CONSENSUS: RISK ASSETS RALLY HARDER

Let's Lawyer This Trade - The Bull & Bear Points. Then let's dig into: Mega Earnings Meets Monetary Moment In The Week Ahead! Key earnings, events & themes I'm watching.

Let's Lawyer This Trade

As mentioned last week, McElligott of Nomura suggests what we already feel: a potential melt-up for markets is afoot.

Another quant we know well, Cem Karsen, is making the pitch that if Fed turns dovish, markets can melt-up another 10%: ala 2000!

Yes, Cem even tweeted $6666 - as I proposed as potential back on Dec 2nd.

Add to that are the bulls betting that Trump backs off on China tariffs, just like he did in 2018. I think that's a dangerous bet, but it's moving markets higher every time a Trump headline to this affect hits.

Despite Trump threatening Canada and Mexico with heavy tariffs Feb 1st, GS gives a "25% tariff on all imports from Mexico/Canada" at only a 20% probability. With that, the bulls see tariffs coming in below expectations driving a dollar unwind, and falling rates, further exciting the animal spirits.

And don't forget, many believe with Trump now in the driver's seat, the USD and yields have peaked - mostly on reasons that government spending will decline. He has said he has stopped foreign aid to Ukraine (but not Israel), and as Geoffrey reminds often:

"War has an immense capacity for creating inflation and higher rates"

Trump wants Oil falling to 50, with help from OPEC+ 'frens', so that implies he won't be sanctioning Russia, as that would push oil prices (or at least the risk premium) in oil higher. He wants oil prices lower so as to act as economic stimulus to Americans.

If successful, falling oil prices will pull down inflation expectations. I have already suggested that inflation (how Wall St not Main St measures it) with shelter inflation will continue to fall (as it’s badly lagging), and this will help the data look like Fed has done its job, so normative (not accommodative) cuts will be deemed as justified.

Assuming Powell goes along with it.

And assuming Fed continues to cut rates, this will not only better help the govt service its interest payments on its debt, but it will embolden the equity not bond bulls.
With that, Trump's Wall St pick for Treasury Secretary, Bessent, has warned the bond vigilantes not to expect an easy time shorting treasuries while he's financing the fiscal budget.

Lastly, bulls believe that Trump's "Golden Era" of reduced regulations, fairer taxes and mass deportations will create the business climate where private sector jobs will compensate for the the fake, inflationary and crowding-out government jobs that were created that are now being removed.

All combined, if Trump is successful in pushing down the price of electricity and oil along with the goods and services that US consumers and businesses use every day, then this should also contribute to pushing down rates which should help lower the US dollar.

Ok, so that's the bull case. Here’s what bears worry about:

That, and key earnings, events & themes I'm watching…