Dan’s Blog

The Trump Stock Market

Dan Calandro - Sunday, January 21, 2018

Stocks are off boldly again this year in a continuing show of strength that has become typical under Donald J. Trump. In fact, the Trump stock market shares several characteristics of the man himself. It is showy and arrogant, and an embarrassment of riches. It, like Trump, beats to its own drum, sometimes with irrational exuberance. Trump is known as an early bird, arriving to work when most are just getting out of bed. The Trump stock market, like the man, also arrived early, about one quarter-year before his presidency. 

Bill Clinton and George W. Bush left office with an economy in recession and a stock market in correction. Notwithstanding their unfortunate endings, both presidents experienced solid long-term economic gains during their time in office. Each had bona fide booms (the tech-boom and housing-boom, respectively), and each implemented policies that contributed both to growth and calamity – all of which were stoked by an overzealous and overreaching Federal Reserve.

The actual endings of the Clinton and Bush stock markets can be argued but no one would suggest stopping them before they left office. Their respective recessions and stock market corrections had started before elections and continued through the inaugurations of their successors. Their according stock market performances ended when they left the White House.

Indeed, an argument can be made that their successor’s stock markets didn’t begin until some corrective legislation was enacted under their authority (for Bush it was a tax cut plan; and for Obama it was a multi-trillion dollar spending effort.) But that’s simply a difference in starting point for the new president. The previous president’s stock market performance ended with their presidency, as they could no longer move Congress or the Federal Reserve to enact corrective legislation or policy. So the accountability of a president’s stock market performance ends with their last day in office at the very latest.

But they could relinquish it before they leave office. The Obama/Trump transition is a perfect case in point.

President Obama left office with a stable, low-growth economy that never lived up to its expectations. That is because Obama’s expansion was a different kind of beast; it was one that shifted focus from the individual to the central authority in Washington DC, making his “boom” a centrally planned and directed one. That is why his economic performance never produced growth anywhere near his two predecessors’. Consumers represent two-thirds of all economic activity; minimize them and economic growth will flounder. Happens every time.

Central planners believe government is a much more reliable and stable market participant than individuals, and therefore, operate to assume control over a larger section of the market (a.k.a. the economy, or GDP). They believe that a greater degree of market participation by government produces more fairness, and therefore more stability. That was the reasoning behind the Affordable Care Act, a.k.a. Obamacare.

Central planners believed they could do healthcare better than the semi-socialized system America had before by controlling prices by standardizing benefit plan offerings with centrally directed mandates (their idea of fair). The benefit of experience has proven central planners wrong again, as healthcare is anything but affordable and more people are actually cut out of the system because they can’t afford the huge deductibles, let alone skyrocketing premiums.

As Ronald Reagan once said, “The trouble with our liberal friends isn’t that they are ignorant, it’s that so much they know isn’t so.”

That same ideology – that government is a more reliable and stable market participant than individuals – is what drove the solution to the 2008 financial crisis. It wasn’t about cutting taxes and rolling back government programs and regulations to empower individuals. It was about adding more regulation on top of the failed regulations that caused the crisis in the first place, and then assuming control over a larger section of the economy. They did so with debilitating central government debt and deficit that did little more than weaken freedom’s cause and We the People.

Consider that for all the historic money Obama spent during his time in office the U.S. military actually weakened during his presidency. The American People also weakened during the Obama era because they became more reliant on government programs for health and welfare. This, of course, placed a colossal debt burden onto future generations – weakening them long before they had the chance to become of age.

Make no mistake, this was made possible by unprecedented action by the Federal Reserve via QE (quantitative easing) and unconscionable spending programs granted by a Republican Congress too scared to challenge the first black president in fear of being labeled a racist; and because they are big government socialists at heart. SIDEBAR: Socialists always lose to communists because communists aren’t scared of being racist, think Black Lives Matter and Antifa. They are who they are, damn the rest. Socialists, to the contrary, are too scared to be anything but politically correct.

Barack Obama was the epitome of a big government central planner, a communist for all intents and purposes, who was moronically lauded as the one who single-handedly “saved” the economy from doom. Moronic because Obama’s policies and the according “boom” that followed had nothing to do with economic performance. It was about taking over the economy and fundamentally transforming how America operates – to change it from a quasi-capitalist economy to a quasi-communist one. Obama attempted to do so through debt and deficit – the eye of the next storm.

Obama’s expansion was growth in government that was financed by a fiasco choreographed by the Federal Reserve. His boom, the QE-boom, is one of debt and deficit and monetary dysfunction – and the world followed, as every power hungry politician and corrupt political system printed and spent, borrowed and bribed, and paid-off and kicked-back -- so reminiscent of what subprime mortgage borrowers did in the run-up to the last collapse. And Wall Street loved it just as much. After all, it was they who laundered all that money and made a king’s ransom in the process.

Many people don’t properly connect QE with the bailout of the Wall Street establishment for all the terrible derivative bets they made during the housing-boom. The QE practice exchanged toxic assets for newly printed cash, a portion of which was earmarked to purchase U.S. Treasury securities (government debt and deficit). Banks got stronger by offing their losses to the Federal Reserve, and interest rates were kept artificially low (a Federal Reserve objective), which made the financing of government debt easier (as interest expenses were at the lowest possible level.) So the Wall Street establishment got bailed out with trillions of new QE cash, a practice that lasted more than five years after calamity struck.

Every time the Federal Reserve prints that kind of currency inflation ensues.

The Obama economy never produced solid economic growth; it was always weak and uneven. That’s because it minimized the individual and grew the establishment – government, the Federal Reserve, and Wall Street. For that reason inflation never presented itself in the market economy (besides healthcare, of course). Instead “stimulus” was held-up in the banking system, a.k.a. the Wall Street establishment – which is the reason why excessive inflation presented itself in their market, the stock market.

Obama’s stock market started when he took office and the Dow Jones Industrial Average was at 8,000, or 43% off its previous high (October 2007). Stocks regained their previous high-water mark in February 2013 and then peaked in July 2016 before heading down from there until Election Day. 

Stocks reversed course the day after Trump was elected and have charged higher ever since. It was the vote for Trump’s policies that changed the direction of stocks; Obama had nothing to do with it. The proof of this reasoning is elementary: the policies that Trump campaigned on are good for business and investment, good for people and stocks. So stocks rallied.

That said, the Trump stock market began during the Obama presidency, on November 9, 2016, one day after his election. Since then stock market strength via the 15-51 Indicator has gained a stunning 45% in the 1.2 years since the vote, and the Dow Jones Average added 42%. The S&P 500 has lagged significantly behind those two indicators, advancing just 31% during the same time. See below.


Perhaps the most amazing part of this stock market surge is the breadth of gains. Only two industries have not participated in the sharp run-up (energy and consumer staples) though they have produced gains; the other five industries, however, have enjoyed an embarrassment of riches. See below.


My goodness.

And while stocks have been rallying on the Trump agenda since the vote, it wasn’t until Christmas 2017 that something finally got done; the Tax Cut and Jobs Act was signed into law on December 22, 2017 – and I am torn…

First off, any kind of legitimate tax cut program will help consumers, businesses, and stocks. The relevant questions are: How much will they help, and what are their downstream effects?

To begin it is important to note that what passed Congress last December is far from Trump’s campaign pledge. Trump campaigned on a highest individual tax rate of 25% and a corporate tax rate of 15%. The new tax law reduces the highest rates from 39.6% to 37% for individuals, and from 35% to 21% for corporations – a long distance from the president’s campaign.

And it really troubles me that a guy who wrote a book entitled, THE ART OF THE DEAL, failed to start negotiations with his campaign pledge, and then failed to leverage the historic endorsement the American people provided him on Election Day to push it through. But no, in typical Republican fashion Trump over-promised and under-delivered. Not to mention that yet again the best a Republican controlled government could do was to provide temporary, auto-expiring tax cuts.

I can’t help but feel as if Republicans are sabotaging Trump to position him as the sacrificial lamb in 2020. First, the tax cuts are way too small to really impact the economy in the short term. Recall that Republicans advertised the tax cut to increase income for middle class Americans to the tune of $1,000 per year, or less than one hundred bucks per month. That’s just not enough to boost market activity in any significant way – certainly not right away.

And second, it’s hard to determine how the corporate tax cuts will actually play out across the board. They will certainly help some companies, but it may hurt others that have been paying far less than the posted 35% rate for many years. General Electric, for example, is notorious for paying little to no federal income taxes. Should GE’s rate jump to the newly established 21% rate in 2018 the recently enacted Tax Cut and Jobs Act would translate into a huge tax increase that, due to its size, could cause layoffs.

Will the good in this new tax law offset or supersede the bad?

It is important to also remember that neither Democrats nor Republicans like President Trump. They both despise him and greatly want him to fail. You can add the FBI to that list, the Federal Reserve, and Wall Street too. Trump broke code and pierced their inner sanctum. They believe he must be punished and held as a stern example of the kind of retribution to be expected by any other foolish outsider who attempts to disrupt their accord.

The Trump tax cuts will produce more money to the market economy. That’s good. How much they will, in-fact, deliver is the trillion-dollar question everyone has. And while the world can speculate and drive stock prices to the moon without any firm basis, one person can’t be so frivolous. That person needs to be exactly sure how much new money will flow into markets, and that person is Jerome Powell.

The Federal Reserve was Obama’s key ally in his war against individualism and free markets. It was they who aided and abetted Obama’s takeover of the American ideal by printing an unprecedented amount of money and concocting an illegal ponzi scheme for which to launder it (a.k.a. quantitative easing) – this to keep interest rates low to supposedly “repair the labor market and right the economy.” But those objectives had nothing to do with the Fed’s use of QE. Those objectives were simply props in a false advertising narrative.

Think about it…the country emerged from recession in the fourth quarter of 2009 and unemployment reversed and began trending down at the beginning of 2010. QE didn’t end until October 2014 – four years after the program had achieved its objectives.  

Consider also that under chairwoman Janet Yellen the Federal Reserve finally began what was promised to be a very gradual process of unwinding QE.—When, you ask? That’s right, shortly after Donald J. Trump took the oath office – this to leave the mess for him and not Obama.

Yellen, a die-hard establishment player, would have certainly sabotaged Trump if he appointed her to a second term. And he knew it, which is why he opted not to extend her to another term. That puts the first female Fed chair in undesirable company; Yellen is the first chair not to be reappointed to a second term in more than forty years.

Ouch.

So to take the sting out of the proverbial slap in the face Trump appointed another long time establishment player to lead the Fed. The media widely portrayed the Powell selection as a safe bet because he is cut from the same cloth as Yellen. He too is a monetary dove. That means easy money and outrageously low interest rates will continue until the last possible moment, which is usually way too late. The Fed is notorious for their uncanny inability to see the iceberg, take Greenspan and Bernanke as recent examples. 

Despite this the establishment through its media arm urges us – those outside the beltway – to be happy with the Powell selection because he is just like Yellen, Bernanke and Greenspan. “Safe,” they say. 

But let me ask, Who can be truly content with sending a dove to do a hawk’s job?

Regardless of any profound response, it will be Jerome Powell who will lead the Fed’s effort to unravel the QE ponzi scheme -- and he must do so in a completely different fashion than Janet Yellen mapped out. The tax cuts changed everything. Powell must act readily and more aggressively, and be less patient – characteristics of a  hawk, not a dove. Should he mistime anything inflation will swiftly return, interest rates will spike, and the global credit markets will be thrown into a state of flux. And Powell knows it.

Today Trump loves the stock market. 

Jerome Powell is scared to death of it.

Here is Powell’s dilemma…right now the 10-year yield is 2.6%. By this time in the economic cycle it should be closer to 6%. If corporations turn all of their tax benefits loose – by increasing salaries and bonus, and expanding capital expenditures and research and development – the economy might kick into overdrive faster than any projection. Should that happen it would be impossible for anyone but God to raise interest rates fast enough to hold off inflation. And when interest rates rise due to inflation they become uncontrollable; Mr. Powell knows that too. And he also knows that higher interest rates and inflation are the impetus of the next corrective cycle.

So there are many sleepless nights ahead for Mr. Jerome Powell, as he tries to figure how to do gracefully what Janet Yellen should have done years ago.

Think about this...If the Fed would have moved when economic conditions warranted in 2011, or 2013 the latest, the next correction would have already been upon us. But Obama was in still office, his government takeover of the economy still in full swing. The establishment was benefiting, expanding, and thriving under his leadership. And the Federal Reserve was financing it. In other words, all the tentacles of the establishment were deployed to protect Obama and his big government legacy. Together they would prove that central planning was more reliable, and more stable, than the capitalist system. 

For this reason the establishment likes Powell and views him as “safe” because he is also one of them, a big government accommodator. But as sure as the sun will set tomorrow each and every one of them will turn against him the moment calamity presents itself. The media will blame him for missteps and excoriate Trump for changing Fed generals at the worst possible time (to unwind QE). And then of course Democrats will shift their focus to the “ill-timed” tax cuts. They must be repealed, they will argue.

All of this will happen so far away from Obama’s tenure that his contribution to the disaster will never come up, like Bill Clinton sidestepped any and all responsibility for the housing-bust. And then it will only be a matter of time that Obama’s “solution” to the last crisis – more printing, more spending, more debt and deficit, more government – is held out as the gold standard of recovery.

And then We are all in very big trouble.

Until then, however, stocks should continue their rise on wild expectations and steroidal speculation. Interest rates and inflation are the keys to watch. Both will rise, making bonds a risky bet. (Yields and bond values move in opposite directions.) Gold will most likely trade down on the stronger dollar only to reverse course when market inflation presents itself.

Keep alert.

One final thought about Trump’s stock market…most presidents pretend that the stock market is a sideshow or no big deal because it is so unreliable and speculative, manipulated and corrupt. Crazy to hook your wagon to it. The best example of this tempered stance is how President Reagan once referred to the Dow’s sharp decline on Black Monday, October 19, 1987, which is still the single largest one-day decline in history. He said simply, “Stock markets go up and they go down.”

Trump isn’t Reagan. He has made the stock market a big deal and by so doing he has taken full responsibility and accountability for it. He has claimed ownership. And when asset values rise sharply they fall sharply.

Markets correct all the time, but one hasn’t happened in a very long time, in fact, the longest period in history. Obama was lucky to avoid correction because he had the entire establishment helping him, a spendthrift Congress and an accommodating central banking system.

Trump has none of it. The entire establishment would like nothing more than to have the next major crisis hit during his re-election campaign. What better way to assure Trump’s removal from office?

The tax cuts, a Trump policy, make unraveling QE and controlling inflation extraordinarily more difficult. They have forced the Fed into a tighter corner. Higher interest rates and inflation are inevitable. 

Good luck Mr. Powell. 

And good luck Mr. President.

One last point, I don’t believe there has ever been a “stupid” American president. It’s simply too hard to get there for smart people. Dopes have no chance. And while it is true that some presidents say and/or do stupid things, that only proves they are human. Nobody’s perfect. Trump is human and imperfect, and like all of his predecessors, he is no dope.

One of the stipulations in the new tax law is for American companies to bring foreign profits back to the U.S. at a deeply discounted tax rate. All of the multinationals are doing it, especially the banks and technology companies. The importance of this cannot be dismissed. Hundreds of billions of dollars, perhaps even trillions, are leaving foreign banks and being infused into American banks. This weakens foreign banks and strengthens American banks. It weakens foreign central banks and strengthens the Federal Reserve and U.S. dollar. This will aid in the effort to unwind QE, and place the U.S. in a much stronger position to survive the next crash.

So when the world turns upside down and everyone blames the president, Powell, and the tax cuts for causing disaster, Trump will have some solid ground from which to stand. Around him, however, will be a stock market in shambles. And it will be his.

Stay tuned…

 The road to financial independence.



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