The Markets As President Trump Took His Oath Of Office
Mark Lundeen | Jan 22, 2017 06:06AM ET
It’s been a month (December 20th) since the Dow Jones last closed at an all-time high. And since January 6th, the Dow Jones is finding breaking above its 20K line a hard nut to crack. That’s not to say the Dow Jones won’t see a 20,000 closing price. But the ball is on the bulls’ side of the court, and so far they’ve shown little excitement about doing what everyone is waiting for them to do; take the Dow Jones above 20K.
The longer they wait, the harder it will be for them to do it. It takes buying to make a market go up. But markets can go down on their own with no help at all.
Since early November, the bulls have had considerable success in moving the Dow Jones higher. Just days after the November Presidential election, trading volume for the thirty Dow stocks exploded. However, I have to wonder who is buying and selling these shares. Are we looking at real investment demand, or are the big Wall Street houses using their high-frequency trading programs to manipulate the market higher? It’s increasingly looking like the current advance in the stock market is something that Wall Street cooked up for the new sheriff in town; President Trump.
Look at the explosion in trading volume for the 30 Dow Jones companies since Trump won the November election (Red Plot chart below). With all that the Dow Jones still can’t break above 20K? I know what the problem is; when the Dow Jones is about to break above 20K, sellers come out of the woodwork to close out their position. For all too many; 20K in the Dow Jones looks like a top, or close enough for one to motivate them to sell and wait on the sideline to see what comes next.
Looking at the Dow Jones’ Bear’s Eye View (BEV) below, we see how closely the Dow’s BEV plot has hugged its BEV Zero line for over two months now. Although this happens, it can’t go on forever without the market seeing a correction.
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When the inevitable market correction in the Dow Jones’ BEV chart above comes, assuming the December 20th all-time closing high of 19,974 still stands, the table below shows how far the Dow Jones must decline to break below the -2.5 to the -15% BEV lines above.
To see the Dow Jones correct 15% as it did in the summer of 2015, and again last January, it would have to decline just under 3000 points. Few people are thinking that today – but I am and then some. 2017 still has eleven months in it. Lots of bad things can happen in eleven months.
Since the Greenspan Fed of the 1990s, trends in corporate earnings and share prices have been bolted together, where “market experts” analyze trends in earnings to predict future trends in share prices. However, before the Greenspan Fed, earnings had little to do with predicting price trends, and for good reason.
Below we see the Dow Jones from 1968 to 1984, a time when 1000 was the bulls’ line of death. Note how earnings were increasing the entire time, yet the Dow Jones couldn’t break above, and stay above 1000. That is until November 1982 when the Dow Jones finally broke above, and stayed above 1000 –whileits earnings collapsed 93%. I know most people don’t know that, but it’s a historical fact.
Note too how the 1973-74 Dow Jones bear market (the first Dow Jones 40% market decline since 1942), took place as earning increased to new all-time highs during the entire decline. Go back and read Barron’s market commentary of the early 1970; you’ll discover that decades ago, market experts placed little emphasis on analyzing trends in earnings when discussing the stock market, for reasons that are painfully evident below.
The futility of studying earnings to predict future price trends was evident long before 1968. The 89% crash in the Dow Jones of 1929-32 began as earnings exploded 40% in the first nine months of the crash. The best year in the history of the Dow Jones took place from July 1932 to July 1933, where the Dow Jones increased 153% in twelve months as earnings for the Dow Jones were either collapsing or negative.
So how goes the Dow Jones’ earnings on the first day of the Trump Administration? After peaking in October 2014, they’ve declined about 19%, and as before Alan Greenspan became Fed Chairman, the bulls couldn’t care less.
Still, I expect that when “the big one” finally comes to Wall Street, Mr Bear will take the earnings for the Dow Jones down along with the Dow Jones itself. The simple reason for that is what we see for earnings in the post credit crisis period above is just too good to be true. It took twenty years for the Dow’s earnings to recover from the depressing 1930s, but only four years after the credit crisis?
Economists from the Federal Reserve and Wall Street are fully aware of this amazing reversal in the earnings for the Dow Jones. If given just half a chance,they would boast that they are responsible for it. I’m sure that’s correct. After “injecting” trillions of dollars of “liquidity” into the financial markets, you can be sure it will show up somewhere, like in the valuation for the Dow Jones and its earnings. I only doubt durability of current market prices and earnings when the predictable inflationary consequences of the “policy makers” three doses of quantitative easings once again drive up consumer prices, interest rates and bond yields.
As anyone who does their own grocery shopping is very aware of, consumer prices are increasing. It’s dismaying how little a $100 buys today. And the four decade trend in declining bond yields apparently bottomed last July, exactly when the Republican Party nominated Donald Trump to be their candidate for President (chart below).
I also note how during the entire Obama Administration, mortgage rates (Red Plot) were lower than Best-Grade Bond yields (Green Plot). This was especially so up to July 2013 when the financial system was still in need of “stimulation.” If you want another bubble in the housing market; this is how Jim Carry and Jeff Daniels would do it, so why not Ben Bernanke and Janet Yellen? But since the end of November, once again mortgage rates have increased above Best-Grade Bond yields.
If the trends seen in the chart above continue, and I expect they will, eventually the deflating debt markets will take the stock and real estate markets down with them. And that’s when you’ll be really glad you purchased the old monetary metals and precious metals miners at today’s low prices.
Next is the Step Sum & 15 Count table for gold and the Dow Jones. It’s not always this apparent (and not always so), but note the contrary trends in these two data series step sums and 15 counts. It’s obvious that since December 14thgold is inflating as the stock market deflates, though not enough to create any excitement in either market.
Historically, it’s not inflation that drives precious metals assets higher in their bull markets; central bankers do all they can to prevent their monetary inflation from doing that. What central bankers do is inflate the valuation of stocks, bonds and real estate, while at the same time contain any flow of inflation away from consumer prices and the old monetary metals.
It’s deflation in financial assets that drives consumer prices, gold and silver higher. And that doesn’t happen until Mr Bear takes control over the market’s pricing mechanism away from the central bankers. Looking at the market’s tea leaves above and below, that’s exactly what began happening last summer for bonds, and about a month ago for the stock market.
I’m making no predictions here. My ability to see into the future is no better than anyone else. And the people on the other side of our trade are the central banks and big financial trading houses. These institutions are “the establishment”, and so are allowed to cheat. I guess that’s why they call the American financial markets “regulated.”
But the market trends I follow are increasingly bearish on financial assets, and bullish for the old monetary metals and their miners. That’s as good as you’ll ever get in the early stages of a major market reversal.
Gold and its step sum plots below make for a pretty picture. Both the blue price and red step sum trends having bottomed and reversed upwards in the past four weeks. Looking at the Step Sum and 15 Counttable above; the gold market got its Christmas present on December 22nd. It doesn’t look like much now, but December 2016 should prove to be a significant bottom in the precious metals markets. Given time, good things for the precious metals bulls should happen from here.
Below is the BGMI, with 52Wk High & Low lines from 1999 to today. Rats! The market correction that began in April 2011, and bottomed in December 2015, completely wiped out the gains of the previous eleven years. Sorry to say it, but nothing in the stock market is as volatile as are the gold and silver miners, and that’s been true since 1920 when my data begins.
But the part of the boom-bust cycle that generates new 52Wk lows seems exhausted. It really is time for the BGMI to resume making new 52Wk highs in the chart below. Hopefully enough new 52Wk highs to leave the 1600 from 2011 far in the dust.
Well, if you believed the BGMI was cheap in 1999, you have to believe it’s even cheaper today. In fact, when priced in terms of an ounce of gold, the BGMI hasn’t been this cheap since the 1920s (chart below).
That’s all I have to say about that. What else is there to talk about? Plenty, such as municipal bond yields are still above those of Barron’s Best-Grade Corporate bond yields, and have been for the past 324 weeks.
One of the things the bond market used to be very good at was pricing in market risks into expected returns.
Higher risk, higher yield / lower risk, lower yield.
Sadly, that’s not so much true anymore. Former Fed Governor,Kevin M. Warsh shared his thoughts on this exact topic five years ago at Stanford University.
"Now that I am out of government, I can tell you what I really believe.
- Central banks are now so heavily influencing asset prices that investors are unable to ascertain market values. This influence is especially evident, with the Fed's purchase of government bonds, which has made it impossible for investors to use bond prices to learn anything about markets.
- The government-sponsored housing entities remain sources of vulnerability to the U.S. economy, and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense are deeply counterproductive. Such efforts have not succeeded”
- Kevin M. Warsh: Former Federal Reserve Governor. Comments made to the Stanford University Institute for Economic Policy Research, 25 Jan 2012.
If you were wondering why mortgage rates were much lower than Best Grade corporate bond yields from 2008 to 2013 (4 charts up), former Fed Governor Warsh in 2012 admitted it was the Federal Government’s doing.
If there is an exception to government influence making it impossible for investors to learn anything about the markets, it may be found in the municipal bond market (chart below). With rare exception; from 1937 to 2010, tax free muni-bonds yielded less than taxable corporate bonds. One reason was that the income streaming from muni bonds is tax free, and the market priced that fact in. Another was that muni bonds were outside the business cycle. Local government would sell muni bonds to fund infrastructure projects such as a water works upgrade or new roads, bonds to be financed on local government tax receipts. These bonds were rarely defaulted on.
Corporate bonds really are assets with higher risks, and from 1937 to 2010, the bond market priced them to yield more than muni bonds. Then beginning six years ago, all that changed as seen in the chart below. Today, bond purchasers are willing to forgo an additional seventy basis points of TAX FREE income available in the muni bond market, for lower yielding TAXABLE income in the corporate bond market – why?
The problem with muni bonds is that for decades the Democratic Party has dominated America’s large cities such as New York, Chicago and Los Angles, as well as many of the big blue states such as California, Illinois and New York. These politicians have greatly expanded the scope of government in the lives of their citizens, thus creating a need for more government employees to “execute policy.” To buy their bureaucracies’ loyalty (a good thing to have in election years) politicians have increased the pay and retirement packages of the past few decades far above that from decades ago. The result will eventually prove disastrous for holders of local government debt, and the six year yield inversion in the chart above shows muni-bond buyers are fully aware of this situation.
Below is a Google (NASDAQ:GOOGL) search for the Illinois pension crisis. It tells a story that’s common in all too many municipal and state governments. In the list the Chicago Tribune has an article on how Congress could solve the pension crisis.
https://www.google.com/?gws_rd=ssl#q=illinois+pension+crisis
One only has to listen to the main-stream FAKE NEWS media to learn that the big spenders in Washington have the answer to everyone’s problem – spend more tax money / drive the nation deeper into debt. But ultimately I expect Mr Bear will have the final say on what happens when voters allow politicians to have unchecked control over public finances.
I should note I’m not a credit analysis. But one doesn’t have to be one to understand that investing in muni bonds from San Francisco has its own unique set of risks. And I’m sure there are many local, and state governments who manage their financial affairs competently. But none of that will matter when bond yields once again begin to rise towards double digits. All fixed income assets in an inflationary economy such as ours eventually becomesa mug’s game for creditors.
It’s unfortunate people I respect have been quick to be critical of Donald Trump. “He’s got a big mouth” they say. To my ears he hasn’t said anything to anyone that didn’t need to be said. And seeing someone as politically incorrect as Mr. Trump has intentionally been, survive the expected backlash from the leftist media is sign of progress towards a return to individual liberty for the rest of us. I also liked how in his inaugural speech and ceremonyour new president honored the Judeau-Christian culture and traditions that were so long the corner stones of our country.
As long as now President Trump makes an honest effort to restore Washington’s bureaucracy to the rule of law,use his office’sprosecution powers appropriately towards errant high-office holders to the fullest extent of the law, reduce the ranks of renegade regulators in the EPA and elsewhere, and restore fiscal sanity in the budgetary process, I’ll be happy with him.
And then maybe one more thing too; thatheconfoundsEarth’s would be tyrants, those who meet at Davos every January is something I expect from him too.Geeze Louise: the “policy makers” at Davos this year had another Nobel-laurate economist explain the need to eliminate paper money across the globe to control criminal activity in the economy.
No; he wasn’t talking about the Bill, Hillary and Chelsey Clinton Foundation, or even the Clinton Global Initiative where tens of millions from foreign governments (but not Russian) helped finance Hillary’s 2016 Presidential campaign. He is really talking about the need for a global government to track every financial decision Earth’s “human resource” makes 24/7 - 365 days a year.
These vile people don’t approve oflesser mortals earning cash money from a part time job from a friend, or using cash to buying a bottle of beer. The greed and ambition of these people exceed even that of Lenin and Hitler, and modern digital technology is making their dreams come true a real and dangerous possibility.
Digital money, recorded in files stored on computers controlled by a banking system infamous for its ethical lapses is the way to go, so says these masters of smartness. But then these same people complain about computer hackers whostole the election from their gal-pal Hillary, as well as votes stolen by computer hackers in key states last November, something reported by the MSM that didn’t happen at all.
God bless President Trump if he kills any notion of eliminating cash. In fact he should insist that Congress authorizes the US $1000 and $5000 bill, as inflation has consumed what little value remains in a $100 bill.
That members of the establishment are foaming at the mouth as the hour of his inauguration approached is a good indication that they fear President Trump will do much to spoil the next eight years for the members of the New World Order.
One thing I don’t expect President Trump to be able to do is to avoid a massive collapse in the financial system sometime in his first term in office. Wall Street and everyone else still have a day of reckoning with Mr Bear.
If I was President Trump, I’d remember what President Obama said: “don’t let a good crisis go to waste.” Now is the time to prepare a list of names of who did precisely what to bring our financial system to its current sad situation.Many laws, including perjury must have been violated for many years now.
People with modest means come to Washington, office holders of the public’s trustwho then become wealthy during their term of office. How does that happen? The media is fully aware of this, and says nothing. If the rest of the country suffers for it, it’s our bad luck for trusting them.
Compiling this list shouldn’t be much of a task. When the hour of crisis comes, send out the US Marshalls to round up the guilty and get video of the scoundrels being frogged marched to be finger printed and publish their mugshots and charges on the internet.
When the s--- hits the fan, President Trump should be very quick to return the party loyalty shown to him by Republican members of congress such as Paul Ryan and John McCain. In the coming panic, instead of making yet another vain attempt to “save the system”, I hope President Trump chooses to let Mr Bear finally do his job of clearing out the rot from Wall Street, and focus his attention on prosecuting the guilty regardless of party affinity.
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