US Financial Markets – Alarm Bells Are Ringing

Friday, January 20, 2017
By Paul Martin

by Pater Tenebrarum via Acting-Man.com,
ZeroHedge.com
Jan 20, 2017

A Shift in Expectations
When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump’s election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election result has strongly boosted certain market expectations.

s we have mentioned late last year, US true money supply growth rates have accelerated sharply again. Since the stock market has concurrently broken out to new all time highs, its strength deserves some respect for now, despite the fact that valuations are extremely high. Our assessment is that there will likely be near term weakness, followed by medium term strength and ultimately a long term disaster. The “alarm bells” mentioned in the title of this post refer to the near term outlook.

In a recent article on post election seasonality (see “Regime Change – the Effect of Trump’s Victory on Stock Prices” for details) Dimitri Speck has pointed out that there is a case to be made for near term weakness based on the market’s average performance in post-election years. The question is now whether the current technical, sentiment and fundamental backdrop is conducive to market action that is in line with this statistical average.

Inflation expectations have trended higher through most of last year (note: we are referring to expectations regarding the future rate of change of CPI – they have nothing to do with monetary inflation). This is quite rational for a number of reasons. First of all, headline CPI is almost certain to rise due to last year’s rally in energy prices. This is due to a statistical artifact (the so-called base effect), the main characteristic of which is its inevitability.

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