Louis Moore Bacon sees sea change in trading opportunities

“The recent election in the United States has, in our view, launched nothing short of a sea change in the potential opportunity set for trading markets globally” – Louis Moore Bacon

We believe the above quote pretty much sums up the sentiment change amongst our managers after the initial shock of the election result. And the words of Louis Bacon carry a lot of weight. The last time he wrote a letter to investors was over four years ago. This was in the summer of 2012, when a lack of trading opportunities and market liquidity led him to return a quarter of his investors’ capital.

While the election outcome was a total surprise also to Moore Capital, it quickly created short-term market moves from which they profited. Furthermore, the medium-term and longer-term implication of the election presents a rich environment for global macro investing, according to Bacon.

He writes that, while early days, some things are already clear. The Republican sweep represents the best possibility for economically positive legislative progress since the Reagan Era and at the least should bring an end to a decade of infighting between the government branches. The Trump tax plan is sweeping and comprehensive nearly to the point of explosive. It is highly stimulative compared to what we have now. The proposed tax changes will greatly shift the financial and business landscape with the ultimate details picking winners and losers among sectors and companies. Dismantling business regulatory entanglements will cause animal spirits to take flight well before the precise rules are redrawn. Most business leaders (outside of Silicon Valley) have from one day to the next come to the realization that America is open for business again.

Bacon has never seen the outlook for macro opportunities turn on a dime like this in the history of his career. And his career spans decades (even before founding Moore Capital in 1989, Louis Bacon was trading markets). To us, it is quite something to have him proclaiming that “Everything changed literally overnight in early November from a pretty meagre opportunity set to a very broad one.”

Bacon believes that Trump’s tax plan and regulatory initiatives will fuel not just growth but also fan the fires of inflation at a time when the core CPI rate is already running north of 2%, with energy-related base effects soon to roll off of the headline rate. And with unemployment sub 5%, there is firm pressure on wages to trend higher. This is a dramatic turnaround from the fears of deflation that gripped markets in the very recent past and could finally put the Federal Reserve in play in a substantive way for the first time in many years. The control of all parts of the yield curve by the Fed has ended and the bear market in US fixed income is underway.