The fabulous bull run in US bank shares

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The fabulous bull run in US bank shares

The only thing more surreal than Donald Trump's election was the American stock market's wildly bullish reaction to his upset win

By Matein Khalid

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Published: Sun 13 Nov 2016, 7:08 PM

Last updated: Sun 13 Nov 2016, 9:15 PM

Financial shares rose 10-12 per cent last week after Trump won the election. Trumps has promised to rollback the regulations of the Obama era. Trump will probably fire the director of the Consumer Finance Protection Board and scrap the Department of Labour fiduciary rule. He judges Dodd Frank, the most crisis bank reform, "a disaster". His plans to increase infrastructure spending has led to a spike in interest rates. This has led to surge in the valuation of money centre banks, asset managers, life insurers and even asset managers on Wall Street. The Republican Party never embraced Dodd Frank or draconian rules on banking. Now Trump could well inaugurate a new era of financial deregulation to boost bank loan growth.
Trump has made no secret about his plans for fiscal stimulus or his frustration with the dovish Fed chair Janet Yellen. This means a high inflation risk premium for US Treasury debt and a sharply steeper government bond yield curve. Trump has a mandate for tax reform from the Republican Party, a key pillar of Paul Ryan's blueprint. His economic growth policy package is hugely bullish for US regional banks as it will goose balance sheet growth and returns on equity. The best positioned banks are those who will benefit most from a rollback of the consumer banking regulatory regime, have a high degree of operating/expense leverage and a liquid, asset sensitive balance sheet. Trump might not "make America great" but he has definitely made investing in Wells Fargo great as it shares have soared 11 per cent to 51 as I write. The Californian banking Cinderella finally found her Prince Charming or rather Prince Trumpkin!
The only thing more surreal than Donald Trump's election was the American stock market's wildly bullish reaction to his upset win. The world's biggest economy could, if Trump's campaign promises become policy, impose tariffs on China and label Beijing a "currency manipulator", repeal Nafta, build a wall across the Mexican border, "take" Iraq's oil, exit from Nato if Europe does not pay the bills for its own defense, scrap Obama's Iran nuclear deal, fire the Fed chairwoman and punish US companies who "offshore" manufacturing jobs. Not exactly a formula for a bull market!
Yet Wall Street has turned bullish on Trump's plan to lower corporate taxes, repeal financial regulation and boost infrastructure spending by $500 billion. This means a higher Uncle Sam budget deficit and higher inflation. Sectors that benefit from higher economic growth - copper, steel, construction materials, transport, industrial conglomerates, banks, engineering and machinery, were bid up by investors on Wall Street.
Yet Trumpnomics also means sharply higher US interest rates and at least three Federal Reserve rate hikes in 2017. So it triggered a surge in the US dollar, a meltdown in the US Treasury (and global government) bond markets and a stunning $80 an ounce fall in the price of gold.
The post-Lehman era of easy money and rock bottom interest rates is over. The post 1945 US dominated international trading order is threatened by Trump's economic populism and protectionist rhetoric. Trump's threat are not toothless since the Republicans now control the House and the Senate.
Economist calculate that Trump's pro-growth policies will add $10 extra EPS to the S&P 500 next year but also raise Uncle Sam's debt by 25 per cent in the next four years. As King dollar soars and the world bond market crashes, the risk of capital markets catastrophe has begun to rise. King Dollar will make protectionist policies inevitable as Trump seeks to protect US manufacturing jobs in the Rust Belt. China will then retaliate and the world will be plunged into a trade war that is a disaster for emerging markets. King Dollar, a bond market meltdown and a trade war defined Ronald Reagan's first three years in the Oval Office. The early 1980's also coincided with the worst global economic recession since the Great Depression.
Wall Street has concluded that Trump will implement Reaganomics for the Digital Age. I believe this bullish verdict is too premature. The wild market swings last week once again thought us that the pendulum of greed and fear swings at the speed of light.

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