“The world is wrong side up. It needs to be turned upside down in order to be right side up.” – Billy Sunday

A lot has clearly happened post-election to investment markets, as significant rotations have pushed money into new themes. There has been a historic streak of positive returns in small-cap stocks, bonds have sold off aggressively, cyclicals have rallied, and the dollar has hit multi-year highs. The theme that appears on the surface to be most broken is the hunt for yield, as dividend plays hugely diverged from headline averages. All of these tectonic moves happened because the market was wrong in assuming Clinton would win, even though nearly all polls prior to the election showed the two candidates to be within the margin of error.

Being contrarian clearly paid off. The market was wrong in its certainty about who the future president would be. Being contrarian can pay off when such conviction occurs in the minds of investors. Trump’s win in and of itself is a perfect example of contrarianism to the narrative that existed throughout the election that he would never win. Human beings, however, rarely learn. Conviction is what got most investors in trouble about the election. Now, we may be in an overshoot where a different kind of conviction could subsequently result in another shock move.

The overriding belief here is simple: Trump will be a reflationary President. Why? Because he will push through infrastructure spending, and cause a significant jump in growth through tax credits/cuts. Yes – this would short-term likely be bullish. But what all of the pundits and all of the narratives are forgetting about is the starting point of fiscal debt. Yellen in recent testimony made the very good point that government is likely unable to significantly take on more debt to boost near-term growth, and that if it did, there would be even less potential for stimulus whenever the next recession comes around (and it will).

This is where stocks are likely wrong. Whatever legislation Trump gets passed will explode debt. Debt can be reflationary short-term, but long-term tends to do quite the opposite as servicing debt becomes a bigger a bigger portion of where revenue is spent. So we have this interesting situation here where the market believes Trump will do aggressive fiscal stimulus, taking on more debt, and being inflationary. But rates rising would make any of that stimulus more and more expensive, which will pull from future growth. The underlying assumption now is that the Dollar is rising because of this “America First” theme Trump ushers in. But it could very well be that the Dollar is strong anticipating that Trump may actually end up being a deflationary President. And before you say “there’s no way!” ask yourself what you would have said about Trump winning to begin with.

Am I saying that the yield theme will return? No – I believe deeply that the one thing Trump could be is the catalyst for normalization of intermarket behavior. What we have experienced in the last few weeks is precisely how risk-on behavior should look, as bonds and stocks diverged the way they historically have prior to the last few years. But I also believe that we may be in the midst of a significant overshoot by stocks and bonds due to conviction about Trump and what happens next. This overshoot can last for a while, or it can end abruptly.