“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.”
-Baron Acton
Karl Rove was famously referred to as President George W. Bush's brain. Steve Bannon, in the early weeks of the Trump Presidency, seems to have even surpassed the brain designation. According to Mainstream Media, Bannon is either, aside from being the devil incarnate, the second most powerful man in the world or the most powerful since he's making all of Trump's decisions for him.
Based on the track record of mainstream media accuracy in recent years, Bannon is undoubtedly not nearly as powerful as they wish us to believe. But logically it makes sense to vilify someone who said this:
“The media has zero integrity, zero intelligence, and no hard work.”
(To be fair, he’s not terribly far off.)
There is no doubt that Bannon does have influence, especially on the policy and strategic side. (Despite his addition to the NSC, we don't see him having much influence on foreign affairs.) So it is worthwhile to give some thought to Bannon's beliefs since he was a relative unknown prior to the election of Trump.
In part, Bannon has been shaped by the writings of our own Demography Sector Head Neil Howe. In particular, Bannon has regularly emphasized a book that Neil co-authored along with William Strauss called, “The Fourth Turning: What Cycles of History Tell Us About America’s Next Rendezvous With History.”
In the Time Magazine cover piece in which Bannon is called the second most powerful man in the world, the magazine noted Bannon’s captivation with the book:
“The book argues that American history can be described in a four-phase cycle, repeated again and again in which successive generations have fallen into crisis, embraced institutions, rebelled against those institutions and forgotten the lessons of the past--which invites the next crisis... During the fourth turning of the phase, institutions are destroyed and rebuilt.”
For those of you who have already had the pleasure of meeting with Neil, you know his views are not quite so draconian. Yesterday, we did a segment with Neil on Hedgeye called, “Inside Bannon’s Brain." Click here to view the segment.
Back to the Global Macro Grind…
In global stock market news, the failed candidate for California governor and new head of the Minneapolis Fed, Neel Kashkari, wrote an essay yesterday giving an overview of why he joined in the unanimous chorus of Fed doves in keeping rates unchanged. He based his view on the fact that inflation is subdued and employment has still not reached its full potential. #GolfClap
Needless to say, if you are looking for the Fed to stand in the way of the #TrumpTrade, keep your expectations “subdued”. In the year-to-date, every major sector in the SP500 is up, with the exception of energy which is down just under 5%. The SP500 itself is up almost 3%. The technology sector is leading the way (repatriation anyone?) and is up almost 6% on the year, which leads us to the NASDAQ.
On the back of recent all-time highs in the NASDAQ, volatility is at literal all-time lows. As my colleague Ben Ryan wrote in an internal note to our team today:
“Yesterday’s close marked the least volatile 60D time period in the Dow and Nasdaq ever (I have the data back 30 years). The implied volatility premiums are MUCH higher in the DOW. Consensus is much more positive on the Nasdaq. Vol looks cheap 1) to hedge an underlying long position in Nasdaq on overbought signals – buying short-dated at the money puts; 2) Straddles – buying a put and a call at the market and this way you’re purely price neutral and just long vol.”
Certainly, this is all good news for the long only managers. But as for the hedge funds who take part in the dark act of short selling, not so much. According to WSJ this morning, over the last month the 50 most heavily shorted stocks in the SP500 are up more than 6% versus only 1.8% for the index itself. Another reminder to screen for low short interest as a style factor when selecting shorts ...
(On the topic of volatility, we will be hosting a Black Book call this Friday at 11am to discuss the extremes we are seeing. Ping for details.)
Despite bringing in the former CEO of Exxon Mobil as Secretary of State and despite all of the proclamations that he was in bed with big energy (mostly by the Mainstream Media), oil has struggled under the new administration. In reality, that has nothing to do with Trump and everything to do with the fundamentals.
Yesterday, the American Petroleum Institute reported a 14.2M barrel crude inventory build last week. This was the second-largest build on record and comes ahead of today's DOE report. Meanwhile, the EIA said in its monthly report that domestic output will average 9.53M bpd in 2018, the most since 1970. Drill baby drill!
It is no surprise then that OPEC is again making noise about extending production cuts. If they do, and stick with the cuts, that might buoy the price of oil, but, as always, it’s difficult to suspend economic gravity.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.37-2.55%
SPX 2
VIX 10.23-12.53
EUR/USD 1.05-1.08
Gold 1185-1245
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
