Until recently market dynamics have been something like the following: Trump threatens more tariffs, the market sells off, the fed eases and the market rallies. I wrote about this in a past article entitled Trump is Beating the Fed like a Rented Drum Set.
Recreation of a BofA Merrill Lynch Diagram
Phase I: Get Interest Rates Low
The result is interest rates at 1.5-1.75%, “This is not QE” QE, and the S&P 500 at all time highs.
Trump Playing the Trumpet in a badly Photoshopped image
I believe Trump’s prospect for reelection is tied almost entirely to how the stock market performs. So why would he threaten tariffs if they cause the market to go down?
I conjecture firstly that Trump genuinely believes in tariffs and secondly: so he gets lower rates.
But this is only Phase I: where interest rates are already low and perhaps the Fed has signaled they intend to keep lowering. On 30 October the Fed poured a little cold water on Phase I by indicating they intend to pause easing.
Low interest rates and QE is just the first tailwind.
Phase II: “Win” Trade War
I expect Phase II, the “Double Tailwind”, to occur in 2020 and be timed for the election.
Phase II is kicked off either by winning the trade war, or (more likely) simply declaring the trade war won.
The market believing there won’t be new tariffs is the second tailwind, which combined with the first forms the “Double Tailwind”.
Phase two means fewer tariffs or even a complete trade war victory
The “Double Tailwind” means the market isn’t getting freaked out by tariffs and selling off and interest rates are low.
The US stock market could go to even higher highs and secure Trump’s re-election. Trump can then use the bully pulpit of the presidency and appoint an uber-dove to ensure that rates are raised slowly or not at all.
Interest rates might very well stay where they are at. During the 30 October press conference Fed Chair Powell said, “I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.”
Why he appointed Jerome Powell only to throw him under the bus is beyond me, but he will probably do more to ensure he get’s a low interest rate puppet as Fed Chair for his second term.
I don’t know if Trump is planning this out in some grand ‘3D chess’ maneuver or not. But if he is, I have to admit it has a sort of Machiavellian genius to it.
Potential Problems
3D Chess – metaphor for using multiple, non-obvious levels to outmaneuver one’s opponents
Whether it is intentional or not, Trump is now responsible for blowing more air into what is now an even bigglier and uglier bubble and can join the ranks of the Presidents responsible for destroying the dollar and the US economy.
Quarter three GDP was up 1.9% beating the expected 1.6%. Employment is robust. Inflation as (not) measured is “contained”. Between that and the S&P 500 rise will the Fed be able to justify continuing to cut rates?
Another problem is when you get high on heroin you have to deal with the crash. You can’t take the heroin away and keep the high. In fact you have to keep taking more heroin to get a similar high.
Low interest rates are monetary heroin. So if interest rates don’t continue to fall then the market will fall. This most recent “insurance” rate cut may have been the last. If so there is a whole year between now the election in which even the Double Tailwind can fade, bringing the economic ship to a halt. Timing the trade war “victory” correctly before the election will be essential.
The uninitiated often think of the United States as a free market economy. It is in some specific ways but it is a far cry from a laissez-faire free market system. The main reason why the United States isn’t a free market is because of the Federal Reserve System, which controls money and how much it is worth. Money which is on one side of every single transaction that occurs in the economy.
Another reason the United States is not a free market is because of the myriad of taxes, rules and regulations prescribing how virtually all aspects of economic activity must be conducted.
Conventional foolishness states that deregulation causes the 2008-2009 financial crisis. However there were 115 agencies regulating the U.S. financial sector. As Tom Woods says, “Your friends think things would improve if there were 116.”
Monday the 28th of October was another example of how distant the US stock market is from a free-market and how the US economy is very much controlled, manipulated and centrally planned. Trump primed the trading algorithms this morning by stating he, “Expects A Good Day In Market Today”.
The S&P 500 then opened at a new all-time record high as a result. Meanwhile the Federal Reserve, the biggest currency manipulator in the history of the world, is expected to cut rates from an extremely low 1.75-2% to an even more extremely low 1.5-1.75%.
A free market economy is not driven to all time highs by the words of one man or a small group of bankers.
But a larger question remains: if everything is so great, why the rate cuts and “This is not QE” Quantitative Easing?
One factor driving the market is the trade war. When China and the US talk and say nice things to each other the market rallies. When they say mean things or refuse to talk the market sells off. The Federal Reserve is perhaps trying to give some support to the markets when China and the US seem like they can’t play nice.
But I believe the main reason is because the market is expecting it. The Fed isn’t data dependent. The Fed is market dependent. The odds of a rate cut are really just a voting machine to tell the Fed what to do.
I’m sure it doesn’t help the US Fed to be “independent” when Trump pounds on the oval office desk demanding more rate cuts and QE. The irony is that Trump is now just as guilty as Clinton, Bush, and Obama in blowing a big, “fat, ugly bubble.” Trump, if reelected, will be lucky if he can pull an Obama and exist stage left before it blows up during his tenure.
If the US were a free market interest rates wouldn’t be set by a small cabal of unelected, semi-private, pseudo-governmental bankers. It would be set by the supply and demand of lenders and borrowers.
The central banks, who artificially lower interest rates and inflate asset bubbles, fuel greed and cause recessions and crashes. Meanwhile, free markets get blamed and the plutocrats call for more regulations that simply reduce competition from smaller players who can’t afford an army of attorneys to both comply with the new rules and look for and find the loopholes. Regulations also raise costs for consumers.
Meanwhile the regulations wouldn’t have prevented the crisis anyway.
This can’t end well but who knows when it will end.
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.
Starting in October of 2008 gold made a run from 680 US dollars per ounce up to and over $1920 in September of 2011 for a gain of 182% in less than 3 years. Gold traded sideways and down for the next year and a half until April of 2013 when it crashed down to the low $1300s. For the next few years gold trended down in a falling wedge pattern. Gold was negative for years 2013, 2014, and 2015.
The recent multi-year low of $1045 was logged in December 2015 and I believe this price is the new bottom for the gold market.
Below is a chart of the gold market with my comments. Click the link if you’re not familiar with reading candlestick charts.
2016 was a positive year for gold even though a lot of the gains were surrendered in November. On the whole for 2016 the yellow metal was up over 9%. It’s my opinion 2017 will continue this trend of gains in extension of a new multi-year bull market.
Gold is up over 11% in 2017. It started the year around $1,155 per ounce and is currently trading over $1,290.
Gold still Undervalued and US Dollars are Overvalued
Despite these positive moves I still believe gold is significantly undervalued at this price.
Why?
Paltry efforts at “tightening” at the United States Federal Reserve notwithstanding interest rates are at historic lows. There is also record debt and unfunded liabilities paired with an unbalanced budget. The United States Federal Reserve balance sheet remains over $4 trillion. Globally interest rates are also historically low and debt is high. There are even negative interest rates in Europe and Japan. Geopolitical risk of war in North Korea and Syria may have caused the most recent bump in precious metals price.
President Trump has recently done a 180 on several issues. He told the Wall Street Journal the dollar “is getting too strong.” He has also warmed to Janet Yellen and has stated: “I do like a low-interest rate policy, I must be honest with you.”
Last week gold made a strong move up through the 200 day moving average (the solid light blue line above is the 200 day simple moving average.
My Predictive Guesses as to the Price of Gold
The following are my guesses/predictions as to where the price of gold will move over the next year. I’m not recommending anyone buy or sell gold based on these predictions.
Gold has been trending upward since the December 2015 bottom. I think gold will make a new intermediate high between 1400 and 1425 in the fourth quarter of 2017. From that peak it should drop back down to 1260 sometime in mid-2018 perhaps around June.
Of course if there is another 2008-style crash or a hot war in the middle east then all bets are off.
The dashed purple line is my predictive guess as to the price of gold
Longer term I expect gold to make a new high above $1920 within the next four to eight years.
Although there is no substitute for physical possession of a percentage of one’s precious metals I also think it is vital to have some gold stored offshore.
The most cost effective way to own physical gold offshore, particularly for investors will less capital, is through Goldmoney.
I personally own several grams worth of gold via Goldmoney and I’ve been extremely pleased with the service.
Gold has been valued across cultures for thousands of years. It has no counter party risk and I believe it is an excellent defensive holding.
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