by John Galt
March 26, 2017 19:10 ET
Poor President Trump.
The first rule of Washington Fight Club is that once you promote an idea, no matter how stupid it is, you own it.
Thus it might Paul Ryan’s and Reince Priebus’ bill, but you are the proud owner to this failed nightmare because you kept promoting it and saying it would pass and be great for America.
After being swept into office by surprise to many in the “mainstream” media, the financial world, and most members of the two inept major U.S. political parties everyone thought that Trump would calm down and use his so-called abilities to cut deals to actually complete deals. Under the Trumpian view of the world, this would mean that the political elites shall bow down to any idea, program, or legislation that he supports.
Welcome to Realville as of Friday, March 24, 2017 at 3:40 p.m. ET, Donald J. Trump.
The entire theory of the stock market and economic boom projected was based entirely on “confidence” that the President would actually achieve the bold agenda he set forth to achieve. Instead, as demonstrated throughout his campaign, it is more important to project being “right” and taking out his petty attacks on the Republicans that he needs to promote and pass his agenda, which only furthers doubt as to if he can achieve his targets or succeed in office.
Mohamed el-Erian summed it up best in his recent editorial America’s Confidence Economy on March 20th (excerpted):
That is not the case for companies investing in new plants and equipment, which are less likely to change their behavior until announcements begin to be translated into real policies. But the longer they wait, the weaker the stimulus to economic activity and income, and the more consumers must rely on dissaving to translate their positive sentiment into actual purchases of goods and services.
It is in this context that the economy awaits a solid timeline for policy announcements to evolve into detailed design and durable implementation. While there is often some delay when political negotiations and trade-offs are involved, in this case, the sense of uncertainty may be heightened by policy-sequencing decisions. By deciding to begin with health-care reform – an inherently complicated and highly divisive issue in US politics – the Trump administration risks losing some of the political goodwill that could be needed to carry out the kinds of fiscal reform that markets are expecting.
Fast forward to the state of the real economy which is getting little if any coverage in the FakeStream media at this moment. Real estate speculation is dropping sharply due to a glut in supply of not single family homes; investors abandoned those when Blackrock outbid everyone in the past, pushing many small cash investors out of the market. No, a glut in speculative luxury real estate on the high end, especially condominiums in major markets is now causing investors to prepare to eat huge losses on units that they can no longer flip in a 14, 30, or 90 day time period.
Another red flag highlighted by Ambrose Evans-Pritchard tonight in his article, Fading Trump rally threatened by rare contraction of US credit, demonstrates another potential canary in the coal mine where he reports:
Data from the US Federal Reserve shows that the $2 trillion market for commercial and industrial loans peaked in December. The sector has weakened abruptly as lenders tighten credit, especially for non-residential property. Over the last three months it has dropped at a rate of 5.4pc on annual basis, a pace of decline not seen since December 2008.
This is the type of development where lenders act in anticipation of a recessionary environment, even if the Federal Reserve or US Treasury does not give the BEA permission to call it such.
Worse, the GDPNOW data estimates provided by the Atlanta Federal Reserve show 2017 Q1 GDP falling off a cliff to an annualized 1% growth rate and still declining with each passing week:
If this does verify anywhere close to a sub-1% level along with C&I (Commercial & Industrial) Loans continuing to contract, the indeed the consumer will feel the pinch and pull back even further.
The loss of confidence in the President and Republicans to accomplish anything, especially since health insurance rates will now skyrocket, will result in a major contraction in consumer spending on vacation, luxury items, automobiles, new homes, and of course any extra cash for investing in their retirement accounts.
Hence this 1 year chart of the S&P 500 could be a warning sign for the weeks ahead:
I am not saying this will happen tomorrow, Tuesday, or even next week. But the odds of a financial outlier event happening to scare the political elites and shatter market confidence is very high. I think that the possibility of a 5-6% one day correction, eventually leading to a long overdue 10-12% correction, will shock the politicians and Wall Street to the point where they are forced to get something done not just on healthcare, but also the border, infrastructure, and especially income tax reform.
In the end, after the Easter break for Washington and Wall Street the markets should finish correcting and rally one more time into summer to all time highs. The last of the suckers will believe the political rhetoric and dive into the market committing their money thinking that Dow 30,000 is only months away.
That is when I think the hidden liquidity issues are exposed and the bubble pops. Sometime this autumn, probably between late August and mid-October, the Stupid Party (Republicans) will fail to pass some sort of income tax reform, be it corporate or individual (or combined), and that will be the final straw that breaks the markets back with dramatic swings and eventually a 30% plus move to the downside.
It’s not locked in stone but a retrenchment back to the Dow 15,000-16,000 level would not be a shocker; if Trump acts foolishly after the crash look for a 15-25% move to quickly become a 30-50% decline during the autumn pushing the fragile mess of an economy Obama left from some semblance of growth into a recession if not worse.
Sadly by 2018, comparisons to Herbert Hoover will be unavoidable.