L’épiphanie

First, the French Revolution. Then, American Independence. Finally, the Demented Beaver Report. Please take your seats. Quit that damn Instagramming. Turn off your phone. Leave all children outside. Dogs are welcome.

The election in France matters to the world since it pitted the forces of Trumpian populist against a more centrist view of the world. Marine Le Pen is one scary mademoiselle, anti-immigration, anti-globalist, anti-corporate, pro-nationalist and promising an isolated France-for-the-French. She didn’t win the first round, and is unlikely to change that on the second. So markets figure photogenic, T2-clone Emmanuel Macron (who sort of married his mom) will end up president. As a result, the Dow shot ahead 200 points and European markets roared.

After getting beat up with Brexit and Trump, this was a big day for free-traders, globalists and others who think the world is okay and moving ahead. Volatility plunged 25% in a single session. Gold and gold stocks sank. My obsessed Portfolio Manager partner Ryan drove his Porsche at 110 km through crowded Toronto streets and over sidewalks so he could get to the bank tower and send me this note:

• With the perceived positive outcome in French election, the S&P 500 broke above its short-term downtrend
• The S&P 500 has been consolidating in a descending triangle but with today’s breakout it’s broken out of this consolidation pattern
• Next resistance is the March high of 2,400
• Looks like Europe might finally be breaking out relative to S&P 500
• With cheaper valuations, improving political environment (if Le Pen loses this would follow Netherlands loss by right wing candidate) and improving technical profile, we could consider reducing US and adding to Europe in the next round of changes

I found the part about the ‘descending triangle’ particularly arousing. In any case, the point is the French thing, at least until le deuxième partie on May 7th, may be signaling that the populist movement is running out of gas and all the 1%ers can stop buying elephant guns. Markets eat this up, since big corps can continue their global operations, moving money and labour around for the efficient manufacture of profits for shareholders.

Now, on to America. More dopamine and endorphins for investors. On Wednesday the poster boy for populism makes good on his campaign promise to slash the US corporate tax rate about in half – right down to 15%. The impact of this, if enacted, would be huge. Stocks which look sort of pricey now on a P/E ratio (that’s the relationship of stock prices to the money the underlying companies actually earn) would end up looking cheap as profits plump. Yup, higher highs, higher lows – extending a pattern that’s been in place now since 2009.

Of course, fatter profits, rising markets and an expanding US economy will also bring more of a response from the Fed. So, if the Trump tax cut comes to pass (or even if it doesn’t) you can expect two or three additional interest rate increases in 2017. The Bank of Canada will follow a few months later, but in the meantime the bond market will adjust mortgage rates upwards. This is not speculation. It will happen.

Meanwhile, in the land of the flat-tailed, house-horny, buck-toothed rodent, taxes are going up, not down, our most indented province just announced it will give people free money to live on in three cities as a universal income pilot project, and property lust has apparently hit a new high along with debt and risk.

Nik Nanos’ current snapshot of how Canadians are feeling reveals a people detached from economic reality. The number of us who think house prices will rise from nosebleed levels in the next six months has soared to almost 49% – the most on record – while only 10.8% think they could decline. The rest are terrified.

“Bullish sentiment on real estate in Canada continues to drive consumer confidence,” says my pal Nik. Which is strange, given what is happening with household finances. Nanos asked people how they’re doing relative to a year ago, and found that almost 30% of people report their situation has deteriorated – almost twice the number who think it has improved.

So how can people keep buying houses that have never cost more, with record amounts of debt about to become more costly, believing they will continue to inflate even as their own situation worsens? Yup. They believe it’s different here.

Sure got that right. Have you listed yet?