Tuesday 24th January 2017
In this issue of Money Truths….
- Powerful enemies are bent on revenge….
- Wrong time & wrong place, Mr. President….
- The life support system will be switched off….
- Trump’s comeuppance….
Powerful enemies are bent on revenge….
What happened in America with Donald Trump and the presidency is like going to bed in Britain one night and waking the next morning to find foul-mouthed chef Gordon Ramsey calling the shots in 10 Downing Street.
Trump and Ramsey are both successful businessmen. Both have used reality TV to carve out a constituency. Both have personas deeply rooted in unadulterated and unmitigated boorishness. Neither man lacks for self-confidence. Neither takes prisoners nor spares feelings.
Life under either man would be nothing if not interesting. You don’t know where the journey with either man would take you, but you know there’s going to be plenty of effing and blinding along the way….
Trump is an establishment outsider with no experience of politics or high-office. That’s precisely what the American electorate liked about him.
He’s not soiled by the mucky Washington ‘swamp’ of insiders, power-brokers and vested interests. He casts himself as a man of the people – reclaiming America for the ordinary man-on-the-street American.
He pounded that big drum again during Friday’s inauguration speech – attacking an ‘establishment’ that had ‘betrayed the citizens of our country’….
‘A small group in our nation’s capital has reaped the rewards of government while the people have borne the cost….’
His audience – composed of many of the establishment figures he was talking about – gazed back at him with faces of stone….
Trump won the presidency despite all the obstacles the establishment put in his way and he is enjoying his moment of victory. He’s only just taken office. But he’s already made powerful enemies set on de-railing his train….
Some would like to see Trump brought down by scandal. Others, no doubt, by the sniper’s rifle….
But most will be perfectly content to see him go down in history as the man responsible for America’s next big stock market crash….
Wrong time & wrong place, Mr. President….
The stock market in America is riding high. The Dow Jones Industrial Average is not far shy of 20,000. The S&P 500 Index is also buoyant.
Investors have been clapping their hands and talking about a magic beanstalk that grows to the sky. But a market correction is well overdue….
The bull market in US stocks has lasted 95 months. That’s unusual. The average bull market lasts just 52 months. Investors are on borrowed time.
US stocks are over-priced. They trade at 26.4 times CAPE (cyclically adjusted price to earnings). The long-term average is 17. US stocks are ripe for a fall.
Many thought the overdue stock market correction would follow a Trump election victory. But those fears proved unfounded.
Instead, the market continued to rise. It reached new highs. It had never climbed to such altitudes.
Investors seem willing to bet that Trump’s election promises of lower taxes and increased infrastructure spending will prove a potent mix that makes America great again….
I don’t know how Trump intends to meet those promises. I don’t have the detail. Nobody does. Right now, the market is taking the promise for the deed. And, for now, the promise is sufficient to underpin values.
But, regardless of what the US stock market does today, tomorrow, next week or next month, a market correction remains overdue.
Barack Obama got through his second term as president without that correction occurring. Trump won’t be so fortunate. Trump doesn’t have the right friends in the right places. Trump is in the wrong place at the wrong time.
The correction will happen on his watch. And it will be a correction of monumental proportions. The taller the tree, the louder the crash when it tumbles to the forest floor. And Trump is in position to carry the can.
It’s harsh. It will not be Trump’s fault. What happens will be the end-product of a long process whilst Trump has only recently arrived on-stage.
But politics is a game of musical chairs. The man left standing when the music stops is the one who pays the price for all transgressions – whether he is responsible or not….
The band continues to play – much as it did on the Titanic after it hit the iceberg. Trump is on his feet – front and center. There isn’t a single chair in sight. Barack Obama waltzed off into the sunset with the last one.
The life-support system will be switched off….
There is one reason why the overdue stock market correction didn’t happen on Obama’s watch: Federal Reserve policy….
Since 2008 the Federal Reserve has had the American economy laid flat-out on a life-support system….
Quantitative easing (money-printing) programmes pumped trillions of new dollars into the economy….
Interest rates – the cost of money – were set and held at the lowest level in human history….
The twin-headed programme was deployed to ‘stimulate growth’ – to keep the patient alive. The Fed’s money-printing financed Barack Obama’s deficit. Now Obama is gone, will the Fed extend same largesse to Donald Trump?
Will the Fed, the ultimate establishment institution, be as committed to propping up a Trump administration? And if not, how will Trump fund the trillion-dollars-worth of spending he’s promised – a promise recent market highs are based on?
We don’t know. We must wait and see. But there are already clear indications that Trump won’t be able to rely on the low-interest environment that served Obama’s presidency.
All through Obama’s reign, the Fed took a cautious approach to interest rates. It offered little forward guidance. It wanted to know how blue the sky was before deciding against packing the umbrella.
Then, last month, as Obama and his people cleared their desks, the Fed raised the base rate to 0.50% and confidently announced it would raise the rate three times more over the next 12 months….
That’s quite a change in approach and direction. We have gone from overtly cautious vagueness to direct advanced-warnings of certain action in one specific direction….
A change in President, a clear change in policy. Coincidence? I don’t believe in them….
Quantitative easing was switched off at the end of 2014. The plug will now be pulled on ultra-low interest rates too.
The Fed’s monetary policies pumped the stock market balloon up to its current dimensions. Now those policies have been reversed.
The bubble was blown up and continually re-inflated by lashings of cheap and ready money. It will deflate owing to a lack of the same.
What goes up must come down. It is as true for stock markets as it is for aircraft. Rising interest rates will bring the market down.
Trump has no control over those rates. He is hostage to them. All he can do is prepare to carry the can for their effects.
Trump is no idiot. He knows the score. Throughout his campaign, he repeatedly referred to ‘a big, fat, ugly bubble’ in the stock market….
He accused the Fed of keeping interest rates down so that asset prices remained propped up….
He accused Fed chief Janet Yellen of being political and not raising rates because it might harm Hilary Clinton….
Now interest rates have been raised. And they will be repeatedly. Yellen and the establishment don’t seem too concerned about the damaging effect that might have on Trump.
His victory was unexpected and unwelcome. But, now he occupies the hot seat, he can serve a purpose. The stock market bubble can be deflated on his watch. He can take the blame. His legacy can bear the severe staining.
Trump has a little time yet to enjoy his presidential honeymoon, to implement his programme and maybe even to make his mark.
The big US stock market correction (sending ripples out across the world) won’t come next week or even next month. If it happens too soon, Trump will be able to deftly deflect blame onto the previous administration.
But it will happen. The stock market is overdue a correction. It will happen on Trump’s watch. The Federal Reserve will see to it. This will be Trump’s comeuppance. He has made many powerful enemies in the wrong places. This is how he will be paid out.
That’s how it looks from here….
There’s going to be plenty of volatility in the markets going forward. Traders will be rubbing their hands together in anticipation of profit opportunities. But volatility isn’t the only game in town. ‘Resting’ markets can be very profitable too. I’ll be back on Thursday afternoon with more on this little-known opportunity….
All the best,