investorpolitico

Just after a week of idyllic period – the decisiveness of Trump policy are start to crack open the “under the surface” American society issues.

The ban on some Muslim immigrant have directly pitched  the internet giant versus the administration and also part of the judiciary systems.

But, if President Trump continues its “dictatorial” (in the sense of without consulting) and specially the war on media….things will soon turn ugly in a fight of everyone against everyone and no winner.

This should be the “wobble” I predicted in December and confirmed to my clients on 18 January 2017…not a market crash yet.

This will be an intense year.

Wow…that tarted soon.

President Trump just fired the acting Attorney General for defying his ruling on the immigration ban.

The only other time that something similar was with President Nixon and the Watergate scandal.

The major difference that Yates was just an acting Attorney General – soon the Trump nominee should be selected (Mr. Sessions), but its nomination will become presumably a “referendum” on Trump and the immigration ban.

Every time the Dow surpassed a milestone….there was a big cheer. And always premature.

Dow broke 1,000 the 14 November 1972 and 3 months later went into the bear market and only in 1976 re gained it and definitely cleared it in 1982.

Dow broke 10,000 in 1999 and, after an initial leap, broke it again in 2001 and from 2003 seemed to be safe until the Global Financial Crisis of 2008 and cleared it by 2011.

So history is NOT always right, but on average it took 10 years to clear a milestone

The first week of President Trump has passed and the first conclusion we can draft is that he means what he says more than any US President.

On this basis a few points we need to keep an eye on.

He is rebuilding the armed forces. In this period of Middle Eastern Wars the US Forces went sideways. Confronted with a sneaky, but not powerful enemy – the US is very battle hardened, but lost the edge in confronting a serious enemy like China or Russia.

He will probably ally itself with Russia in “deleting” Islamic State with a brutality usually seen only from the Russians. Also if this “war on terrorism” will really be brought to the pointy end he will have to confront Saudi Arabia – the main exporter of the Salafist jihadism which at the end is the basis of all Muslim terror. Maybe he will do it directly or , more probably a proxy (Turkey or a pseudo terrorist state run, under the radar, by a friendly like Turkey).

He will have to confront Germany and Merkel. This is an interesting one. He already praised the UK to have left the EU dead experiment and kind of accused Germany to weaken on purpose the Euro to make it more competitive. While this is true, it also is hard to prove as the EU, theoretically, is not under German dominion. However it will play it, this will further weaken the EU and bring it more to the brink of collapse. Specially if then the UK-USA trade agreement is good and of fast implementation.

China is the big one – definitely there will be a re think of the relationship between US and China. A trade war is possible, but could damage seriously both countries as the relationship export/import are very deep ( practically there are more imports in US – but they are mostly low price imports (toys, clothing, base electronics) which will hit more the middle -low income US population). A conflict is more possible, also for error. China army focus a lot on “face saving” and could radar paint aggressively US warships (it already happened, but the US response was always soft). President Trump could order a real retaliation.

The last one are trade wars. There are multiple examples in history that trade wars  do not work…even if since at  least 2015 world trade is actually decreasing (also to structural forces as China driving its consumption inwards). The main issue that a lot of items are manufactured in multiple country (even the Mexican imports have on average a 40% Made in US components). In a sense it feels like one of the populist candidates typical of South America.

But a world of warning about all the above from political economy (game theory applied to socioeconomics):

A president can accelerate or decelerate the economic path…but the path is already established.

A few examples.

As I said world trade is decreasing since 2014 (data IMF).

Europe is disintegrating since 2011.

Deflation is set by the fact that the developing nation population is growing older.Yes this year there will be spike…but a spike is not a trend.

Oil is becoming less and less efficient as an energy source compared with other advancing technologies.

Western societies are becoming less and less democratic (eg Europe is not governed by the unelected commissioners as the anti Europe party say (the commissioners have a lot of power and are not elected, but they do not govern Europe), but clearly Germany steers the inner workings of the EU as it is the major wealth contributor and does what it wants – as it invited 1 million migrants to Germany…in reality it invited a million refugees to Europe since there are no borders).

A US/China confrontation is inevitable as nowhere in history of mankind an old empire left the baton to the new empire (and it is not said that the new empire will be China/US. The 2 World War was the old empire Britain against the new one Germany…and the US won).
So Trump walking the walk merely accelerate what is going to happen anyway. Just tighten your seat belts.

Quite funny how the market behaves. By technical analysis the market (SP500) has a straight target circa 2,400 and it is stubbornly trying to achieve that notwithstanding all the news out of President Trump.

Very hard to predict the outcome, but, looking at the past, it could still achieve it (so a plus 5% between now and April) before rolling over.

Interesting battle.

So why should President Obama would want to give President Trump an increase power.

Practically there are two theories possible

1. The US defense lobby is super powerful (no need to tell you with all those massacre and not a low passed against owning guns). Jack Ma, Chinese billionaire founder of Alibaba, accused the US of spending more than USD14 trillion in the last 30 years in wars. And mainly the weakening US economy is propped up by the military industry.The military lobby logically do not care if Obama, Clinton, Trump are Presidents and just needs new wars (hello hello…Trump just hinted that the US should invade Iraq again).  So the increase  of the powers suits the lobbies that have a “shadow hand” behind the US Government
2. President Obama gave rationally pore power to President Trump so the new President would be too tempted not to use and probably would end up impeached. This could be a scary strategy as it could easily backfire as Trump already outsmarted the Clinton/Obama election strategy and could be the end of the US democracy (if it ever was a democracy)

President Obama is leaving a scary legacy that could make President Trump the last America democratically elected US President.

Under President Obama the Presidential powers got terribly expanded.

Apart an almost unaccountable hunter killer drone program..a few other pieces of legislation.

Lybia…Obama introduced the possibility of attack for humanitarian reason (not defence from.potential attack as before) and bypassed the 3 months limit (before having to ask permission from Congress)  as air strikes (over 7000) were not defined as war.

He attacked Islamic State even if Islamic State did not threaten the US ( under the Terror act after 9/11 anti terror attack were allowed, without Congressional approval, only against imminent terror attack). 

And the above are not the only one.

But what worries me most is that in the 15 days before President Trump takes over President Obama signs a law against fake news (could CNN be a fake news producer? For President Trump definitely yes) and  a law that allows the NSA sharing information with a multitude of US agencies.

A movie could be made of a conspiracy theory of a good President paving the way for bad President…..  

Thanks to Mohamed El -Erian (Allianz Chief Economic Advisor)(highlights by me)

<<From Davos, Switzerland, where all the almighty Central Bankers and Government are meeting a scary decision

Jon Hilsenrath (WSJ correspondent in Davos

in the Wall Street Journal: “An epoch of exceptional monetary stimulus is drawing to a close. Central banks have exhausted themselves in their efforts to spur economic growth with low—even negative—short-term interest rates and bond-purchase programs meant to drive financial-asset prices higher.”>>

Which mean that the Guardian Angel that oversaw the last 9 years of rally and made the SP500 grow  over 240%…just went AWOL.

In a study Deutsche Bank said that the Central bankers intervention was responsible for 40% of this rally (the paper was from last year…which mean that by their calculations SP500 minus Fed would be somewhere around 1,600…).

Reserve Bank intervention usually hits the top 20/top 50 company for each index (due to the volume needed) which means…INDEXING IS FINISHED.

By the way all the large financial planning companies and Private Banks are mostly doing…indexing

At least in the last two decades and most probably forever, the world populace has been told a bunch lies….European Union is good for you, China plays by the rules etc.

Now, in its first real interview, Trump is saying the truth. But I do not know if the world is ready for it.

Some examples.

The stock market has been held up and “made rally” by the Federal Reserve (from my data true).

Russia does not pose an imminent threat to the US – it is simply the bogey man to push more weapon sales to the US by the defence corporate (it is mainly truth as the US economic machine is based a lot on wars. That is why the original President Obama anti IS strategy was containment and not destruction…a constant enemy makes you keep on producing and wasting arms….until Putin arrived and changed the game). true

China plays by its own rules (true) and manipulates data and prices at its own convenience.

And the latest ….EU is a vehicle to make Germany rich, NATO is obsolete focusing on Russia and not terrorism, Brexit is good for the UK (well the IMF just upgraded the UK GDP forecasts) and a trade deal with the UK will be a priority and other nations will follow Brexit example. (again true)

So I think President Trump will  tear apart the veil of lies that politicians fed us.

Will the population handle the truth or start a revolution?

Or will the CIA take care of him? Well, if you want a conspiracy theory…the last President that did not play by the rules (eg wanted to end the Vietnam war etc) was John F Kennedy and we all know how he ended.

A new US President cycle has quite a defined pattern in history – whoever the President is.

Phase 1 – The promise

Form election day to a few weeks after Inauguration day.

It is the period where the President-Elect delivers his promises.

The market can react good or bad, but it set the following pattern. If it starts on a positive note, usually the market retrace as the President cannot maintain all its promises – if it starts on a negative note, usually the markets rally as  the President cannot maintin all is threats.

Phase 2 the delivery

This is the next 100 days (May 2017)- where the deal-making will make possible (or impossible) the delivery of the promises. It will be volatile as the Democrats and the media will do anything possible to damage President Trump and set the tone of his defeat in the mid term election

Phase 3 -The enactment.

This period last between 3 and 6 months (so say till end of 2017).

This is when the promise/threat will start to really deliver and the Fed really respond to residential policies. Usually the market movement are quite out sized in respect of the policies.

Phase 4 – the economic impact

Any change (tax, investment) in reality  as a lag between 8 and 12 month. So it is the second year (2018), which usually is the best for the market as the economic plans start really to deliver an impact

Phase 5 – the slowdown

As the presidential policies effect start to wane (also due to the fiscal stimulus tapering) the growth (and stock market) slow down.

Please note this is mere stats and nothing to do with President Elect Trump in particular

2016 may have tricked you in thinking there is a low correlation between political events and the stock market.

Two main unforeseen events happened and the market did not crash.

It is important that one understands which effect does have the political event on the market.

Brexit was a surprise, but the market realized that the effect will be felt at the earliest in 2017 (tomorrow there is the Theresa May speech on leaving the EU), but most likely until 2019/2020 nothing will happen. So calm was re -established.

Trump victory was a surprise, but the markets loved the idea that the Congress is “all Republican” and so the gridlock that, to be fair, hampered Obama so much disappeared.

On top of this event, the low level of inflation allowed the Central Banks to intervene at will in the market without any collateral issue.

In this light let’s examine 2017.

President Trump will have to walk the walk, after having talked the talk. As doing is much more difficult than talking at least we need to pay more attention.

Netherland election should be too small to rattle the market.

German election will probably see the fall of Merkel, but the Alternative for Germany will have difficulties to form an alliance – so even this event will not rattle excessively the market.

The French election, in case of a Le Pen victory, have a great potential to rattle the market as Le Pen wants a Frexit referendum that could really spell the end of the Euro as the end of the Euro would have a definite impact on capital markets and companies.

A potential Italian election again would be disruptive as Italy is weak and too big to let fail and the Italian banking system is too integrated with Europe.

A Greek potential election would rattle the market, but is too little and too “considered already out” to create a crisis – there are many fail-safe switches that isolate Greece from Europe

So it is not that political event do not influence the markets, it is more about understanding the consequences of an event.

Specially in 2017 this will be very important.