Age of Entropy

Monday, January 9, 2017 - The election of Donald Trump replaces an era of relative predictability with one of uncertainty which our colleagues at Societe Generale so appropriately named the Age of Entropy – after the thermodynamic term used to describe higher levels of randomness.

The post WWII era of free trade, open markets and Pax Americana looks to be ending and more to the wallet, being succeeded by the era of cheap money from Central Banks as G-7 Governments pivot to Fiscal Spending. What will replace this regime and what the consequences will be are unknown.

What is known is that the President-Elect’s tweets targeting Boeing, Ford, and Toyota have not been ignored by their corporate stewards or investors. In US economic news, Average Hourly Earnings grew 2.9% year-over-year, the fastest pace since 2009. ISM Manufacturing and Non-Manufacturing Indexes came in better than expected indicating that the Republican Administration is inheriting a healthy economy – at least on a statistical level. Investors continue to be confident by voting with their wallets and bidding up stocks this week with the S&P 500 up 1.70% and the Russell 2000 up by .75%. Long Live the Trump Rally!

More importantly for those of us who are ETF investors, 2016 was another banner year for the ETF Industry.  Worldwide investors put at least $375bn in new money into ETFs according to early estimates from BlackRock. Indeed the historic shift seems to be accelerating as investors shift more money from actively managed mutual funds to ETFs and various lower fee indexing strategies. This gives investors of all sizes equal access to various asset classes previously only available to institutional investors. This shift is likely to bring new funds into difficult to access asset classes like Gold via GLD and with it, new price levels and volatility. No asset class will be spared including crypo-currencies once they are approved.

A number of other concerns could spoil the party and here are just a few:

First, there are the currency markets.  The dollar continues its upward move against most currencies at a level not seen since the Plaza Accord in the mid 1980s. Sooner or later, a strong dollar is bound to slow down exports and manufacturing employment.

Secondly, we have elections coming up in France and Germany which if populist politicians win, will make it more likely that the Euro will cease to exist as a currency regime. New Trump policies deregulating energy exploration, transportation and exportation are likely to rattle any price stability reached by OPEC and Non-Opec Energy producers.

Then of course the wild card is the imposition of tariffs, if any, in international trade, which could dramatically change the flow of goods, services and capital flows. Seldom do these adjustments occur without some pain.

Looking at our ETFG Quant Movers List for ETFs with highest percentage change in scores, we again see another  Russian ETF (ERUS) rising up the ranks, HUSE – US Equity Rotation - continues to move up as does VDC , the Vanguard Consumer Staples ETF and interesting, SBIO - the Alps Medical BreakThroughs ETF despite the virtual certainty to restructure the Healthcare Sector. Likewise, a number of Energy and related ETFs show up in our top 25 Global Theme list:  IEO, IXL, FILL, IYE, and IPW. Traders seeking short positions or to trade volatility should check our Red Diamond Risk Ratings particularly those rated at 7 or above. We continue to urge some caution to Fixed Income investors as the direction of interest rates is up.

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