Divine Powers

The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.

 

The DJIA keeps surging… but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During his campaign he professed to worry about the “giant bubble”. We happen to think that it is probably best for a president not to talk about the stock market at all, but the Donald evidently couldn’t resist. One thing that continues to be quite satisfying is this quote by Paul Krugman on election night, when stock market futures plunged after it became clear that the Donald would beat Hillary: It really does now look like President Donald J. Trump, and markets are plunging. […]  I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.” Krugman’s predictions are often devastatingly wrong, but rarely this fast. [PT] – click to enlarge.

 

President Donald Trump is pumped!  As Commander in Chief, he believes he possesses divine powers.  He can will the stock market higher – and he knows it.  For example, early Wednesday morning he blasted out the following Tweet:

 

“Stock Market has increased by 5.2 Trillion dollars since the election on November 8th, a 25% increase.” 

 

Four minutes later, he sent out another Tweet:

 

“…if Congress gives us the massive tax cuts (and reform) I am asking for, those numbers will grow by leaps and bounds.”

 

Who knows?  Maybe President Trump is right.   These days even bad reforms – and just about everything else – are good for stocks.  And what’s good for stocks is good for everything.

For instance, according to President Trump stock market gains reduce the national debt.  He even said so this week. President Trump’s logic for how higher stock prices reduce the national debt was unclear.  But it certainly sounds good to say.  More importantly, it sounds bullish.

 

Smart and Savvy Investors

On the other hand, obvious risks and hazards no longer matter.  Not the prospect of nuclear war with North Korea will stop this bull market.  Not the gold backed yuan oil exchange agreements being developed between Beijing, Moscow, and Tehran, and the implications for the petrodollar’s reserve currency status.  Not weak jobs numbers.

So, too, runaway government debt, consumer debt, and corporate debt haven’t fazed the stock market’s trajectory.  Because everyone loves debt.  Especially bankers.  They want more debt so they can buy more stocks.

Nosebleed level valuations don’t matter either.  Because, if you haven’t heard, high valuations are no longer high; they’re permanent.  Likewise, the beginning of the Fed’s great unwind of its $4.5 trillion balance sheet has hardly elicited a flinch.

 

The margin-adjusted version of the Shiller P/E ratio (a.k.a. CAPE or PE-10) via John Hussman. The Shiller P/E looks at valuations over the span of a decade, which is intended to filter out cyclical effects. Mr. Hussman has taken this a step further by adjusting it for profit margins, which tend to be mean-reverting in the long term (discussed in detail here). Looked at in this way, markets are now more overvalued than ever (there are other ratios suggesting the same, such as median price/sales). As to the president’s remark about the effect the market may exert on the budget, he was probably thinking of capital gains tax windfalls… which happened to be quite supportive for Clinton’s budget. Of course such inflationary gains are illusory – once the bubble bursts, the deficits will simply pile up all the faster. [PT] – click to enlarge.

 

President Trump’s shoddy tax reform proposal, the proposal that would tax income that’s already confiscated via state and local taxes, hasn’t done a thing to deter today’s smart and savvy investors.  Why should they care about taxes when, thanks to The Donald, their portfolio wealth has increased by 25 percent since election day?

Of course, smart and savvy investors, particularly buy and hold index investors, have reaped plentiful fruits for mindlessly plowing their capital into low cost S&P 500 index ETFs.  Indeed, this strategy has worked well for nearly a decade.  Surely it will continue, right?

A passively managed S&P 500 Index ETF, such as the SPDR S&P 500 ETF (NYSE: SPY), is up over 279 percent since March 9, 2009.  Investors that merely bought and held have been rewarded for their lack of discrimination.  Conversely, those who scratched their head, did some homework, and concluded that the market’s fundamentals are deficient, have been sorely punished.

 

The Donald Can’t Stop It

Yet, while SPY investors have experienced the delightful sensation that comes with a burgeoning investment portfolio, they’ve also been handicapped.  The extended bull market has lulled them into believing that investing is easy.  All you need to know are several simple rules.

Buy and hold the SPY.  Dollar cost average.  Eschew individual stocks.  You’ll always come out ahead over the long-run.

A SPY buyer doesn’t need to study businesses to understand which ones are profitable and which aren’t.  They don’t need to bother with the tedious task of analyzing a company’s financial statement and making inferences about its growth prospects and risks.  They don’t have to read footnotes.  They don’t have to do any work.  They don’t even have to think.

But not only has the bull market made the SPY popular for individual investors.  It has also made it a popular investment for funds and institutions.  This combination has served to relentlessly push the market higher, even though there’s no fundamental rhyme or reason to justify it.

 

There are now more ETFs, ETNs and other trackers than there are individual stocks. This is undoubtedly distorting asset prices. For instance, most modern-day indexes are cap-weighted, and the ETFs tracking them simply buy stocks according to their weighting when new baskets are created. This buying is just mindless, which suggests it isn’t going to end well (a tracking ETF cannot decide to e.g. forego purchase of a stock with an obscenely high P/E ratio). In fact, the Nasdaq’s decline between 2000 – 2002 already gave us a preview of what happens when the trend turns down. [PT] – click to enlarge.

 

Certainly, buying SPY has been a great strategy over the last eight years.  Who can argue with 279 percent returns?  However, it’s unlikely to be a good strategy over the next eight years.

You see, passively managed ETFs that simply mirror the movement of the S&P 500 are a fantastic investment vehicle when the stock market rises over an extended period.  On the other hand, in a bear market, when there’s a protracted stock market decline, these passively managed index tracking ETFs are terrible investments.  When the stock market crashes by 50 percent – which it likely will, these ETFs will also crash by 50 percent.

No doubt, with each passing day, the bull market moves closer to the next bear market.  That’s when the trajectory will no longer be up.  But, rather, it’ll be down.  That’s when SPY portfolios will vaporize as the herd attempts to panic out of the market at precisely the same moment.

What’s more, when push comes to shove, The Donald can’t stop it.

 

Charts by: StockCharts, John Hussman, EWI / Bloomberg

 

Chart annotations and captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “The Donald Can’t Stop It”

  • Hans:

    There is a likelihood when the tax overhaul either fails
    or is so diluted that businesses and Broad St are left
    unimpressed, that a market drawdown of up to 10%
    will occur.

    The current 20% corporate tax rate (up from 15%)
    will IMHO be supplanted by a 25% rate, if at all.

    Too many Socsheviks and RINOs want their spending
    dole to keep them in power.

    Conservatives must continue to grow their base, with or
    without the wayward GOP.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • Credit Spreads: The Coming Resurrection of Polly
      Suspicion isn't Merely Asleep – It is in a Coma (or Dead) There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest? Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com