We currently view long gold and miners as perhaps the strongest near term trade(s) if you believe the “Trump trade” is unwinding for the time being.

The American Health Care Act is dead in the water and it is very murky water indeed. Is volatility going to rebound? Is tax reform going to have a tough go at crossing the finishing line before the August Congressional recess? How about infrastructure spending to “rebuild America?”

Quick question: are massive deficits cool again? Or, is there a secret plan to make a trillion dollars of waste, fraud, and abuse disappear without anybody noticing in order to fund Reagan-esque tax cuts and new infrastructure? Probably neither.

It seems increasingly unlikely that after the AHCA deficit reduction savings were buried at least three feet under ground (though maybe not quite six) on Friday evening, that we now pivot to rapid enactment of $54 billion more in military pork, corporate tax cuts, deregulation, and a heap of new infrastructure investment.

Where exactly is this money coming from? House Speaker Ryan’s Border Adjusted Tax (BAT) could cover only half of the proposed deficit increases–and that is in an ideal world. Since the BAT is looking as likely to pass as AHCA, given ardent internal opposition from more than one key Republican bloc as well as the entire retail corporate sector, it would then appear to be trending toward offsetting none of the proposed deficit increases at all.

The numbers simply don’t add up for quick passage of the Trump growth agenda. Failure to pass AHCA makes the deficit math even more difficult. My base case is a delayed, scaled down version of the Trump agenda. As is typically the case, politicians love making heroic hatchet swings to the federal budget when it counts the least or when someone else is in charge. The Republicans were handed a beautiful, shiny hatchet glorious enough to make Paul Bunyan blush. The first thing they did with it was point it at immigrants and then drop it on their own foot.

Until such a time when the Trump agenda finds its second wind, it is best to trade-in the irrational exuberance for investment grade precious metals, primarily gold. When I highlighted a tradable top in bond yields on a risk/reward basis, there was plenty of low hanging fruit to be picked by buying Treasuries and closing dollar longs. The risk/reward is now more favorable for buying gold as bond yields fall, dollar declines are steepening, and oil can’t catch a bid, which means inflation expectations and growth won’t be screaming for faster Fed hikes for the time being.

The Fed was previously behind the curve as it allowed inflation to spike from low levels without wages doing the same, which as I’ve pointed out is what happens in an aging demographics world where consumer price inflation is never good for this type of economy. It only reduces real growth and wages, harming future growth. Now we have the aftermath of reduced real wages, political dysfunction, a deteriorating outlook for deficit reduction, and accelerating shale energy production into falling oil prices. Gold will shine brightly in this theme. Maybe very brightly.