Sunday, January 01, 2017

Ready To Bet On A Trump Stock Market?


The Wall Street cheerleaders at CNBC would like you to think 2017 is going to be another great year for stick investors. I’m less certain and, in fact, scheduled a meeting with my financial advisor to discuss just that. The market seems dangerously inflated to me. And it looks to me like the pros are sucking in the buy-high/sell-low crowd now, in preparation for a… correction. CNBC see something different (with the usual caveats) than what I perceive: “The bull market enters the new year with a bit more spring in its step, but 2017 is not without its risks.”

Republican policies under Bush and his GOP Congress had destroyed the market— and nearly the economy— and Obama took over with a severely wounded Dow at 7,949.09. Friday, the Dow closed at 19,762 (up 13.42% for the year). People who understand numbers but not politics (or psychiatry) insist 2017 will see more, more, more— buy, buy, buy. “There's very little question that a reduced regulatory backdrop with reduced taxes should encourage corporate animal spirits,” drools Tobias Levkovich, Citigroup's chief U.S. equity strategist and an insufferable bull[shitter]. “The two things businesses are most concerned by is high taxation and high regulation.” He’s predicting the moon, if you follow his advise and buy, buy, buy and go broke, he’ll get a bonus. “In the near term, I'm a buyer on any weakness, because I still see the market going higher. I don't think anybody's really euphoric. They worry about trade issues with Trump. They worry about geopolitical dynamics… There are things we're going to have to worry about. What's the timing of the legislation? What happens to the dollar? Does the economy slow in Europe ahead of the French election?”

Andrew Rawnsley, writing for yesterday’s Guardian, says the surging market indicates Trump is a conman and Theresa May a phony. He’s concerned that Brexit is going to be devastating for the U.K.’s economy. And “before that,” he wrote, “in less than three weeks’ time, Donald Trump gets his fat fingers on the nuclear biscuit. One of the most inexperienced and erratic personalities ever to occupy the Oval Office – and that’s the PG version of his character – will take office at a time of severe geopolitical turbulence.” Wall Street analysts aren’t talking about that… not at all. Nor even about how Republican policies kill markets and economies. Odd, huh?

The agonies of Syria are part of a wider proxy war in the Middle East in which Russia, Turkey, Iran, Saudi Arabia and the Gulf states are all participants. North Korea has nuclear warheads and ambitions to be able to land one on mainland United States. As if that wasn’t a sufficiency of unpredictability, there will be critical elections in Germany and France, the EU’s two most significant actors. Voters in the Netherlands and probably Italy will also have an opportunity to join the insurrection against the status quo that delivered the Brexit vote and the Trumpquake. In the most apocalyptic scenario for Europe, the eurozone begins to disintegrate, followed soon afterwards by the EU itself.

The conventional wisdom still maintains that this won’t happen because Marine Le Pen will be defeated in the final round of voting for the presidency of France. The consensus view also tips Angela Merkel to receive a favourable answer when she seeks a fourth term from German voters. Optimists will be expecting to arrive at the end of 2017 to find columnists debating the unexpected resilience of European liberal democracy and pronouncing that we have passed “peak populism.” This is likelier to be the case if the nasty economic side-effects of Brexit become palpable to Britons and President Trump starts to get unpopular with those who put him in office. He is already unpopular with the larger number of Americans who never wanted him in the White House.

…Stock markets, especially those in London and New York, are celebrating. While most of us look anxiously upon stormy waters, markets apparently see only tranquil seas ahead. The FTSE-100 ended the year at a new high. The US indices have been anticipating President Trump by surging to record levels. A most remarkable signal is coming from the VIX Index, sometimes called the “Fear Index” because it is a gauge of how much investors are prepared to pay to insure themselves against shocks. The hoariest of the cliches about financial markets is that they hate uncertainty. Yet we begin a year pregnant with perils with the Fear Index at exceptionally low levels.

Stock markets are not buoyant because they have a superior window into the future. Their predictive powers were among the most useless in 2016. Markets bet that Hillary Clinton would become the 45th president of the United States. The night of the Brexit referendum began with the value of sterling rising against the dollar, so convinced were most traders that Britons would vote to stick with the EU. When these “unthinkables” then happened, markets responded with an instant panic plunge before bouncing back. The “Trump trade” powering Wall Street is based on an assumption that he will do all of the semi-sensible things he has suggested to boost the US economy, while fulfilling none of the reckless campaign promises that would derail it. Share prices are also being driven by salivation that he will deliver the lavish tax breaks he promised corporate America. A man who ran against Wall Street – and painted his opponent as a creature of the financial elite – is now being loved by Wall Street. It is not a coincidence, as old Marxists used to say, that his proposed cuts to personal taxation would shower cash on the already wealthy.

You will have spotted the contradiction between what markets expect and what he promised. He secured the White House by harvesting the discontent of working and middle-class Americans, whose living standards have fallen or been frozen in the past decade. Theresa May finds herself in Number 10 for not dissimilar reasons. Many Britons used the Brexit vote to express their anger that the economy was not working for them. There are myriad accounts of why large segments of the electorate in many developed democracies are rebelling against the status quo. Nearly all place economic grievances at the heart of it. More sophisticated accounts recognise other factors. Discontent about levels of migration. Distrust of mainstream politicians. Fear of terrorism. A reaction against the cosmopolitan complexity of the early 21st century. The inability of lacklustre centrists to find a vision or language that could compete with the potency of cheap tunes such as “Take Back Control!” and “Make America Great Again!”

There are many sources of what I have called the Age of Rage, but the other discontents are entangled with or sharpened by the fundamental one. People feel worse off. Since the financial crisis, the most important fact of political life has been anaemic growth in most western countries, accompanied by wages that have stagnated, declined or improved only feebly for millions. This discontent has spread to quite a lot of those who have actually done OK since the Great Crash of 2007-09. They have nevertheless felt worse off, because the rewards of prosperity have been disproportionately and conspicuously enjoyed by the very top slice of society. There are many ways of dissecting the Brexit vote, but the starkest is by income. In every income group in Britain bar the most affluent ABs, there was a majority for leaving the EU. Donald Trump would not have acquired the White House had not an important section of the working-class vote withheld its support from his opponent or transferred it to him. The biggest shift of ex-Obama voters to Trump came among those earning less than $30,000 – £24,000 – a year.

Theresa May says she gets it: the fruits of prosperity have not been equitably divided. She has spent a lot of the time since she moved into Number 10 talking about the reform of capitalism. “A change is going to come,” she declared at the Tory party conference. In a more recent speech, to the City at Mansion House, she defined her task as ensuring that the profits from globalisation were spread more widely and fairly. She put herself on the side of “people on modest to low incomes in rich countries like our own” who “see their jobs being outsourced and their wages undercut”. That echoed Donald Trump when he used his victory speech to acclaim what he called “the forgotten men and women of our country” and vowed that his presidency would ensure that they “will be forgotten no longer.”

In both cases, the implied promise is that there will be a reordering of the distribution of profits. Those who own and manage assets will be obliged to take a diminished share so that a greater slice of the rewards can be enjoyed by workers.

What are stock markets telling us when they respond to Mr Trump and Mrs May by sending share prices to record highs? They are telling us that they think that the British prime minister is a phoney and the incoming American president is a conman. They are wagering that President Trump will betray the poorer voters who helped put him in the White House. They are betting that Theresa May will not deliver for the less affluent Britons whose Brexit votes helped elevate her to Number 10. That’s what the cash is saying. The “forgotten men and women” of America will be no better remembered in the Trump cabinet of tycoons. Mrs May’s “just about managing” will find out she is all jam tomorrow, never today.

The money temples are almost certainly right in their assessment of Donald Trump. Theresa May has the coming year to try to prove the markets wrong about her.
By the way, had you invested in Trump's businesses you would be a poor, bitter person today. No one does well under Trump... but Trump.

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At 5:01 PM, Blogger Kurt said...

The major stock indices are extraordinarily overbought, and the activity of the past month looks like a blow-off top. The Dow probably needs to test 20,000 just so everybody can cheer about it, but the greater risk now is being in long positions.

At 9:40 PM, Anonymous Anonymous said...

Because of cheap money for the past decade+ (thank you fed) that nobody is using to create jobs and industries, corporate buybacks financed by (bonds, mostly) debt is what is artificially goosing the indices. I've read several analyses that corporate debt is at record levels.

If bank fraud takes a little longer to crash the economy again, corporate debt might be the next bubble to burst, especially if the price of oil jumps or the U6 jumps a half tick which will discourage spending on shit. Corporate profits outside of oil are pretty good, but it won't take a lot to reverse that given all that debt load.

OTOH, there's an expanding bubble in student loans that could pop first. And I've seen a return of low-doc loans for autos and even homes. A few years of those and just a tiny downturn in jobs... and poof.

It's been a mistake to look at the indices as anything other than a symptom of the entirety of the disease any more. It isn't an indicator. All the old rules don't apply any more.

I don't know what the indices might do in 2017, but I *AM* sure what won't happen:
There won't be a net increase in wages/worker in 2017 because corporations are loathe to pay workers. There won't be any sort of useful decrease in U6 even with the very public job keeping and moving back shit you see on the teevee machine. Those numbers are far more than negated by an announcement from just Boeing for instance. And each M&A thing that condenses the tippy top more will mean thousands more jobs lost per occurrence.

I also know that Democraps won't interfere or impede any of it.


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