco Capital writes: “Given the Trump trade is based on expectations for reduced regulation, lower taxes, and faster economic growth, if investors had moved all their chips to the Trump table, we would expect strong outflows in defensive-oriented bonds over the past several months.” According to The Wall Street Journal, skeptical investors are racing toward bonds at a record pace:

The WSJ writes: “Investors are buying record volumes of new bonds, signaling that many remain skeptical about the prospects for faster economic growth and are reluctant to move on from a strategy that has worked for years… The strong appetite for bonds shows how hard it is for investors to shake the assumption that the economy can do any better than muddle along as it has for years, with U.S. real gross domestic product growing less than 3% a year.

On April 10th, President Trump began walking back the time frame for tax reform and tax cuts. Healthcare reform comes first. Additionally, he just made a very rare comment that the U.S. Dollar is too strong and that he prefers low interest rates. He also changed his positions on China, NATO, interest rates, the national debt, and the Export-Import Bank. These are big policy reversals from candidate Trump. It sounds like Goldman Sachs/Wall Street and the President’s son-in-law are re-directing White House policies.

S&P 500 – Six Months

The S&P 500 topped out in early March after the President’s State of the Union address. Stocks have come a long way on a lot of promises. Stocks remain expensive by historical standards yet interest rates continue to remain stubbornly low despite the Fed’s forecast for increasing rates later this year. Earlier this week the yield on the 10-year U.S. Treasury bond traded at the lowest yield level of the year.

We won’t know if the Trump Jump will revert to a Trump Dump until it happens. Volatility and risk have started to pick up dramatically in the last few weeks with the incredible daily news flow.

Gold is trading at a five-month high as geopolitical events and U.S. Dollar weakness continue. From Bloomberg: “Gold prices have climbed back to the highest level since November on growing worries about everything from North Korean nuclear tests to faster inflation and French election results. In 2017, bullion has risen 12 percent.

Gold – Six Months

We will close with an extreme example of one stock that is trading at new highs. Tesla Motors (TSLA $305) just surpassed General Motors in valuation reaching $51 billion in market capitalization, even though the company sold just 76,230 cars last year – compared to GM’s 10 million. That means Tesla has less than one percent of GM’s market share. Extraordinary CEO! Extraordinary company! Extraordinary vehicles! Extraordinary valuation!

Regards,
J. Brock Hamilton April 12, 2017