Trump’s Transparent Trojan Horse

The Donald made his millions the old-fashioned way — he inherited them. That is a transparent fact, but one which is ignored by the wide-spread belief that he is a brilliant business man, despite his companies having gone bust at least four times.

Trump is transparently a narcissist, never having done anything for the benefit of others unless there was something in it for him or his family. There is no record of him ever giving any of his own money to the Donald J. Trump Foundation, but according to The Atlantic, there is evidence of others giving money to his foundation, which he then re-donated in his own name, and for which he received a philanthropic award. In addition, the Donald made a profit from the rental of his own venue which was used for the award ceremony. He even regularly short-changes his employees and contractors, hundreds of whom are forced to go to court in an attempt to secure their contractual payments.

Trump is transparently (and loudly) part of the 1%, yet the fantasy persists that he is “one of us” and not part of the establishment. Platitudes such as “I love the uneducated”, and promises of bringing back industrial-age jobs to America, were served-up to the disenfranchised as a way of getting inside the heartland — and it worked.

The Trojan horse is now inside the gates and has already started leaking its caustic contents. Even before he sits in the oval office, Trump has managed to alienate the Chinese, scare the Japanese (his daughter was in on the hastily arranged meeting with the Japanese prime minister because she has business dealings with a Japanese fashion house), hire a far-right racist as his top advisor, appoint a climate change skeptic to the EPA, place a home-schooling advocate in the department of education, and nominated Rex Tillerson, the 2013 recipient of the Russian Order of Friendship medal, as secretary of state.

Rex and Vlad share a bromance moment.

But the attitude on the street is “give the Donald a chance, what could go wrong?” Nothing, according to the stock market. It is trading as if it was perfectly reasonable that, after eight years and a 180% increase in price without a matching earnings increase, valuations should rise even further because the Donald has promised to “make America great again”.

Last week, we outlined that today’s stock market behavior is like that of 1999–2000, even though the economic situations are not-at-all similar, because Human behavior never changes. During the final stages of the tech bubble, the market had dissociated from the business cycle. The PE ratios were approaching infinity driven by the consensus that technology in general, and the internet in particular, would very quickly turn expensive, earning-less start-ups into real profitable businesses.

Now, the market is being driven by the consensus that Trump’s fiscal policies will very quickly allow the business cycle to come back to life and catch up to the historically-high stock market valuations. We think that, like in the year 2000, the business reality will not be quick enough to support the over-optimistic stock market. We don’t think that the metaphorical branch can grow thick enough, or fast enough to prevent it from breaking.

We agree with the concept of judicious fiscal policy that benefits the “bottom of the economic pyramid” where labor and producers reside (instead of the financial, wealth-extracting top of the pyramid), and we want to see an increase in jobs. But if the spending is not properly applied, or even prevented, due to the planned tax cuts for the rich, and if Trump tries to bring back lost, old-fashioned manufacturing jobs, instead of focusing on education and technology, then the backlash, both political and economic, will collapse the equity ‘house of cards’ the market is currently living in.

The chart below shows the pattern of peaks in the bull sentiment indicator (pink vertical lines) that show up between one and six weeks ahead of maxima in the S&P 500 (colored vertical rectangles). The last peak developed three weeks ago, and the probability of the SPX topping out continues to increase.

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The chart below shows the put to call ratio working its way down as the S&P 500 works its way up toward a local top.

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Gold continued to demonstrate impressive and relentless weakness this week. Neither an uninterrupted decline, nor a bounce recovery would surprise us leading up to Christmas.

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The HUI Gold Bugs index and the Gold Miners Percent Bullish index, are still above their over-sold zones, but they are closer at this point than they have been for more than a year (chart below).

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Forty years of private equity trading, and still learning.

Forty years of private equity trading, and still learning.