The “big, fat, ugly bubble” in the stock market that President-elect Donald J. Trump so astutely identified during his campaign now becomes one of the greatest potential liabilities of his presidency. If that bubble bursts soon, the pain will correctly be understood to be the result of monetary manipulations during the Obama years. But if it persists and the United States economy manages to further postpone its long-overdue recession (following an expansion that was barely that), Mr. Trump’s ostensibly “free-market” policies will unfairly bear the blame when the markets finally do return to reality
The single most extreme syndrome of “overvalued, overbought, overbullish” conditions we identify (see Speculative Extremes and Historically Informed Optimism) was restored last week; a secondary signal at a level on the S&P 500 that’s 4% higher than the syndrome we observed in July. Recall that with one exception, that most extreme variant has only emerged at the market peaks preceding the worst collapses in the past century. Prior to the advance of recent years, the list of these instances was: August 1929, the week of the bull market peak; August 1972, after which the S&P 500 would advance about 7% by year-end, and then drop by half; August 1987, the week of the bull market peak; July 1999, just before an abrupt 12% market correction, with a secondary signal in March 2000, the week of the final market peak; and July 2007, within a few points of the final peak in the S&P 500, with a secondary signal in October 2007, the week of that bull final market peak.
DoubleLine Funds founder Jeff Gundlach said the stock market could sell-off around inauguration day. During his final investor webcast for the year on Tuesday, he pointed out that stocks typically rise in the days after an election, just as they have.But they drop after the president is sworn in, as investors realize that he does not have a magic wand to implement everything they are hopeful for. Gundlach’s presentation was titled “Drain The Swamp,” a reference to President-elect Donald Trump’s promise to reform ethics in Washington by not relying on career lobbyists and party insiders. However, Trump’s top cabinet picks have included former Goldman Sachs staffers, CEOs, and politicians.
As the frantic attempts by die-hard Democrats, the media, and the CIA to prevent Donald Trump from being sworn into office reach a fever pitch, Hillary Clinton’s anguished cry seems like the only appropriate response. Trump won the election, he’s now announcing his Cabinet, and that’s the end of the matter. Or is it only the beginning? When the CIA targets a country for regime change, I wouldn’t bet the farm on the targeted government surviving. And while this isn’t quite Allende’s Chile, America’s increasing resemblance to a banana republic is augured in the CIA’s refusal to appear at a congressional oversight committee to explain leaks in the press charging that Russian intelligence actively worked to elect Trump. So who’s in charge here – the CIA or the people’s elected representatives?
The Coalition government’s explanations seem sensible, with the mass media generally supportive. Yet, there are robust arguments why the Australian public should oppose this move – mostly because the government is trying to deal with problems it created itself. The drug trade in Australia is thriving and constitutes a considerable portion of the black economy. This illegal trade, however, only exists because the government criminalises it. The primary reason offered is that it prevents the production and consumption of dangerous substances for recreational purposes. It clearly does nothing of the sort.
But the blunder was not in staying out of Syria’s civil war, but in going in. Aleppo is a bloodbath born of interventionism. On Aug. 18, 2011, President Obama said, “For the sake of the Syrian people the time has come for President Assad to step aside.” Western leaders echoed the Obama – “Assad must go!” Assad, however, declined to go, and crushed an Arab Spring uprising of the kind that had ousted Hosni Mubarak in Cairo. When the U.S. began to fund and train rebels to overthrow him, Assad rallied his troops and began bringing in allies – Hezbollah, Iran and Russia. It was with their indispensable assistance that he recaptured Aleppo in the decisive battle of the war. And now America has lost credibility all over the Arab and Muslim world.
In other words, what is significant about the FOMC vote continues to be this redefinition of the US economy in these official terms. Not so much that policymakers have finally arrived at these conclusions, rather that the inarguable reality of it has worn them down so much that they no longer have any choice now but to accept them even though they still have every reason not to. If it took seven years (really nine, at least) just to get past “demand shortfall”, how much longer still before dollar instability is likewise forced into their vocabulary and working principles?
Full year-over-year GDP growth for 2016 is likely to fall to 1.6%, based on weakness early in the year (with three quarters of the year already done and relatively strong consensus on the fourth quarter, there isn’t a lot of room to argue with that forecast). That result compares with 2.6% in 2015 and has generally averaged 2.0%-2.5% annually during the current recovery. The Wall Street Journal Economics Survey showed expectations of 2.6% GDP growth for 2016 last December. The December forecasts have proved to be too optimistic for most years of the recovery. Continuing with that optimistic bent, those same forecasters are expecting 2.4% growth in 2017…..Export data was already looking poor and a stronger dollar and trade restrictions would likely make it difficult to increase exports much at all. Business spending has been awful for most of 2016 but may have the potential for improvement next year as labor shortages grow and force businesses into investing in more labor-saving devices. Given these factors, even with a limited stimulus package at midyear, we think the economy will be hard-pressed to grow much more than 1.5%-2.0% in 2017.
The true danger to this latest bull run—the Trump rally—comes from itself. The genius of a matador is to wear out the bull by persuading it to keep charging, entrancing the audience in the process. The stock market has been attracted by the flourishes of Mr. Trump, the appealing prospect of tax cuts and infrastructure spending. The question for the next month is whether the bull will be worn out before Mr. Trump even takes office.
The US Treasury Department released its Treasury International Capital data for October, and what it said about the dynamics of Treasury securities is a doozie of historic proportions. Net “acquisitions” of Treasury bonds & notes by “private” investors amounted to a negative $18.3 billion in October, according to the TIC data. In other words, “private” foreign investors sold $18.3 billion more than they bought. And “official” foreign investors, which include central banks, dumped a net $45.3 billion in Treasury bonds and notes. Combined, they unloaded $63.5 billion in October.