The Aussie market started the year in style yesterday, hitting its highest level since June 2015. A combination of ultra-low interest rates and an economy that is benefitting from higher commodity prices seems to be behind the bullish mood.
An economy doesn’t have to be ‘strong’ for the market to rise. It just has to be ‘OK’. And right now, the Aussie economy is OK…if only just. No doubt it will face further challenges this year, but the market will tell you before time if those challenges are dire or not.
The main influence on the market isn’t the economy though. It is interest rates. Low rates support a higher stock market valuation. You might not agree with it, but that is the way it is.
And while much has been made of the effect of Trump and rising interest rates in the US, they are coming off historic lows. For example, US 10 year bond yields are still only 2.45%. They can move much higher before having a negative effect on stock market valuations.
Remember yesterday I wrote about ‘looking for what doesn’t make sense’ in an investment? The idea behind it is that if something doesn’t make sense to someone, it isn’t yet priced in and there is a potential opportunity (or danger) there. Only when something makes sense to ‘everyone’ it is fully priced in, and a risky investment.
Well, no sooner had I sent that article back to Albert Park HQ than I received an email from a reader asking me to comment on something he thought looked like a case of insider trading.
Here’s the email intro…
‘Hello Greg Canavan,
‘I look forward to following you in 2017 at Money Morning. I would like to comment on a set of arrangements that have recently occurred in American politics that would have to be tantamount to ‘Insider Trading’. Why the media has not picked up on this more beggars belief however I am sure you could make some headline news by further exposing these cosy relationships.’
Our dear reader is referring to a number of trades that occurred on the night of Donald Trump’s election victory. He references Jim Rickard’s Strategic Intelligence letter, which pointed out that legendary trader Carl Icahn (and Trump advisor) left the Presidential party early and instructed his traders to buy around $1 billion worth of S&P 500 contracts just as market’s were plunging.
Around the same time, the equally legendary Stanley Druckenmiller began selling his gold holdings. He saw very quickly — as good traders do — that Trump’s policies would be bad for gold, so he got out as fast as he could.
Is This Insider Trading?
While it might seem like these guys made decisions based on insider trading (knowledge not available to anyone else) it doesn’t look that way to me.
They simply made decisions based on logic, while most other market participants were operating on emotion.
The Trump election victory came as a shock to most people. In particular, it came as a shock to the mainstream media and all those who followed and believed in what the media were saying at the time.
The narrative (based on people’s emotional view of Trump) was that stocks would plunge and gold would soar if he got in. And for a few hours post-victory, that is exactly what happened. The market stuck to the script.
But big and successful traders don’t operate on emotion. They deal in cold hard facts. Carl Icahn left Trump’s victory party to trade the market because of the emotional opportunity the market had given him. He didn’t have any inside information the market didn’t already have. He just didn’t have the emotional baggage most others were operating under.
It was the same for Druckenmiller. A noted bear leading into the election, Druckenmiller was long gold and looking for a major correction. But new information means a new assessment, and he very quickly saw what a Trump victory would mean for gold. So he got out BEFORE prices plunged.
Which brings me back to the readers’ claim of possible insider trading. In my opinion, this claim just doesn’t hold up. What you saw was two old school traders doing what traders do best. Acting quickly and unemotionally, to profit from a mispricing.
Our reader may have been mislead by the emotive language that Jim Rickards used in trying to explain the market’s movements.
Look, Jim is one of the best strategic thinkers in the world. I read all of his stuff.
But with Trump’s victory, Jim experienced a very difficult situation. That is, he picked the outcome well before everyone else, and he was right in predicting how the market would react. But the reversal was vicious, and that left him on the wrong side of the trade.
When this happens, the tendency is to engage in hindsight analysis. Hence the explanation of Icahn and Druckenmiller’s big moves in forcing the market reversal (stocks up and gold down). ‘I was wrong because…’
The fact is that these were completely rational moves. And the rationality of these moves will become increasingly apparent as time progresses.
I found the following quote from Jim telling. It tells me that gold will be in the doldrums for some time yet.
‘Gold is more interesting. I can’t read Stan Druckenmiller’s mind, but his stated reasons for dumping gold don’t make sense.’
Uh-oh…‘don’t make sense’. There’s that phrase. But you have to ask, doesn’t make sense to whom? Of course if you’re long gold the moves don’t make sense. This is cognitive dissonance in action. That is, when something challenges your belief set, it won’t make sense to you.
This is why I encourage you not to have any beliefs when it comes to the market. If the market moves, you move. If the market says jump, you say ‘how high’.
This is a very difficult thing for many people to do. They have beliefs, and want to put those beliefs to test in the market.
But people like Ichan and Druckenmiller don’t have beliefs. They have opinions, which change when the facts change. That’s why they are so successful. That’s also why they get accused of insider trading.
Have beliefs by all means, but don’t bring them into your investment decisions. The market will eventually destroy them…and you.
Editor, Money Morning