The policy of being too cautious is the greatest risk of all. Jawaharlal Nehru

When the yield on the 10 year treasury moved from 1.80% to 2.30% over the course of the last week, it signaled a shift in the mindset of large investors from the fear of deflation to one of expecting inflation. What might have happened to cause such a dramatic change in bond yields?  Something in China, maybe Japan, how about Europe?  What could it have been?  

Perhaps the biggest money managers in the world just think the domestic economy is ready to rock after eight years in, ahem, the can?  Oh yeah, in case you forgot, there is a new sheriff in town, and his name is Donald Trump, along with a Congress being run by the Republican party, albeit with a Senate which is not immune from a filibuster from the Dems. Anyway, a dramatic change of governing policy requires participants adapt to those circumstances, and have they ever.  Clearly, there is the anticipation of a more inflationary environment and the shift out of bonds and into equities this week was the byproduct of President Trump.  The key question is, could this be overdone, or just the preview of the main event?

Looking at historical data, bond bulls believe the move this week is too far too fast, with overcapacity in many industries and most importantly, a vast labor pool ensuring inflation will remain muted.  Oil prices bouncing along the bottom of a low range, mostly because of a glut of foreign supply from the friendly folks at OPEC (especially Iran), supports this argument.  

Equity bulls argue that after a thirty five year bull run in bonds, the dramatic change in government policy from nearly hostile toward business to downright friendly must help growth a little bit, maybe, just a touch, a tad, a smidgen?  Heck, if you went crazy, you might even suggest you could see a surge in risk taking, right?  At the very least, a profit seeking enterprise won’t be demonized for attempting to maximize profits.  

My own thinking is regulation is always going to affect the mindset of those who are regulated, both suppliers and consumers. When you have fewer rules, or less stringent enforcement, or lower tax rates, a business is more apt to reinvest capital in search of higher profits in the future. If you add in lower rates on bringing back profits from outside the country, again, the attitude towards risk becomes more aggressive. Of course, a key factor is going to be the change in policy towards trading partners, possible tariff retaliations, and the effect on currencies.  All are totally dependent on the Donald, who made the central theme of his platform a move toward fair trade or face the consequences. In sum, it remains to be seen what the new administration gets accomplished in the critical first 100 days and the resulting economic effects.  Still, ask any business person to compare Mr. Trump to Mr. Obama and see what kind of reaction you get.  

In that light, you might enjoy an interview with Mr. Malone on CNBC where he gave his thoughts, and more, on the prospects for the new administration.  Having again attended Liberty Day this year, it is always a good learning endeavor and run in a first class manner.

Elsewhere in the markets, Target (TGT) reported a stellar quarter, investors cheered and then bid up the stock. Its largest competitor, Wal-Mart Stores (WMT), delivered its usual disappointment and you can only guess what the market reaction was. Financials have been the biggest beneficiaries as all the largest banks have had major moves higher. It is a light week this week as Turkey day is Thursday (hope you enjoy it immensely) and Black Friday follows (market is open only a half day on the final day of the week). 

In the political realm the Trump administration is busy making more enemies in the progressive movement with the first cabinet and personnel appointments.  The reaction has been hostile and Donald just started, wait until he starts implementing his policies.  If you think the media is upset now, imagine when Donald gets sworn in and starts working his magic.  

I would point out that Mr. Bannon is a Harvard MBA and worked at Goldman, Donald went to Wharton, as did Ivanka. Ivanka’s hubby, Mr. Kirschner also is a Harvard MBA.  All have made millions and been around the block once or twice, or maybe more. On the Democratic side, there is a huge dilemma they face as the obvious leaders would be Mrs. Warren and a 76 year old socialist named Bernie. If Hillary’s more moderate policies did not attract voters in the industrial midwest, will more progressive ones do the trick?  Not an easy choice, but if the new Republican group fails, they could win by default. In the meantime, let’s go eat some turkey.