The Bar is Set Very High Think of an elephant trying to pole vault. Trump stimulus is the elephant. The bar is all the optimism. And the bend in the pole is the stock market rally. Makes me think Trump's stimulus better pass or global investor and US business and consumer optimism is going to snap and come crashing back to Earth.

How Did We Get Here? 2008-2010: Fed casts QE; investors go out risk curve; stocks/EM benefit; US recession ends 2011: Global commodity super-cycle peaks; Euro crisis; US debt downgrade 2012: EM industrial slowdown; Euro crisis ends 2013: Fed signals QE rollback; EM taper tantrum 2014: Oil price crash/energy bust; US dollar rallies; Fed ends QE 2015: Chinese devaluation; EM industrial recession; US industrial slowdown; Fed raises rates; Negative interest rates in Euro Area 2016: Global financial market turmoil; Negative interest rates in Japan; Brexit/risk of UK leaving EU; US recession risk rising 2017 Global recession risks lower Exit deflation in global industrial supply chain Europe political uncertainty – UK hard Brexit, Euro Area rise in populism/break-up (France, Italy) US fiscal policy uncertainty – Trump stimulus hope, Trump protectionism fear Central bank uncertainty – End of global liquidity super-cycle (Fed hikes, ECB tapers) Fed rate risks – More and sooner hikes than markets expect US inflation – Prices becoming driver of demand, risks from labor and product markets point up Excessive optimism from Trump stimulus hope  Failure to deliver risks financial market correction Excessive optimism for US unemployment: Red swan risk and financial market correction

US Labor Tailwinds – Bubble in Unemployment Optimism Unemployment expectations are my holy grail indicator, an anchor, where I start my business cycle analysis. Unemployment expectations are like a crossover artist, someone in music who finds success in multiple genres. These are the genres where unemployment expectations provide forward guidance: Stock Prices – business cycle marker that signals health of corporate balance sheets, since labor is largest cost on balance sheets. Growth – consumer spending driver; not fearing job loss  borrow more (and vice versa) Inflation – labor cost driver Labor – unemployment predictor Accuracy: 17 for 17. Past bubbles in unemployment optimism have led to declines in the US unemployment rate 4 quarters forward 100% of the time with an average decline of 1%. Higher labor costs from tighter labor market. A tighter labor market puts a premium on labor availability, something especially notable for more labor-intensive service firms. Fed risks becoming more hostile. Gradual normalization would be retired. Current bubble in unemployment optimism, formed in Jan and sustained in Feb, implies US unemployment rate could fall faster than Fed and Bloomberg economist consensus expects. Economic implications: Past bubbles have led to more heat for US growth, inflation and labor market. Financial market risks: Once past bubbles formed, these signals preceded stock market corrections that began 0-3 quarters forward. (Red Swan. Black swans don’t happen first. Red swans happen first. Heat. Then they burn out. What’s left are black swans. 2017 will be the year of red swans.)