Updating the Reflation Bounce

The president announced he is imposing tariffs on currency manipulators (which is a way of saying all nations with paper currency) and talked the USD down earlier, with FOMC due on December 11th.

Anyway, Uncle Buck is off its perch today but we’ll see how that goes. It’s trending up and stuck between daily chart resistance and support, as has been the case all too often in 2019. The goal for Trump is reflation, where the US is no longer relatively impaired by its strong currency (hello ISM out today). Look, nobody wants Goldilocks dead more than me and this would be anti-Goldilocks, anti-consumerist culture.

While I suspect his policy tools as being ineffective if not damaging on the whole, I do like this support for grittier aspects of the economy like manufacturing, farming and even mining in this context (let’s put aside for a moment Trump’s other agenda, which was massive corporate welfare using different weapons (like the tax code and deregulation) than the Bernanke tipped missile aimed at bailing out the big banks and other large enterprises under Obama.

Trump wants a weak Fed and thereby a weak dollar. That would be playing the same game everybody else is playing and it would woo inflation. So far, it’s been just a bounce. Here’s a too-busy chart showing a few items that could go hand in hand.

The inflation gauge TIP/TLT especially is going hand in hand with the 10 year yield, which is important in determining the degree to which inflation is driving yields at any given point.

KBE/SPY ratio would rise as banks, which would favor an inflation-driven steepener in the yield curve, play the old borrow short, lend long game. At least in theory as long as the economy holds up and there’s someone to lend to. So, with respect to a steepener… shelf life is a consideration.

yield curveyield curve

Of course, said steepening is not yet in effect. It’s just a little bounce, like the rest of the reflation trade as noted above. What’s more, this picture can steepen from inflation’s opposite, deflation as well. Look no further than 2008.

yield curve

So that’s our update here on a busy presidential tweet day.

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