The Golden Age Redux

Here we go again...

Way back in January, at Trump's inauguration, he proclaimed this to be the new golden age of America. Markets were euphoric and entered a manic blowoff top just days later. To the shock of over-levered bulls, after the inauguration Trump launched the largest global trade war since 1930. Week after week he piled on more tariffs using every excuse in the book. Markets tanked. And then came Liberation Day April 2nd. In addition to the tariffs he had piled on to date, he unveiled a massive new set of "retaliatory" tariffs. Markets collapsed. The Nasdaq fell into bear market. The Magnificent Seven suffered the largest losses. So a few days later Trump capitulated on ALL retaliatory tariffs except China. That was the largest up day since October 2008. Subsequently the market staged a rebound from those bear market lows, however the trade war between the U.S. and China escalated as there was no sign of capitulation from either side. Then came another total capitulation this week, this time on the China tariffs which were de-escalated far below the Liberation Day level of 54%, down to 30%.

Which gets us to Golden Age Redux.

Now that markets have traded back to overbought levels and volatility has collapsed, all manner of narratives can once again be sold at the new permanent plateau of prosperity. Last week Wall Street was downgrading their S&P price targets and this week they were panic upgrading their price targets. And considering the fact that the first golden age was a golden selling opportunity, one can only wonder how many bulls were once again easily fooled into believing THIS is the golden age of prosperity. In other words, imagine if they got fooled twice in a row. Who to blame this time?

Here we see the total put/call moving average has collapsed back to levels preceding two major tops.

As I mentioned in my last blog post the safe havens are rolling over. Here we see the ratio of Momentum stocks to low volatility stocks reached a new cycle high showing a manic reach for risk:

One of the biggest tales being sold right now is that inflation is low and therefore the Fed will be free to cut rates soon. The Fed doesn't believe that story and the bond market doesn't believe it, but just about every bullish pundit believes it. They are all pointing to lagged inflation data to prove their point. Unfortunately, more timely inflation data is telling the opposite story:

"Traders are forward looking, and hard data are backward looking. Consumers and companies, while they may be worried, have yet to feel the blow of steep price hikes or empty shelves...That could be about to change. Walmart CEO Doug McMillion warned on Thursday that tariffs are already affecting costs"

The worry is that if Walmart, the world’s largest retailer by revenue and known for its low prices, can’t avoid raising them to remain profitable, then others won’t be able to, either. And if there’s one thing to remember from the recovery from Covid-19, it’s that rising prices are contagious."

In this chart we see that in Trump's first term Treasury Inflation expectations were at a cycle low while consumer sentiment was at a cycle high. Now they are reversed and we are to believe it's all due to politics? Is the bond market a Democrat?

In summary, today's bullish pundits will continue to use the lagged inflation and GDP data to encourage over-allocation to risk. Up until such time as the lagged data catches up with reality and all willing fools are duly buried.