By David Haggith:
Bulls and bears seem to agree that the “Trump Rally” is based almost entirely on speculation about his tax cuts and infrastructure spending
Trump is market magic. The Donald spoke, offering nothing he hasn’t said hundreds of times before in his campaign speeches, and the Dow parted its way through the 21,000 barrier without hesitation. The stock market’s rise from 20k to 21k also tied a record for the quickest 1,000-point gain. How long will this rampaging bull market last? Is 22,000 now an easy reach?
It apparently doesn’t matter that Trump offered no more specifics than he ever has about how he’s going to turn things around or that he has said it all innumerable times. The market heard the pep talk it wanted to hear and rose on the dreams of a rebuilt America.
I, on the other hand, sat there thinking after the speech, Anyone can say over and over how great it is going to be and what great things he has already done, but as always it remains unclear how Trump is going to do them when they depend on congress. Anyone can talk about the need to become united, but that doesn’t unite anyone. Constantly taking swipes at people everywhere (even if though they deserve it and I love to see some of them get it) isn’t going to unit them either.
So, while the commentators that I listen to (even those on CNN) talked about how he focused on uniting people, I didn’t see it happening, and I still don’t. For me, the big question still hangs out in the air: How is Trump going to get congress to implement his plans when all Democrats hate him like he’s made of spam along with probably half of Republicans? He can do small things by decree, and he’s done a lot of them in a short time; but the big things take money, and that requires congress.
It seems to me the only thing that caused stocks to rise after his speech was the change in Trump’s tone, which was less antagonistic, possibly giving hope-inflated investors some basis for believing he can accomplish things that can’t be done by executive order. But won’t that only hold for as long as he keeps a lid on himself?
(Again, I enjoy seeing him beat up the press and the Washington establishment, but I’m just saying it is not the kind of talk that markets normally like, and the only thing I can find in Trump’s talk that would have caused the market’s burst into glory on Wednesday would be his change toward a more conciliatory and “presidential” tone. No other variables or constants changed in terms of Trump.)
An alternative view of the stock market’s spike after Trump’s speech
I do like this alternative explanation, though:
Players figured that the Trump rally, which has stretched on for months, has been based on hope and that, unless the president gave details about plans for the economy, there would be a big selloff. They reasoned that, by looking at past speeches of presidents before Congress, the details are almost never there. So it appeared a perfect setup to short sell; in other words, to bet on a decline in share prices. According to algorithms at The Arora Report, these players built substantial short positions…. After Trump’s speech, when the market did not fall, the short sellers were forced to cover their positions, thus driving up share prices…. This forced-buying made futures run up prior to the 9:30 a.m. start of trading in New York. When the stock market “gapped up” at the open, computers and their algorithms took over and bought aggressively. That triggered other algorithms, exaggerating the move. Thus, that was interpreted as a confirmation of how good Trump’s speech was…. According to algorithms at The Arora Report, about three-quarters of the increase in stock prices today is from short squeezes. (MarketWatch)
One of these days our own algorithms will kill us with their hyperactivity.
Regardless of which explanation above is true, I think the rise is likely to be short-lived (which is not to say it won’t hit 22,000, but I still believe its days are numbered). While the pep rally had its immediate intended effect, my guess would be that people slow down in a couple of days and start asking the question I raised in the absence of any more facts than what they had the day before the speech. (Please share below anything new or more specific you heard because I must have missed it.)
No schedule of the roll-out was hinted at, no time goals laid out for anything, not much indication of where all the money will come from, no indications of how the requested unity would happen under a continual barrage of angry tweets, no cue from Democrats that they have even the tiniest willingness to take him at his unifying gesture and work with him on anything. At the same time, promises of infrastructure spending plummeted from earlier campaign promises that ran around $5 trillion to $1 trillion in this speech.
Earlier in the day Trump made an admission that Obamacare was proving much harder to work out than he ever imagined (and it hasn’t even started to be debated in congress yet). There was some mention in his speech of letting some immigrants stay, which sounded a lot like a move toward a small dose of amnesty for those who came here illegally. (Perhaps he was throwing a bone of peace, instead of contention, to the other side.)
My recent articles have laid out some of the many structural flaws in the US economy that ultimately assure economic collapse, but the Trump rally keeps charging ahead as if the economy is solid. Not only has the stock market just passed another major milestone, but it also finished an historic run of new daily records this week. The more I see of this, the more I am convinced that it is all …
I stated my belief last fall that the Trump rally right after his election was a clear example of irrational exuberance, and that euphoric behavior almost always takes over the market like a feeding frenzy right before a long bull run crashes. The last two weeks, in my opinion, have demonstrated the highest euphoria ever.
The irrational aspect lies in the fact that Trump hadn’t done anything at the time when the stock market’s climb first began, and he didn’t do anything throughout most of this multi-record-breaking rise, other than repeat his campaign promises, which is all he did again on Tuesday.
That is not to disparage those promises, and I’ll add that Trump has done a lot very quickly since being inaugurated, which is what fueled the latest spurt leading up to his speech, but you cannot accomplish the big promises by executive order. So, how long can a well-delivered repetition of Trump’s promises fuel more euphoria? What did anyone learn on Tuesday that he or she didn’t know the day before?
It is impossible to predict when euphoria will end, since it is not rational by definition, just as one cannot predict when someone high on Meth will run out into the street to argue with a car approaching at fifty miles per hour.
There seems to be a broad consensus among market bulls and bears that the “Trump Rally” was based almost entirely on speculation about his tax cuts and infrastructure spending. Whether sentiment outpaced reality is more debatable by the bulls, but I think it clearly has. If this were a rally based on sound economic fundamentals, corporations would not be endlessly conniving ways to bury the least flattering information deep into their quarterly report, nor would corporations be inventing new methods of accounting that ignore GAAP. Nor would they have to spend so much on stock buybacks.
In terms of corporate reports, this quarter has been worse than previous quarters. MarketWatch reported shortly after the reporting season got started that it is seeing some of the most cloudy reports it has ever reviewed.
If you look at stock prices, you might note the Dow has risen 75% since the economic “recovery” began in 2011. Crack out the champagne! But if you look at the revenues of the thirty Dow component companies that created this march, you’ll see barely rose during the recovery and have mostly declined over the last two years to a point lower than 2011. Put the champagne back in the basement.
I’ve said that the speculation in the Trump Rally is “irrational exuberance” because there is also so much that can stall or end Trump’s dreamliner plan. That includes contingencies as extreme (but not unlikely) as impeachment or assassination (given how many powerful enemies Trump has in entrenched positions of power who know that Trump is coming after them when he drains the swamp).
To quantify just how “not unlikely” such an event is, several UK bookies have placed odds on Trump leaving office in this first term by either impeachment or “resignation” between 2/1 and even, depending on the bookie. (Not exactly being seen as an unlikely bet. See Benzinga)
Bookies and contingencies aside, the Dow just set a new record high for twelve straight days (as of Monday this week) — the longest streak since the Reagan rise thirty years ago. Thirteen proved to be an unlikely number on Tuesday, though, when the possibility of scoring an all-time record ended with the Dow finally closing down. You can blame the Fed because the market dropped even before anyone had a chance to hear what the Donald had to say to congress. It fell when some Fed officials said that a March interest-rate hike was looking likely.
What does such a peak record-matching run of new records tell you about the rarified atmosphere we are now in when it is all based on hope about what Trump will do? As another measure of hope as the support for valuations, the total value of the stock market is 20% higher than the total GDP. (This is called “the Buffet Valuation.”) There is only one other time the market’s total value was higher than GDP, and that was just before the dot-com crash.
That doesn’t prove a crash is immediately on the horizon, but it does mean the market right now is more overvalued relative to total US economic strength than it was just before the Great Recession hit and more than it was before the Great Depression hit, too.
As another comparison, the last time the market set record highs at a clip like this — the time I mentioned in the Reagan rise — was in January 1987, the year in which the market endured one of its worst all-time crashes. Huge crashes are almost always preceded by euphoric rates of rise.
Even before the US stock market reached its highest milestone in this run of records, the grandfather of the New York Stock Exchange, Art Cashin, said,
It shows a kind of sense of euphoria and that is why it’s a concern. For a market to do something like that only five times in well over 100 years tells you it’s a somewhat rare event. And as I said, it is because it takes a great deal of euphoria to get there…. a great deal of caution is important here. You’ve got a lot of things going on. You’ve got the central banks interfering in the marketplace. Do I think a train wreck is coming? God, I hope not. But I always tell people I have survived more than a half a century with some modified success here because the first thing I do when I walk in a room is look for the exit signs, because if things turn, I want to be able to know where to get out and how.” (King World News)
Without much improvement in the economy to substantiate their rise, stock prices will continue to rise only for as long as the speculators are willing to believe Trump will be able do most of what he has said he will do. David Stockman says the market is high on “hopium.”
This high likely faces stark reality when the Trump administration faces Democratic obstructionism and a fair amount of Republican obstructionism (though the establishment Repubs should like his tax plan, but not much else). The market’s biggest problem, however, may be Trump’s erratic behavior, including the black-swan possibility that the Russian imbroglio actually develops into something that unseats Trump. Even if that ongoing set of rumors comes to nothing, there is certain to be one surprise after the another with a brash provocateur in the White House, and markets don’t like a lot of surprise.
What surprises are so likely they shouldn’t be surprises?
Trump’s instant immigration ban was instituted in such a ham-fisted way (though I agree with his desire to improve vetting and slow immigration and return illegal aliens home) that he had to issue hundreds of exemptions the next day to avoid killing people by sending aliens who had helped the US military with espionage, targeting, or translation back to nations where they would be immediately killed for aiding the US. His surprise implementation also created brief chaos as agencies and airports struggled with trying to understand exactly what the order intended and how it should be carried out. Trump said the element of surprise was necessary to catch terrorists red handed.
Eventually, markets are going to be shaken up by this kind of erratic governance, where it appears the new president is a bit haphazard in not thinking things through carefully before implementing them (which is constitutionally why we have a congress to create such acts, rather than have them done by executive decrees). Markets don’t like surprises, and Trump clearly does — as even his supreme court pick was announced after a suspense buildup. So far as we know, his overnight immigration ban did not catch any terrorists in its net due to the element of surprise. So, it appears Trump likes surprise for its dramatic effect. I think, if there is anything we shouldn’t be surprised by it is that Trump will be full of surprises.
Is the post-speech surge due to Trump’s changed tone?
Many say it is. Before hearing any of them, it was the only reason I could think of. Then I read the one alternative explanation above that people are just covering shorts. So, which is it?
The Trump Rally began on November 9th right after Trump emerged and spoke in conciliatory tones. His change in tone immediately calmed a stock market that had cast all its bets toward crashing if Trump won. He managed to convince investors that his plans were more significant than his tempestuous behavior and that he might behave more presidential now that the race was behind. The Trump that emerged to give his acceptance speech seemed completely calm, rational and thoughtful. He looked like he was going to put away his heated campaign rhetoric, and he continued that demeanor through some subsequent interviews. The market appeared to love it as much as it loved his hopeful plans.
On the other hand, his rally continued doing fine in recent months when he started numerous forays with the press, which sounded anything but calm and presidential. Still, loose tongues can rattle markets. So, I don’t think we can get a clear fix on how the amorphous, soulless, nameless market feels about Trump’s rough-and-tumble ways.
Where we will start to get into trouble is if the red meat Trump offered to stockholders in the form of mountains of tax breaks starts to fade toward a more distant horizon. Then his red-hot tongue may become the dominant market influence. The market may stop breathing helium and floating ever higher.
We saw the inaugural Trump bump flicker into a Trump Slump for a couple of weeks in January when people began to realize we may have nothing but years of increased fighting from all sides that could stall Trump’s plans in gridlock. That quickly corrected once he started doing things by executive decree. I think we’ll see the same thing where things start drifting downward unless we start seeing accomplishments on taxes, infrastructure and Obamacare.
Moves to reform immigration also seemed to contribute to that brief slump. (I like the idea, but shareholders don’t as they crave cheap labor and lots of it and like the idea of many new people flooding into the US to drive the housing market.)
Can the raging bull work with congress?
Trump has never run anything governmental, so no one has any idea whether he can get things through congress. We have seen no evidence one way or the other so far. Perhaps the best he can do with that long-locked group of party-serving people, given his own temperament, is just rule like a king by executive order (as Obama did, but only when he failed to get things through congress). So far we have only seen evidence of his ability to divide congress, and I don’t think “divide and conquer” is a strategy that will get congress to enact his needed legislation.
Trump has huge opposition even within his own party, so “divide and conquer” leaves all democrats and half the Republicans against him. It will not likely put any meat on the table in the next year or two (in terms of either his infrastructure stimulus plan or his tax plan). Trump’s tax changes may simply come too late to save the deeply flawed economy from its own more deeply flawed recovery.
The rickety economic structures that I described in “The Inevitability of Economic Collapse” keeps wobbling in the wind, ready to come down at any moment. So, inaction through gridlock may be all it takes to topple it.
Historically, when stock markets break through major milestones — as the Dow did when it hit 20,000 and then 21,000 and when it rose faster than ever before at more than one part of its journey — they don’t make it far before going into a longterm decline. Nor do strings of record-setting days tend to run very many days past the previous record. If they did, we’d be long past lucky thirteen as the number still to make. So, anyone who assumes that the recent accomplishment of multiple broken records means the bull is ready to keep climbing might want to consider that record-breaking in the stock market more often than not turns the other way.
© Copyright by David Haggith, 2017. All rights reserved.