Despite the fact that he is now 100% complicit in blowing a giant bubble that will eventually destroy the US economy as we know it, Trump is looking like a game theory genius.
Trump as Bagholder
Before he took office Trump knew the stock market was in a “big, fat, ugly bubble”.
Of course after he took office that capacious and ill-favored looking bubble magically transformed into a beautiful example of legitimate growth thanks to President Donald J. Trump parking his rump in the oval office. But I digress.
I thought the powers that be were going to crash the stock market in time for Trump to be defeated by whichever Democrat candidate manages to climb over the metaphorical bodies of the other ones.
Meanwhile Trump got the beginnings of a tightening cycle. In other words, under Obama everyone got drunk and partied, but when Trump took over the booze started to get packed up and the markets began to sober up with a nasty hangover.
However, by using tariffs Trump is forcing the US Federal Reserve to cut interest rates. This will re-inebriate the markets and probably ensure his re-election.
Trump will keep doing erratic tariff threatening, forcing the Fed to lower rates, until rates are as low as Trump wants, then he’ll declare victory in the trade war. The removal of the trade war worries coupled with low interest rates would rally the markets skywards like bubbles in a tornado.
Trump has found a way to avoid being the bag-holder of the next stock market crash, at least until his second term.
At least that is the theory to which I subscribe.
The Fed Doesn’t Want to be Blamed
One potential problem with this theory is that if the Fed really was out to get Trump, they could simply ignore his antics, hike rates and that combined with the tariffs would cause the markets to sell off, a lot, and probably trigger the next great depression and ensure that Trump couldn’t win the 2020 election against the devil himself.
However, Trump has talked about the Fed a lot, and put them more in the spotlight, so if the markets do crash, they might be afraid that Trump will successfully be able to blame them. So while the Fed would like to tighten, and lay the blame of the market crash at Trumps feet, they are afraid of Trump on the bully pulpit saying that the Fed crashed the markets and causes the recession.
So they essentially are caving to his desires to avoid being perceived as the bad guys. I think this explains why, against all conventional wisdom, with the markets at all time highs, price inflation as measured by the CPI near the 2% target, and low unemployment, the Federal Reserve cut rates.
If they had continued to tighten, while Trump was complaining about them, they might get blamed and they can’t have that.
At the same time they don’t want to look like they are not “independent” as they are so proud of claiming, so they can’t do the full 50 basis point cut and start easing, as it will look as though they are just following orders.
Trump Turns to Twitter
Consider that yesterday, July 31st 2019 Powell’s Fed cut rates by 25 basis points, but indicated it was basically a one and done insurance cut and not the start of a new easing cycle.
Mr. Market didn’t like this and sold off with only a modest partial rally going into the close as you can see from the SPY chart below.
Now at around 10am on August 1st the S&P 500 had rallied back to about where it was before Jerome Powell spoiled the party with a paltry 25 basis point cut and jaw-flapping about this not being the start of a new easing cycle.
Trump is fond of taking credit for the stock market highs, as Presidents are wont to do, so he wouldn’t throw cold water on the post rate cut rally, right?
Wrong, sir! Wrong!
By announcing new Tariffs on China he stopped the rally dead in its tracks.
Why? Because Trump wanted the Fed to cut 50 basis points and he wants an easing cycle.
So the market tanks down even lower than it was before, and the odds of a rate cut in September increases from less than 50% up to 84%!
I should be mad at Trump for encouraging bubble blowing and what is incredibly destructive economic policy, but I have to admit I’m impressed with his gamesmanship.
A lot of people can’t see past Trump’s third grade vocabulary and “unpresidential” comportment–this causes them to underestimate him. I think Trump is good at persuasion and he understands perception and negotiation.
If it continues to work I think he’ll be re-elected. Of course it means that the day of economic judgment, while postponed will only be worse later.
On the bright side, investments in gold are looking quite shiny. And if the market doesn’t crash on Trump’s watch free markets won’t get wrongfully blamed.
Even though laissez-faire he is not, Trump does represent capitalism in the minds of many, and if the market crashes on his watch the United States will unfortunately pivot violently even more to the left.
Few predicted Donald Trump would be the 45th President of the United States.
Early on in the 2016 campaign, I believed it was going to be an election between Hillary R. Clinton and Jeb Bush. I actually won a bet (1 ounce of silver) that Hillary would be the Democratic presidential nominee.
I was certainly wrong about Trump.
[poll id=”4″]
Democrats hate Trump, the establishment Republicans hate Trump, there was no major news network that was even remotely neutral regarding Trump. He broke all the conventional rules. Trump disregarded the sacred institutions and unspoken rules of politics in the US, communicated directly to the people and defeated the Clinton machine.
Anyone who can set their preferences and biases aside for a minute should be able to appreciate the genius of Trump’s campaign, similar in magnitude to the genius of Barrack Obama’s 2008 campaign.
Trump Spoke Some Truths
Wars of Conquest and Adventure
The Iraq and Afghanistan wars were unpopular and Trump tapped into that sentiment. These wars were foolish, unnecessary and costly both in terms of money but also human lives and global standing.
Trump was right to criticize these wars. His anti-war rhetoric was a welcome divergence from the bi-partisan pro-war agenda that has gone back at least as far as George W. Bush.
An Economy that Left Many Behind
The economy was worse than any other candidates admitted–for people who did not own stocks or real estate. Trump emphasized jobs and restoring the United States to whatever perceived former glory it had.
President Obama presided over a stock market that recovered and made new highs as well as reclaimed highs in real estate prices. But this did not benefit younger people or middle and lower class folks who don’t own a lot of these assets and do have lots of debt and stagnant jobs. So these and the shrinking middle class were primed for Trump’s message.
I don’t know what impact this would have outside of some libertarian and Austrian economics circles, but my ears perked up when Trump made the following statement:
We are in a big, fat, ugly bubble. And we better be awfully careful. And we have a Fed that’s doing political things. This Janet Yellen of the Fed. The Fed is doing political — by keeping the interest rates at this level. And believe me: The day Obama goes off, and he leaves, and goes out to the golf course for the rest of his life to play golf, when they raise interest rates, you’re going to see some very bad things happen, because the Fed is not doing their job.
Candidate Trump, September 2016 Source: https://www.marketwatch.com/story/where-will-stocks-and-interest-rates-go-if-trumps-big-fat-ugly-bubble-bursts-2016-09-29
Trump’s comments regarding stocks being in,”Big, Fat, Ugly Bubble,” as well as commenting that interest rates were too low for too long, certainly resonated with me.
Trump Contradicted Himself
It is standard practice for a politician to say one thing at one time and then say or do quite another thing. Trump was no exception.
Early on in his presidency Trump began to take credit for the stock market. In Trump’s mind the stock market seems to have magically gone from being a big, fat, ugly bubble to legitimate growth once he was in office.
If this is how you view Trump, you probably don’t care what he does or says.
He has even gone on to demand low interest rates as well as quantitative easing!
I think they should drop rates. I think they really slowed us down. There’s no inflation.
President Trump, April 2019 Source: Source: https://www.reuters.com/article/us-usa-fed-trump/trump-urges-fed-to-lower-us-interest-rates-idUSKCN1RH1M2
War
Trump also attacked Syria and has not stopped aggressive “freedom of navigation” exercises directed towards China. I find this bellicose foreign policy a deviation from what his foreign policy view seemed to be during his candidacy.
Trump’s Reelection will Sink or Swim with the Economy
Typically both the red and blue teams tend to pivot to the center after being elected.
But if the Democratic candidates running are any indication, the country will move significantly in a socialist direction.
Not many people believe in reincarnation, and yet believe Trump is literally Hitler.
Unless for the first time in history socialism actually works, this move to the so-called left will be bad for stocks and the country as a whole.
However the world has underestimated Trump before and there are a lot of factors. A big factor is of course the candidate that wins the Democratic primary.
Trump could also initiate some type of military conflict around the world and a president perceived to be tough could be more likely to be re-elected in a time of war.
A large percentage of people who voted for Trump won’t admit or won’t care that he acted in complete contradiction to key elements of his campaign rhetoric. But will the swing voters or people who turned out because they thought Trump was different do so again if the stock market crashes or they lose their jobs?
If the economy crashes before the next presidential election I’m inclined to think Trump will not be re-elected. I think this is the Trump card, which makes his focus on the trade war with China so dangerous for him.
Over the past few weeks I’ve been writing about the faulty wiring in the United States economy that will eventually result in an Economic Conflagration.
The faulty wiring that will ultimately lead to this economic firestorm includes the fact that the real economy is weak, the economy is crushed by profligate debt and that stocks are overpriced and due for a significant crash.
One of the reasons why candidates such as Bernie Sanders and Donald Trump were popular in the last United States presidential primary and general election is because people know that the real economy is weak. They know how much debt they have and they want someone to make radical changes and do something about it.
Unfortunately government has never been particularly good at creating wealth or prosperity.
Some people might choose to rely on politicians to fix things. This website is not for those people. HowIGrowMyWealth.com is for people who want to take some common sense steps to grow and protect their wealth.
Given the faulty wiring the economy it is more important than ever to grow and protect one’s wealth. It might take a while but this faulty wiring will eventually result in a fire that will burn uncontrollably.
I realize this isn’t necessarily very cheery stuff but fear not! There is plenty of room for optimism.
I’m not a doomsday “prepper” or perma-bear and I’m sure that entrepreneurs, if free to do so, will rebuild the economy and usher in greater prosperity that will not be funneled to the politically connected.
I’m also cognizant that the stock market has gone up nearly 300% since the great recession, there hasn’t been hyperinflation in consumer prices and on the surface the crisis seems to have passed long ago. I don’t have a crystal ball and being right early sometimes looks like being wrong.
Despite the relative calm there is faulty wiring in the economy and sooner or later it will spark and ignite blaze that will, to quote Peter Schiff, “will make the financial crisis of 2008 look like a Sunday school picnic.”
The politicians, if they even realize that there are systemic problems in the economy, simply aren’t willing to endure the short term pain and inconvenience of ripping out the faulty wiring in order to fix the underlying problems. So they will continue to kick the can until the economic house burns down.
The bright side is that this will present an opportunity to rebuild the economy based on a strong foundation as opposed to what we have now, a phony economy based on debt, cheap money and consumption.
There will be winner and losers. I’m very optimistic about the future and I want to be counted amongst the winners.
So where am I putting my money?
My asset allocation falls into three main areas. Value stocks, gold and cash.
Value Stocks
Most people love buying things on sale and getting a great deal, expect when it comes to investing. When it comes to investing people want to buy expensive things and hope they go higher. Value investing takes that same common sense, buying things when they’re on sale and applies it to stocks and other asset classes.
The stock market as a whole is overvalued by a variety of metrics. But there are still good deals out there especially in non-US markets. I don’t doubt that value stocks will also go down in the event of a stock market crash but I think they will go down less and they will recover with more strength.
I share my value stock picks publicly. But I only share if I would buy them today or if I would hold or add to my positions with members of my free email newsletter. I will also let me email subscribers know when I buy or sell a stock first, before I publish that information to this website.
Gold
I don’t think you will get rich buying gold but it could prevent you from getting poor. Under relatively normal circumstances the demand for gold is fairly steady and the supply is fairly steady so for the most part the price of gold will rise with the level of inflation.
Gold is a way to save purchasing power. It’s a way to opt out of the financial system and wait for sanity to return.
If the dollar tanks loses it’s reserve currency status gold will still be valued.
I also think there has been significant effort to suppress the price of gold and depending on how much downward price manipulation there really has been, the price of gold could go up significantly from where it is right now.
If fiat currencies collapse that could very well induce a flight to the safe haven asset of gold that this influx of demand would be very bullish for gold.
Because of the absurd expansion in central bank balance sheets and artificially low interest rates I like gold presents a fantastic value at current prices.
What I write about gold applies to silver–another asset I think will do very well in a downturn. Silver has the added benefit of being an industrial metal that is more widely consumed.
Cash
Long term, like every other fiat currency, I think the dollar will go to zero. So why would I want to hold dollars?
First, I own a month or two of expenses in physical cash in a secure location in case there are capital controls. If there is a panic and people start withdrawing money from the banks the banks might in turn say, you can only withdraw $500 a week or something like that. Withdrawal limits could also be imposed if the US implements negative interest rates and people (very rationally) decide it is better to hold dollars in physical cash so they don’t have to pay interest to their bank for the privilege of loaning their money to the bank.
I reside in the United States and everything is priced in dollars so I need dollars to buy things. If I lived in the eurozone I would hold pounds or euros, if I lived in China I would hold Yuan. If I lived in the socialist paradise of Venezuela I would probably hold dollars (and try to get out).
Secondly, apart from physical cash I also hold dollars in a money market fund as a war chest. If stocks tank I expect there will be bargains to be had. I want to be buying stocks (if they are high quality free cashflow producing companies) when everyone is panicking and selling.
Now I fully expect the United States Federal Reserve to do what it has done in all other crises it has created–it will lower interest rates and buy assets to prop up the markets.
With interest rates already low once they cut rates to zero they will only be able to do things like Quantitative Easing and Negative rates. This is very bearish for the dollar and very bullish for gold.
But in the highly unlikely chance the US Federal Reserve does the right thing and lets the stock market collapse and lets the US government default on it’s debts this could be very bullish for the dollar. So holding some dollars is a hedge against deflation as well as a war chest to draw upon to buy undervalued stocks post crash.
What are some other possibilities?
While the bulk of my holdings are in cash, value stocks and precious metals I also dabble in some other alternative investments.
If there is a dollar crisis or collapse in the faith of central bankers then more people could turn to cryptocurrencies and could see it rise. Demand for cryptocurrencies could also rise for other reasons pushing the price upwards.
While I think blockchain technology is here to stay the value of any one specific cryptocurrency or token could very easily tank to nothing. Cryptocurrencies are very risky and 90% swings (both directions) happen.
You need to have an iron stomach but having between 1-5% of your liquid net work in cryptocurrencies isn’t the most outlandish idea in the world.
I would only speculate on cryptocurrencies with what you can afford to lose and I don’t considering buying cryptocurrencies investing in a technical sense since I am simply betting on the price going up.
I’ve shared with my readers my Group of Six cryptocurrencies that I’ve chosen to own and speculate on.
Options
Net I’ve actually lost money trading options. I traded options while unemployed and failed to remain dispassionate and objective. I was so focused on making money that I opened positions when the conditions were not ideal and took risks I should not have been taking.
I do believe if you are disciplined and follow the appropriate rules, you can do well trading options.
During a stock market crash volatility spikes and selling options could be a good strategy. When the VIX (a volatility index) spiked up in early February I sold a few options and those positions are doing well as volatility has dropped and the market has recovered. Markets don’t move straight up or down for very long so even if the February selloff portends drops to come, the market doesn’t drop as fast as people think in the midst of the drop.
Real Estate
Unlike all the other assets mentioned above I do not and never have owned any real estate.
Lots of people have made lots of money in real estate. I am working to learn more about this asset class and hope to own my own rental property at some point.
What I like about real estate is that it is easy to use leverage and the tax benefits are ridiculous. You can effectively pay no tax on investment property income and borrow a lot of the money you need to get started.
You of course need to know what you’re doing.
My goals for owning real estate involve owning a multi-family apartment building. The key for me is a cashflow positive property. I don’t have any interest in trying to buy and flip, although some people are very successful doing this. There are lots of ways to make money in real estate and I recommend biggerpockets.com to learn about them.
I think cashflow positive real estate will do okay in the event of a crash. If you’re in an area that has stable employment prospects those workers will always need a place to live and have the money to pay for it. Of course real estate won’t “always go up” and there are a lot of risks and headaches associated with managing property (if you don’t outsource property management).
This is part 5 of 5 of what I’ve decided to term The Economic Conflagration series where I discuss the faulty wiring pervasive the global economy:
Despite the pullback over the past few trading days, the S&P 500 is still far beyond the highs during the dot-com bubble and subsequent bust as well as the housing bubble and subsequent great recession.
If the fundamentals supported the S&P 500 at these elevated prices it would be great but the fundamentals do not…these elevated stock prices are one of the faulty wirings running through the global economy.
Up until the last few trading days, using the Shiller PE ratio*, there has only been one time in the history of the S&P 500 when the Price to Earnings level was higher, and that is the peak of the dot-com bubble.
*Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10
While imperfect (I tried in vain to find a Price to Free Cashflow chart for the S&P 500), the price to earnings ratio is essentially how much a stock (or in this case the S&P 500 index) costs relative to it’s earnings. A lower PE is better because it means you are paying less for a stream of income.
Price to book is another metric we can look at and the price to book ratio of the S&P 500 is at a level not seen since the 2008 financial crisis.
I want to pick on Netflix as an example of an overvalued stock.
One of the most important metrics for evaluating a company is free cash flow. Earnings can be a little suspect because of accounting gimmicky but it is tough to hide free cash flow numbers. It’s one of my value investing metrics.
Netflix (NFLX) has not had positive free cash flow since twenty-thirteen. In 2016 the free cash flow was in excess of negative $1.5 billion and the trailing twelve month free cash flow amounts to over negative $2 billion.
So they are bleeding money and yet as you can see from the chart above, apart from this last week Netflix stock continues to climb.
What is Causing the Stock Market to Rise?
The United States Federal Reserve has bought bonds to lower interest rates and has also bought other toxic assets (like mortgage backed securities “backed” by mortgages that had defaulted).
In the wake of the 2008 financial crisis the Federal Reserve balance sheet has swollen to over $4 trillion. The chart below shows the Fed’s balance sheet in millions of millions (aka trillion).
This has driven down bond yields and driven up bond prices.
This makes it cheaper to borrow money to buy stocks. It also forces income focused investors to forsake bonds (which have little to negative real yield) and instead pour money into dividend paying stocks.
Companies can also issue bonds at lower rates, and use the proceeds to buy back their own stock.
Stocks are overvalued and as bubbly as can be due to reckless US Federal Reserve monetary policy. Last Thursday the 8th the stock market closed in correction territory. It rallied back Friday.
I don’t know if this is the start of a larger selloff into a full on bear market or if this will be contained to a correction.
Since the lows of the 2008-2009 financial crisis there have been several corrections and even a 22% drop in 2011. Those were in an ultra accommodative monetary environment and not in a tightening cycle.
This probably *should* be the start of a bear market but the bulls and the Fed might be able to bid the market back up as they have several times before.
I don’t recommend trying to short the market or (if you own stocks) sell. If you know how to time the market I want to get advice from you because I don’t know how to time the markets.
I do know that stocks are overvalued and due for a correction. If the Fed does step in to prop up the markets it will be more negative news for the dollar. The Fed also doesn’t have much room to cut rates and would either have to sit by and do nothing (unlikely) or restart quantitative easing and negative rates.
This should be positive for foreign value stocks and precious metals. From the lows in 2009 the S&P 500 is up 293%. Even if you bought the S&P 500 at the peak of the 2008-2009 bubble you’d be up 80%. The dollar hasn’t tanked so dollar denominated stocks have been a winner. However, if prices and fundamentals mean something, eventually stocks will correct or the dollar will implode. When that happens it will be critical to your financial survival to have alternative investments in place.
This is part 4 of 5 of what I’ve decided to term The Economic Conflagration series where I discuss the faulty wiring pervasive the global economy:
Today the Dow Jones Industrial Average dropped 4.6% and went negative for the year.
Investor’s Business Daily summarizes the pullback very well:
“The Dow Jones industrial average fell by 1,175 points on the stock market today, plunging nearly 1,600 points at session lows. Those were the worst one-day and intraday point losses ever for the blue-chip index, something trumpeted across most financial media.” -Investor’s Business Daily
However, as Investor’s went on to point out, in percentage terms this is hardly historic.
The real question in my mind is, “does this mark the beginning of a larger selloff?” The Dow was also down on Groundhog Day, that is Friday the 2nd. So this marks two days of declines, with today’s selloff being even larger.
Volatility is Back
Volatility in the market has spiked tremendously as measured by the Chicago Board Options Exchange Volatility Index (VIX). You have to go back to 2015 to see volatility this high.
For all I know the market will stabilize tomorrow or the next day, but it is interesting to me that volatility, which as you can see had been declining for the past two years, is now back in the market.
Gold Stable
Gold was flat/slightly up today.
Cryptocurrencies Continue to Tank
Cryptocurrencies continue to tank. Bitcoin is trading around $7,000 (down from the December 2017 highs of $20,000). Ethereum is down to $700 (from the the January highs of nearly $1,400). Other cryptocurrencies have sold off similarly in the past few months but actually rallied modestly as the Dow and other stock indices sold off today.
I previously wrote about how this time is not different how there are systemic problems with the US economy and the economy at large. I wrote how there is the economic equivalent of faulty wiring in a building. You don’t know exactly when the building is going to burn down but it is only a matter of time.
One of the three main reasons why an economic conflagration is on the horizon and why it makes sense to start preparing now through alternative investments is the real economy is weak.
There are a variety of metrics that show the real economy is weak. I’d like to look at two: labor force participation and stagnant wages.
Labor Force Participation is Down
I don’t like looking at the unemployment rate for two reasons. 1) If people give up looking for work then that lowers the unemployment rate 2) The unemployment rate doesn’t look at the quality of jobs. If a person loses one high paying full time job but then they get 1 or even 2 part time jobs that pay less and have fewer benefits, that in and of itself, does not impact the unemployment rate, even though the person might be working lower paying jobs outside of their previous field.
The labor force participation rate is by no means perfect either, but it is in my view a more useful metric in today’s economy.
The civilian labor force participation rate is at a level not seen since the 1970s.
And no, it’s not because the baby boomers are retiring. The labor force participation rate amongst those 64 and older has been steadily climbing even as the the labor force participation rate at large has been declining.
The civilian labor force participation rate amongst those in their prime working years, 24-54, has not regained the levels seen before the great recession nor the dot com bubble, despite rising steadily for decades, it’s been trending down since the peak in the late 90s.
Stagnant Wages
Not only are a smaller percentage of people are in the workforce but those that are working face stagnant wages. According to a PEW Research study, when adjusted for inflation wages have barely budged since the 60s.
However, I’m sure that the inflation adjustments used understate the rate of price inflation. If that is the case then real wages have actually fallen.
Fewer People are Working and They are Getting Paid Less
In summary the real economy is weak. A smaller percentage of people are working and they are getting paid less. The labor force participation rate is on par with levels from the 70s and at best people are not making any additional money and quite possibly making less money on average than in decades past, depending on how much trust you have in the official price inflation numbers.
On top of these factors debt has increased dramatically at the Federal, State, and personal levels. More on that next week.
This is not a consequence free environment. The real economic weakness in the US economy is one of the reasons I think that the US economy (and probably global economy) is due for a large correction. It might not happen this year or even next year, but such a correction is long overdue and it makes sense to take some basic precautions through alternative investments.
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*Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10
Source: https://fred.stlouisfed.org/series/CIVPART
Source: https://fred.stlouisfed.org/series/LNU01375379
Source: https://fred.stlouisfed.org/series/LNU01300060
