It’s funny how an election can change the way a man sees the world. Before the election, Donald Trump thought that stocks were dangerously inflated. In an interview on CNBC, he said “I hope I’m wrong, but I think we’re in a big, fat, juicy bubble.”
That was Candidate Trump. President Trump sees things differently. Here’s what he tweeted on Tuesday:
“Since November 8th, Election Day, the Stock Market has posted $3.2 trillion in GAINS and consumer confidence is at a 15 year high.”
See the difference? So when Trump was running for office, stocks were headed for another thundering crash. But now that he’s president, Happy Days Are Here Again. The question is: Which Trump do we believe? Are stocks in a bubble or not?
Stocks aren’t just in a bubble, they’ve completely detached from reality. According to the Wall Street Journal:
“The stock market’s valuation is now in the 96th percentile of all observations in the past 135 years based on a cyclically adjusted measure used by Yale professor Robert Shiller….
..it is no surprise that most of the S and P 500’s 17.1% annualized price gain since the bottom in 2009 has come as a result of valuation rather than real earnings growth or inflation. Justin Sibears of money manager Newfound Research calculated that a larger portion of the current bull market’s returns have come from valuation gains than any since the 1920s bubble. Perhaps not coincidentally, the Shiller price-to-earnings ratio is at the same level as observed in July 1929.” (“Economy Up, Stocks Down? Don’t Be Surprised”, Wall Street Journal)
Read that clip over again. So not only are stocks inflated to 1929-levels but, also, the bulk of corporate earnings is currently coming from higher stock prices. In other words, fatcat CEOs are making more dough jacking their share prices via stock buybacks than they are by selling widgets or providing services. It’s crazy. What was it that John Maynard Keynes said? He said:
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.”
Was Keynes right? Is the Trump Rally a sign that the markets have become a “whirlpool of speculation”?
The Yale economist who predicted the dot.com bust and the 2008 financial crisis seems to think so. Check out this excerpt from an article on CNBC:
“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.” (“Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008”, CNBC)
It’s worth noting that the article was written in early December. Since then, stocks on the Dow have added another 2,000 points which means that we have definitely entered the Danger Zone.
Of course high stock prices aren’t a problem if they accurately reflect the underlying strength of the economy. But do they?
Look at the economy. Business investment has been abysmal, wages and incomes have either flatlined or dropped outright, personal consumption has remained weak throughout, bank lending is still well-below 2007 levels, and GDP has been stuck in the 2 percent doldrums for the entire eight years. There are actually fewer people working now than in 2007 and 95% of all new hires are crappy, part-time, service sector jobs that don’t even pay a living wage.
Does that sound like a strong economy to you?
Of course not. The economy is mired is a permanent state of near-Depression. Anyone can see that. According to CNBC: “The economy grew 1.6 percent for all of 2016, its worst performance since 2011.”
1.6%! The US economy is on life support and barely breathing. But if the recovery is fake, then why are stocks in the nosebleed section?
1/ Cheap money
2/ Financial engineering
3/ “Irrational exuberance” or “animal spirits”.
For eight years, the Fed has kept interest rates below the rate of inflation which means the Fed provides a small subsidy on every dollar that’s borrowed. This ‘underpricing of money’ creates a powerful incentive to borrow, but borrowing is pointless if there are no investment opportunities. And when growth is slow and wages are flat, consumption stays weak which reduces demand. Companies don’t invest in their businesses when demand is weak, because there’s no one to buy their extra widgets. So why borrow more money and pile on more red ink?
Ah, but that’s where the magic of financial engineering comes in, because even if demand is weak, companies can always borrow money at ridiculously cheap rates and repurchase their own shares. That pushes up stock prices, rewards shareholders, and allows cheery CEOs to walk away with a bundle. And the whole shebang can be carried off even when the economy is in the shitter.
And we’re not talking chump change here either. According to the WSJ: Companies “have been purchasing their own shares furiously. Companies in the S and P 500 have spent more than $2.5 trillion on share buybacks in the five years through 2016’s third quarter, according to FactSet. In the third quarter of 2016 alone buyback champs Apple Inc. and General Electric Co. repurchased $11.5 billion worth of their shares combined.”(Wall Street Journal)
It’s a buyback feeding frenzy and it’s going to get a lot worse under Trump because now we’re adding irrational exuberance to the mix of cheap money and financial engineering. So now we’re talking about some serious blowoff bubblemaking, the likes of which can take down the entire fragile economy.
Check out this blurb from the PBS News Hour: The Dow Jones Industrial Average has risen “from just over 18,000 on Election Day to breaking 21,000 this week. In fact, it jumped by 1,000 points in just 24 days.”
We are experiencing the biggest post-election day rally on record. Stocks are grossly overvalued, traders are euphoric, and Wall Street is in a state of pure rapture.
“Stock prices have reached what looks like a permanently high plateau,” said the jubilant Yale economist Irving Fisher on the eve of the 1929 stock market crash.
Is that where we’re headed? It sure looks like it to me.
How do we explain the hysteria that has swept across the country and pushed stocks into the stratosphere?
Two words: Donald Trump.
Trump has promised the investor class unlimited accommodation, more treats and less rules for Wall Street. He’s promised behemoth tax cuts, massive government spending, and fewer regulations. He’s transformed a heady “easy money-poorly regulated” environment into the Wild, Wild West where anything goes and the sky’s the limit. He’s going to dump $1 trillion into fiscal stimulus to rev up consumer spending and beef up corporate profits. He’s going to allow tax cheats to bring $2 trillion in corporate profits back into the country to accelerate stock buybacks and stretch prices to the limit. He’s going to slash corporate tax rates and fatten the bottom line for America’s biggest businesses. And he’s going to gut Dodd-Frank, the “onerous” regulations that were put in place following the 2008 financial implosion, to prevent another economy-decimating cataclysm.
That’s why stocks are on a tear, it’s because Uncle Sugar is back in town and everyone is going to get well again.
But how does all this square with the astute observations made by Candidate Trump? Is this is the same Donald Trump who, before the election, said that conditions were so perilous that the country was headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market? Is this the Donald Trump who said “I think we’re in a big, fat, juicy bubble”? Is this the Donald Trump who said, “if you raise interest rates even a little bit, (everything’s) going to come crashing down?”
It is. It’s the very same person.
Isn’t it amazing how things change when a man becomes president?