Brazil has many, many problems. This may just be the catalyst for their market to overturn, especially since they have been performing so well this year. Trump doesn't help their situation either, however overblown this Trump Trade may be. Just .02 here.
There are risks, however, when you are paying 10x CAPE the downside is trumped by the upside. From a valuation point of view, things are good. From a sentiment, I still see a lot of skepticism over the brazilian future. Things are not as bleak as they were at the lows but the market is still hated by and large. Which is a good thing And looking at the catalysts, I find it hard to see the market not taking off when GDP bounces, companies reinstate dividends, the central bank slashes rates by 200-500bps. Even if global trade suffers a little Brazil is pretty much the last large economy where real rates are still huge, its the place to go to get some returns in a return starved world. Now with the government moving the right direction, I dont think people appreciate how much assets can levitate as that real rate comes down. That move can lead to an outcome in stocks that can range anywhere from modest to gigantic. Risks are to the upside imo
Well, maybe I'm in a special situation. I feel like I know Brazil pretty well, so I dont need a stop. But I wouldnt necessarily sell out in more unknown markets in this trump panic. Its such a small negative catalyst compared to things like a banking crisis (like in 2009). I bet we will look back in 6 months and laugh at this Trump dislocation A lot of what he will do will be disciplined by the "TARP effect". He says something crazy, market tanks, he comes back and says he was taken out of context or that he means something else. He is a market guy so are his advisors. They will pay attention to it to the disruption they are creating and reverse, squeezing out all the shorts
Jamie Dimon was asked for UST secretary. He wont take it but he is a free trader. Maybe Trump is trying to send a message? “We shouldn’t hold back the progress from trade and technology. But it’s fair to lift up the people that were hurt by it, as opposed to killing the golden goose,” Dimon told CNNMoney’s Poppy Harlow in an exclusive interview in Detroit. Dimon said “trade has been hugely beneficial” to 99% of the people, but not everyone. His comments allude to the ongoing debate over how many jobs have been created and destroyed by controversial trade deals like NAFTA." - Dimon http://money.cnn.com/2016/06/03/investing/jamie-dimon-free-trade-americans/
And how about those UST bonds? Falling off a cliff! I never put my bund/buxl short, IB only allowed me to trade bunds this wednesday and I got no interest in chasing this market down Gundlach says he likes TIPS, there is another interesting place to park some cash. I probably should have switched the last of my UST exposure (5.6% of assets, 15y maturity) to TIPS a few months back. But now its too late to sell
US NGDP growth was around 3% and languishing before the election. The Fed was unwilling to prop this up (to the historical 5-6%) because of fears of creating excessive risk taking, potential inflation and things like that, a lot of market monetarists criticized the Fed for not picking up that slack and letting income growth languish like that. Now with the new Trumponomics, the mix of fiscal and monetary policy will change and it looks to me that since fiscal policy will hit the accelerator and monetary policy will continue to pullback, there is a real possibility that NGDP will reach 4-5%. The question is, how much of that will be real growth and how much will be inflation. If its inflation, that whole thing will be offset by tighter monetary policy (faster rate hikes, the Sumner critique) but if its real growth, then everything will be great as RGDP will rise to 2-3% with 2% inflation (4-5% total NGDP growth). It looks like the stock market is expecting that more bullish scenario I'm sure there will be an inflation component to these policies (and 5-10y TIPS spreads are showing that expectation) but it looks likely that there will be more real growth as well Its a shame that there is no market prices to see that but I think this fiscal policy change will be a good thing as it comes in a time where the Fed needed someone to pass the batton to.
https://www.greatagain.gov/policy/trade-reform.html " Trade Reform Free trade is good as long as it is fair trade. American workers are the best in the world. On a level playing field, we can compete, and win. Yet, too many American jobs have been lost over the last decade because of trade deals that do not put Americans first. Factories have closed and jobs have moved overseas because the government has imposed crushing regulations and taxes, while it negotiated trade deals that incentivized American companies to make things abroad, where environmental and labor protections are minimal and wages are low. The Trump Administration will reverse decades of policies that have pushed jobs out of our country. The new Administration will make it more desirable for companies to stay, create jobs here, pay taxes here, and rebuild our economy. Our workers and the communities that support them will thrive again, as more and more companies compete to set up manufacturing in the U.S., to hire our young people and give them hope and a real shot at prosperity again. America will become, once more, a destination for jobs, production and innovation and will once more show economic leadership in the world."
The reason I bag held those USTs a bit is something I mentioned before, we are all short real income by the fact that we are born and need that to pay for expenses. When nominal and real rates rise like that, that benefits us so much because we can now put capital to work (both current cash as well as future cash from interest/dividends/salaries) at better rates. So whatever loss I have there is more than offset by better priced USTs, IG bonds, HY and EM bonds as well. We can finally start to get paid again!