The Trump trade is dead

The bull market is alive, but the Trump trade is dead.

Academic and former US Treasury secretary Larry Summers last week said the Trump administration's budget was based on an accounting error "that would justify failing a student in an introductory economics course". And chaotic policymaking means markets have essentially given up on the idea that US president Donald Trump will slash taxes and regulations and boost infrastructural spending.

The dollar is back to pre-election levels, as are inflation expectations. Ten-year US bond yields have fallen from 2.6 to 2.25 per cent and bank stocks have underperformed lately, so much so that the initial Trump premium has vanished, according to Goldman Sachs. US stocks with large international exposure have outperformed domestically-focused companies and high-tax companies poised to benefit from lower taxes have given up all their post-election outperformance while international stocks have comfortably outpaced US equities.

There is, says JPMorgan, “little unwinding left to be done from here from the previous post-election build-up of Trump policy-related positions”.

US stocks remain high in spite of Trump, not because of him. The aforementioned negatives have been cancelled out by strong US earnings and a strengthening global economy.

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Ironically, markets’ lack of faith in Trump may have bullish implications. The unwinding of positions mean stocks may emerge unscathed in the event of further negative political developments, while any upside surprises may yet catalyse continued market gains.

Retail investors lose hope in Trump

Retail investors, in particular, have lost all of their early bullish Trump-related enthusiasm.

Traumatised by the global financial crisis, ordinary investors have remained cautious toward stocks for almost all of this eight-year bull market. Prior to Trump’s election victory, bullish sentiment had been below historical averages for a record 54 consecutive weeks, according to American Association of Individual Investors (AAII) surveys. Trump’s win catalysed a dramatic spike higher, bullish sentiment hitting 21-month highs after doubling in the space of a fortnight.

The enthusiasm has not been sustained. After stocks’ short-lived tumble in the wake of Trump’s Russia-related controversies, just 24 per cent of investors described themselves as bullish.

Following indices’ quick rebound, that number rebounded to 33 per cent last week, confirming ordinary investors tend to be a skittish bunch prone to knee-jerk reactions to market movements. Despite last week’s uptick in bullishness, however, sentiment is back below historical norms. For ordinary investors, the Trump factor has faded fast.

Profiting from the bitcoin bubble

$35 million. That’s how much a $1,000 investment in bitcoin in July 2010 would have been worth last week, according to an appropriately titled “regret chart” tweeted by Robeco portfolio manager Jeroen Blokland.

The digital currency has been on an absolute tear of late, doubling in May alone. Indeed, the above calculations actually underestimate the gains on offer – bitcoin’s price soared from $2,000 to $2,700 within days.

Bitcoin is often compared to the biggest bubbles in history, and one can see why. Since 2010, says Blokland, annual returns have averaged 340 per cent. It’s been an extraordinarily wild ride – annual volatility has averaged 127 per cent, roughly five times greater than that seen in technology stocks at the height of the dotcom bubble.

Bitcoin advocates have long argued volatility will decline as the market becomes bigger. Volatility has decreased, although Blokland points out that over the past year, bitcoin’s volatility was more than three times greater than commodities, the second-riskiest asset class.

Similarly, the notion bitcoin is some sort of “digital safe haven or digital gold” doesn’t stand up to scrutiny. The correlation between the two assets is “very close to zero”, indicating they are “two very different creatures”.

Incidentally, Blokland owns some bitcoin. He obviously has a much stronger stomach than this columnist.

Musk talks down Tesla’s crazy valuation

Talking of overpriced assets, Tesla chief executive Elon Musk last week admitted the stock is "higher than we have any right to deserve".

A strange admission for a chief executive to make, Musk uttered similar words in 2013 and 2014, although he has also defended Tesla’s valuation. “Tesla is absurdly overvalued if based on the past, but that’s irrelevant,” he said in April. “A stock price represents risk-adjusted future cash flows.”

Perhaps, but Tesla is already the most valuable car maker in America and the fifth-most valuable in the world. It recently overtook Ford, GM and Honda in the valuation stakes; only Toyota, Volkswagen, Daimler and BMW are worth more, despite Tesla only selling 76,230 cars last year.

Clearly, Tesla, which also has ambitious solar energy plans, is being valued like a technology stock, not a car maker. Many investors see Musk as a Messiah-like figure. Others don’t care about Musk or about valuation; they simply want to ride the momentum.

Still, true believers should be careful. For all the hype, Tesla remains, as Musk admits, a “money-losing company” with a head-scratching valuation.