by David Haggith, The Great Recession Blog:
Trump is market magic. The Donald spoke, offering nothing he hasn’t said hundreds of times before in his campaign speeches, and the Dow parted its way through the 21,000 barrier without hesitation. The stock market’s rise from 20k to 21k also tied a record for the quickest 1,000-point gain. How long will this rampaging bull market last? Is 22,000 now an easy reach?
It apparently doesn’t matter that Trump offered no more specifics than he ever has about how he’s going to turn things around or that he has said it all innumerable times. The market heard the pep talk it wanted to hear and rose on the dreams of a rebuilt America.
I, on the other hand, sat there thinking after the speech, Anyone can say over and over how great it is going to be and what great things he has already done, but as always it remains unclear how Trump is going to do them when they depend on congress. Anyone can talk about the need to become united, but that doesn’t unite anyone. Constantly taking swipes at people everywhere (even if though they deserve it and I love to see some of them get it) isn’t going to unit them either.
So, while the commentators that I listen to (even those on CNN) talked about how he focused on uniting people, I didn’t see it happening, and I still don’t. For me, the big question still hangs out in the air: How is Trump going to get congress to implement his plans when all Democrats hate him like he’s made of spam along with probably half of Republicans? He can do small things by decree, and he’s done a lot of them in a short time; but the big things take money, and that requires congress.
It seems to me the only thing that caused stocks to rise after his speech was the change in Trump’s tone, which was less antagonistic, possibly giving hope-inflated investors some basis for believing he can accomplish things that can’t be done by executive order. But won’t that only hold for as long as he keeps a lid on himself?
(Again, I enjoy seeing him beat up the press and the Washington establishment, but I’m just saying it is not the kind of talk that markets normally like, and the only thing I can find in Trump’s talk that would have caused the market’s burst into glory on Wednesday would be his change toward a more conciliatory and “presidential” tone. No other variables or constants changed in terms of Trump.)
An alternative view of the stock market’s spike after Trump’s speech
I do like this alternative explanation, though:
Players figured that the Trump rally, which has stretched on for months, has been based on hope and that, unless the president gave details about plans for the economy, there would be a big selloff. They reasoned that, by looking at past speeches of presidents before Congress, the details are almost never there. So it appeared a perfect setup to short sell; in other words, to bet on a decline in share prices. According to algorithms at The Arora Report, these players built substantial short positions…. After Trump’s speech, when the market did not fall, the short sellers were forced to cover their positions, thus driving up share prices…. This forced-buying made futures run up prior to the 9:30 a.m. start of trading in New York. When the stock market “gapped up” at the open, computers and their algorithms took over and bought aggressively. That triggered other algorithms, exaggerating the move. Thus, that was interpreted as a confirmation of how good Trump’s speech was…. According to algorithms at The Arora Report, about three-quarters of the increase in stock prices today is from short squeezes. (MarketWatch)
One of these days our own algorithms will kill us with their hyperactivity.
Regardless of which explanation above is true, I think the rise is likely to be short-lived (which is not to say it won’t hit 22,000, but I still believe its days are numbered). While the pep rally had its immediate intended effect, my guess would be that people slow down in a couple of days and start asking the question I raised in the absence of any more facts than what they had the day before the speech. (Please share below anything new or more specific you heard because I must have missed it.)
No schedule of the roll-out was hinted at, no time goals laid out for anything, not much indication of where all the money will come from, no indications of how the requested unity would happen under a continual barrage of angry tweets, no cue from Democrats that they have even the tiniest willingness to take him at his unifying gesture and work with him on anything. At the same time, promises of infrastructure spending plummeted from earlier campaign promises that ran around $5 trillion to $1 trillion in this speech.
Earlier in the day Trump made an admission that Obamacare was proving much harder to work out than he ever imagined (and it hasn’t even started to be debated in congress yet). There was some mention in his speech of letting some immigrants stay, which sounded a lot like a move toward a small dose of amnesty for those who came here illegally. (Perhaps he was throwing a bone of peace, instead of contention, to the other side.)
My recent articles have laid out some of the many structural flaws in the US economy that ultimately assure economic collapse, but the Trump rally keeps charging ahead as if the economy is solid. Not only has the stock market just passed another major milestone, but it also finished an historic run of new daily records this week. The more I see of this, the more I am convinced that it is all …
I stated my belief last fall that the Trump rally right after his election was a clear example of irrational exuberance, and that euphoric behavior almost always takes over the market like a feeding frenzy right before a long bull run crashes. The last two weeks, in my opinion, have demonstrated the highest euphoria ever.
The irrational aspect lies in the fact that Trump hadn’t done anything at the time when the stock market’s climb first began, and he didn’t do anything throughout most of this multi-record-breaking rise, other than repeat his campaign promises, which is all he did again on Tuesday.
That is not to disparage those promises, and I’ll add that Trump has done a lot very quickly since being inaugurated, which is what fueled the latest spurt leading up to his speech, but you cannot accomplish the big promises by executive order. So, how long can a well-delivered repetition of Trump’s promises fuel more euphoria? What did anyone learn on Tuesday that he or she didn’t know the day before?
It is impossible to predict when euphoria will end, since it is not rational by definition, just as one cannot predict when someone high on Meth will run out into the street to argue with a car approaching at fifty miles per hour.
There seems to be a broad consensus among market bulls and bears that the “Trump Rally” was based almost entirely on speculation about his tax cuts and infrastructure spending. Whether sentiment outpaced reality is more debatable by the bulls, but I think it clearly has. If this were a rally based on sound economic fundamentals, corporations would not be endlessly conniving ways to bury the least flattering information deep into their quarterly report, nor would corporations be inventing new methods of accounting that ignore GAAP. Nor would they have to spend so much on stock buybacks.
In terms of corporate reports, this quarter has been worse than previous quarters. MarketWatch reported shortly after the reporting season got started that it is seeing some of the most cloudy reports it has ever reviewed.
If you look at stock prices, you might note the Dow has risen 75% since the economic “recovery” began in 2011. Crack out the champagne! But if you look at the revenues of the thirty Dow component companies that created this march, you’ll see barely rose during the recovery and have mostly declined over the last two years to a point lower than 2011. Put the champagne back in the basement.
I’ve said that the speculation in the Trump Rally is “irrational exuberance” because there is also so much that can stall or end Trump’s dreamliner plan. That includes contingencies as extreme (but not unlikely) as impeachment or assassination (given how many powerful enemies Trump has in entrenched positions of power who know that Trump is coming after them when he drains the swamp).
To quantify just how “not unlikely” such an event is, several UK bookies have placed odds on Trump leaving office in this first term by either impeachment or “resignation” between 2/1 and even, depending on the bookie. (Not exactly being seen as an unlikely bet. See Benzinga)
Bookies and contingencies aside, the Dow just set a new record high for twelve straight days (as of Monday this week) — the longest streak since the Reagan rise thirty years ago. Thirteen proved to be an unlikely number on Tuesday, though, when the possibility of scoring an all-time record ended with the Dow finally closing down. You can blame the Fed because the market dropped even before anyone had a chance to hear what the Donald had to say to congress. It fell when some Fed officials said that a March interest-rate hike was looking likely.
What does such a peak record-matching run of new records tell you about the rarified atmosphere we are now in when it is all based on hope about what Trump will do? As another measure of hope as the support for valuations, the total value of the stock market is 20% higher than the total GDP. (This is called “the Buffet Valuation.”) There is only one other time the market’s total value was higher than GDP, and that was just before the dot-com crash.
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