According to a rosy stock market outlook, the first year of the Trump administration will run to near-perfection. A good deal of available evidence suggests otherwise, according to most economists. Currently, stock valuations are climbing on speculation that Trump can improve America's economic picture. The rosy expectation allows over-valued stocks to be sold at premium levels before the new Trump administration steps into a combative political environment. The coming political conflagration is not priced in, just the optimism that fiscal stimulus will boost growth. The complications of a widening economic inequality gap are ignored.
There was great economic euphoria following Herbert Hoover's election in 1928. Hoover, a self-made millionaire, rose from the status of an orphan. The presidency was his first elective office. He seemed to be a miracle man: Even FDR thought so in 1920. While campaigning in 1928, Hoover declared that poverty would soon be banished from the land. He saw the U.S. as set for the greatest commercial expansion in history, and his supporters believed him. Just consider how that turned out. A stock market crash in 1929 was followed by seven lean years.
Wall Street's narrative about the coming perfection will flip sometime after the 115th Congress convenes, and whenever Wall Street is ready. Wall Street and Hollywood are master storytellers. Those who spin the nation's narratives, and the timing of those narratives, manage the nation's wealth distribution, especially when the narratives induce dramatic swings in asset pricing.
Top economists say the new administration's economic plans are flawed. The global political economy looks increasingly fragile as international relations become tangled. The U.S. Congress is extremely polarized and set for battle. Justifications on the Democratic side for obstructing Republican initiatives are at multi-decade highs. Is any of this priced into the stock market's post-election rally?
Many Democrats believe that Hillary Clinton's 2.1% victory in the popular vote (2.86 million votes) provides a mandate for a blue policy agenda, or at least blockage of a red agenda. Owing to the Senate's chamber rules, Democrats can make Trump's plans difficult to reach, especially since a half dozen Republican Senators are not on the Trump bandwagon. Has the stock market priced in the degree to which Trump's rosy promises can be thwarted? The bills Trump signs will be significantly different than the ones his supporters imagine. The dream of unfettered growth will fade. Markets will flounder, not fly. Speculative certitude will change to uncertainty, and markets will price in the change.
Policy Implementation Challenges
When it comes time for the implementation of Trump bills, the rule-making processes of the bureaucracy will fill with logjams. A huge wave of civil service retirements during the Obama administration combined with an emphasis upon diversity hiring in recent years has produced a liberal federal bureaucracy where many Federal employees, secure in their jobs, will impede Trump's policy initiatives. It is one thing to pass statutory laws: it is quite another to build out cost efficient operations.
Will the Trump administration find smooth sailing in important blue states like California, New York and Illinois? Hardly. Liberal Californians have found a new love affair with states' rights. Should Donald Trump's policies contribute to global warming, California state government will strongly resist. Meanwhile, California is looking at legislation that would undermine Trump's plans on immigration. This is but the tip of the iceberg that Trump's luxury liner is sailing toward.
Looming Difficulties Ignored
Once Trump is in office, his political bluster and economic bravado will breed media concern. Yet in recent times the stock market has priced in a balmy confidence. This errant pricing of the political economy is strategic. Political delusions bring asset pricing disequilibia that can be gamed. The eventual disruptive nature of the Trump agenda will produce opportunities for exploiting misapprehensions of reality. This is what Wall Street does best, and one reason the Street got cozy with Hillary Clinton's campaign.
In the two months preceding Trump's electoral college win, liberal public opinion leaders declared the certainty of a stock market disaster if Trump was elected. The expectation was so strong that U.S. stock market futures fell dramatically the night that Hillary Clinton conceded the election. Stunningly, the market reversed the forecast the next morning, leaping upward in shock and awe fashion. By the following Monday, the Dow was up nearly 1,000 points above its November 4 close. Since then, another 1000 points have been added. Now, some veteran market observers are concerned that the Dow's move to 20,000 may be premature. At this level, stock prices don't match political realities. The prospect exists for something more daunting than a post-inauguration dip.
A Volume Spike Suggests Pump and Dump
A clue suggesting that Wall Street elites have been dissembling is found in the sudden spike in the volume of shares traded in the Dow and S&P 500 indexes during the last ten business days (Dec. 5-16). Volume at four times the five-year average suggests something big is afoot. What is moving through the shadows? Who are the mystery sellers? Does research show that the general public sells at tops? Or nicely times its buys? Or is Wall Street selling to itself? Is half of Wall Street right and the other half wrong? If so, there may be more upside. One must go back to the mini-panic in 2011 to find a ten-day surge in volume even remotely close. The odds are that Wall Street's animal spirits are coming out of hibernation to meet the Trump euphoria. Is this Hollywood's Forbidden Planet?
It would have been irrational for Wall Street elites to dump stocks right after Trump's election. Why make money in one direction when twice as much can be made on a round-trip: up and then down? Why go short in a flat market if it is possible to gain an elevated platform by which to attack exposed late-comers? All Wall Street needed was a viable (but false) bull narrative for the up-leg (the risk-on mantra) followed by a real world demonstration of the bull narrative's defects (thus creating a risk-off game for shorts). The speculative bull-narrative foresaw massive economic growth. But the dream is flawed. An electoral college miracle does not equate to an economic miracle.
A two-week buying frenzy erupted on December 5, but only after the Dow had already climbed a 1000 points. Wall Street met the new demand for stocks with plenty of supply, but not enough to break the upward trend. Tellingly, financial reporters are not highlighting the incredible surge in trading volume. Why not? Wall Street's media shills regularly pass along to the public whatever scraps they are fed by their Wall Street contacts. Their news reports frequently cause people to mistime the market: to buy when Wall Street traders are selling, and to capitulate in fear when Wall Street is ready to gather up their shares. What does this silence mean?
The trading departments of the big investment banks sell into rising markets. When there are huge amounts of stock to lay off after a major pump and dump scheme, elite sellers cannot wait for the price apex. Once the public's optimism declines, buying demand from the public becomes fragile. Elite sellers move gingerly to ensure that huge paper profits can be turned into firm wealth without triggering a trend reversal that undermines demand. Thus, elites feed euphoric baloney to the financial media, while encouraging analysts to extrapolate trends so as to create alluring price targets. Some people step up and take the bait. Wall Street elites get their best night's sleep after luring their critics into dreamboats targeted for torpedoing.
Where To From Here?
If recent volume metrics continue, the volume picture will soon resemble its condition during the great reversal (and historic bottom) of March 2009. Could it be that shares of stock that hedge funds bought back then are now being laid off at an artificial high? It is too early to know. Big turns take time and volume surges are not self-explanatory. It took two years after the March 2009 bottom for most people to realize they missed the big turn. By then many small investors were fearful of buying because the market was well above its lows. Thus, they missed the following five years of P/E expansion as big corporations bought back their stock. Likewise, if a top is forming now, it may be difficult for people to sell stocks two years from now if they see they missed the top. But what if seven fattening years in Egypt (metaphorically) are followed by seven leaner years? No one yet knows. Trump has made big promises. Maybe he is right. Nonetheless, the future will create its own economic weather. All we have now is guesses based on clues. The biggest thing to remember is that Wall Street will protect its granaries, not yours. It is wise to prepare for a downside risk as well as an upside hope. Both are in play.