Markets – Macro – Technicals

America’s Dirty Little Secret

Disclaimer: I’m a market and technical analyst and not a political analyst. However, given how poorly political analysts have faired in 2016, most notably getting both Brexit and the US election completely wrong, I’ll give you my perspective on the US election, especially as it pertains to markets and the macro environment.

And before I get any political hate from one side or the other: The lens through which I approach this subject is purely macro and structurally oriented. Tensions have been particularly high during this historic election cycle and continue to be high. The country appears hopelessly divided and public face saving exercises by both sides to now try to mend fences can’t hide this fact.

Let’s begin with an old joke that now seems very relevant:

“Two hunters come across a giant grizzly bear in the woods. One of the hunters immediately sits down and starts changing his shoes from big hiking boots to his tennis shoes. His buddy finds this behavior odd and says: “Don’t be silly, you can’t outrun a grizzly with tennis shoes.” His hunting buddy replies: “I know, but I don’t need to outrun the grizzly. I just need to be able to outrun you”.

And right here is the root of one of America’s dirty little secrets. You don’t need to win the support of the American people to become president.  You don’t even need to be liked, in fact you can be as highly disliked as Donald Trump is. You don’t even need to get more votes than the other candidate as now both the 2000 and 2016 elections have proven. You just need to get the right votes in certain places.

Consider the following set of statistics:

vote

Let’s be clear what this really means.

Firstly, American voter participation has always been low compared to other major democracies in the world. This long term trend is indicative of two structural problems: 1. A lot of people simply don’t care 2. Many people feel completely disenfranchised. The political system is not working for them. Both parties continue to fail them and they don’t feel they have a viable alternative.

This election in particular was dismaying  and turned many voters off as participation rates hit 20 year lows:

participation

What these numbers highlight is this: Presidents are generally elected despite 66-75% of Americans NOT voting for them.

So for all the noise, hoopla and marketing proclamations the ugly truth is this: Neither political party, whether Democrat or Republican, need to win the support of the American public at large to win elections. They only need to beat the other guy. The one without tennis shoes.

And given how poorly the larger system has worked for a shrinking middle class elections tend to not focus on detailed policy performances. Otherwise both parties would look extremely guilty of having done a poor job for the American people.

So it comes down to election strategy and on this point Hillary Clinton lost the election more than Donald Trump has won it. He was never going to beat her on experience as he had never run anything other than his own business. So he needed to make it about personality. Hillary Clinton took the bait and spent weeks telling America what a horrible person he is. Well 58% of Americans already agreed with her on that, so she was preaching to an already convinced choir.

As an already unpopular candidate herself she wasn’t convincing new voters. Rather the resulting mud fest contributed to people tuning out and putting both unpopular candidates on equal footing. As the old saying goes, if you wrestle with a pig you both get dirty and the pig likes it.

I’ll leave it to your political persuasion to determine who the pig was in this analogy, but, at the end of the day, it doesn’t matter, we know who won.

More relevant for market followers is was what happened after Trump’s sudden victory: Candidate Trump went missing and hasn’t been found since.

A soothing acceptance speech combined with an after-election party of apparent reality moving impact prompted many Wall Street banks to suddenly celebrate a newly found optimism and even well known bears such as Stan Druckenmiller and Carl Icahn reversed course in an instant. Carl Icahn notably raced from the party and placed $1B worth of long trades in the middle of the night. As any 80 year old would do of course.

No, really:

“Icahn, 80, left President-elect Trump’s victory party in the early hours of the morning to bet about $1 billion on U.S. equities, he said Wednesday in a telephone interview on Bloomberg TV.

“I would have tried to put a lot more to work, but I couldn’t put more than about $1 billion to work, and then the market got away.”

What followed was a panic sector rotation for the ages. Up was down, down was up and we witnessed $DJIA futures transverse 4 months of price discovery in a mere 36 hours with financials & defense & industrial stocks screaming higher and bonds selling off with yields rising steeply. All of a sudden coming inflation was the talk of the town which is now a good thing “they” say.

In short: The anti-establishment candidate became the establishment president overnight.

what

With a surprise Republican majority in both House and Senate lower taxes and increased deficit spending became the primary theme of stock market nirvana. In this new universe, the candidate Trump that the Republican party could not control and didn’t support during the election, all of a sudden morphed into president-elect Trump who would do the Republican party’s bidding.

Not so fast I say.

In context of now suddenly rising yields consider what candidate Trump said in May:

“We’re paying a very low interest rate,” he said. “What happens if that interest rate goes two, three, four points up? We don’t have a country. I mean, if you look at the numbers, they’re staggering.”

And he’s right. The numbers are indeed staggering. And apparently president-elect Trump wants to increase them as early proposals include big tax cuts with increases in fiscal spending on military, infrastructure, etc. On this narrative the $DJIA broke to new all time human history highs on the notion that rising yields, deregulation and more spending will suddenly grow the economy.

What does candidate Trump think of stocks prices at new highs? We don’t have to guess as he told us in August:

Donald Trump believes it’s time to dump stocks:

“In an interview with Fox Business on Tuesday, Trump was asked if he has money in the market now.
“I did, but I got out,” Trump replied. He warned of “very scary scenarios” ahead for investors. “The only reason the stock market is where it is, is because you get free money,” Trump said.
Trump slammed America’s central bank — the Federal Reserve — for keeping interest rates at extremely low levels.”

So what is reality? Reality is nobody knows what a Trump presidency will ultimately look like, and I suspect not even Donald Trump himself knows.

coverYes markets can make new highs and clearly some people are chasing prices and valuations higher. While Donald Trump has won the election he has not won the mind of the American people nor the world. The world has been watching the recent election with petrified horror and the headlines have not been kind.

In a way this could all work to Donald Trump’s advantage. Eight years ago President Obama came into the White House on a wave of global optimism. He even received the Nobel Peace price before really taking office. Expectations were so high he could only disappoint.

As far as the world is concerned the expectations for a Trump presidency are so low he may well exceed expectations.

However there is an early apparent problem: The people who voted for Donald Trump also have high expectations. And their expectation is that he “drains the swamp” not make Wall Street and the top 1% richer.

But this is all that has been accomplished in these first days following the election.

And perhaps this is America’s real dirty little secret: The establishment always wins no matter who is president.

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4 Responses »

  1. What an OUTSTANDING article – great analysis packaged in great riding – long live Northmantrader!

  2. I was nearly out of the markets as of about a month ago. I still have some aggregate bond funds whose prices are somewhat stable. I regret having even them. Earlier in the year I had a large allocations to TLT, Muni bond CEFs, Utilities, Reits, and other dividend payers (I’m retired). I was up about 12% by the end of June. If I still had those investments, I’d be down big, especially this week with the bond rout.

    Trump won because America is in tatters. Everything is broken: our education system dominated by Unions (which have to go!), the legal system, our immigration system, our finances including Trillions in unfunded liabilities, our foreign policy, our healthcare “system” is almost beyond hope, our race relations, our overbearing and totally incompetent government and our economy, hollowed-out by “Globalism”. It had to end — and it did with Trump! Everything in America is broke, but Europe is at risk of collapse and the Middle East is in flames. Is this the late 1930s all over again? At least Putin indicated that he hopes to overcome the disastrous state of our relations with him in the Trump administration. Thanks Hillary/Obama! Idiots!!

    As far as NIRP and ZIRP is concerned, those things are a disaster for banks, pensions, insurance companies and had to end. Even all the educated-idiots who dominate all of our institutions (referring to the Central Banks, but also at media and universities) could see that and it’s ending soon, So all of the “front-running” investors are reversing the trend to zero and below first CAUSED by all the Central Banks. The unwinding still has a ways to go. German rates are only 0.35% or so and should probably be about ~1%, meaning that the US 10 Yr will be 2.75% or so. Does that sound about right to you? I think the market will correct since valuations are extreme based on the extremely low interest rates. But corrections are a good thing. We need one, just like we needed Trump. I should buy TBT at a minimum on any bond rally.

    You’re right about recession risks after 2 term presidents. It’s nearly a perfect indicator. I can’t think of any exceptions.

    That MSNBC graphic is probably fabrication. All of these MSM types are liars and/or propagandists with Leftist agendas. Winners of every election always have a similar dynamic in their motivations. MSNBC is just executing yet another smear against Trump. That’s all they ever did. Not one media outlet reported on anything factual or policy issue. It was all smears, lies and propaganda — all the time. Hillary was the same. She never had a single good idea in her vacuous head nor any accomplishment in government other than destruction, failure and lies. She literally had nothing to offer. Obama was an empty suit too, all talk and no substance AT ALL.

    It seems crises are surely coming regardless of who won. But the crises that are coming may be hard to survive. Millions may die and we might find out that the world can’t support 7 billion persons anymore. Hopefully, I’m wrong about that last bit.

  3. brilliant work!

Trackbacks

  1. The charts say hot air is pushing these markets higher and little else | Profitable Forex Strategies: IchimokuMoku Breakout By Ajani Spaulding

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