President Trump: 'I Disavow The Bubble'

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Includes: AMZN, CARA, COST, GS, IWM, NFLX, QQQ, SMG, SPY, TSLA
by: Hedgephone

Summary

Everyone loves free money and Trump is handing it out on the Level 2.

Free stuff is not libertarian or capitalistic.

Markets are quickly closing in on an inflection point.

So, how about that bigger, fatter, uglier bubble? I think it will pop eventually no matter what the government does. To his credit, the Donald warned us that if he was elected the horrible bubble won't pop -- as the seller of high end luxury services and discretionary goods, preventing the bubble from popping at any cost is Trump's main conflict of interest in my view. Not everyone owns financial assets. It might be a hard pill to swallow, but letting speculators go bust clears the system of mal-investment so that productive investments can be made by prudent savers. Whether plunge protection is in America's long term interests is certainly debatable, but it's living with the consequences of the current bubble which is so pertinent to investors and so difficult to isolate from the political environment. Stocks and politics are the two sides of one coin. Or, as so aptly put in Godfather 3, "finance is the gun; politics is the trigger." As a patriot and data driven value investor, I tend to be against interventionism. Much unlike the virtuous circle theory of "It's a Wonderful Life"/ Keynes fame, I am into economic islands. To the perma-bulls pitching us the everything is awesome hard sell, I say "Bah Humbug."

Can Trump singlehandedly save your 401K? Can you buy today and retire wealthy after another 500% run in stocks over the next 8 years? In my view, the answer is no -- bubbles pop, and we are in one of the biggest stock bubbles in history. Financial engineering can't save us, but it may worsen our fiscal position long term while creating paper profits for the elite short term.

Look, we own real estate, but we don't want to live in a break-away financial asset inflation world even if it would benefit myself at the expense of savers, minimum wage earners, fixed income recipients, the young, the elderly, and retiree value investors.

We've been dealing with bubbles for 20 years now, and it is the maintenance costs of keeping lipstick on the current piggishly greedy bubble that is killing America -- either that or there is some actual (non-Krugman) Alien invasion or impending comet that is rapidly hurtling towards Earth that the government/Fed doesn't want us to know about.

Plus, with increasingly globalized corporations, the "wealth effect" trickles down increasingly to those overseas (think other rich dudes in foreign countries exporting stuff). That always, ever rising stock market money is not making its way to Kearney, Nebraska right now no matter how close to the Oracle of Omaha it is in proximity.

While rural America is doing better with rising oil prices, the oil shock forced consolidation in the shale oil and gas industry just as low natural gas prices crushed many of the mom and pop leasers to the frackers.

In our view, a libertarian Trump should allow the market to correct by 20% instead of asking Goldman how to make the markets soar into the stratosphere where we are already tethered today.

The appointment of Jeff Sessions (who we love on anti-bailouts, the debt, open borders, the UN, global government, regulation, gun control, spending, getting lobbyists out of DC, taxes, etc... ) has the potential to change the investment outlook for certain equities which creates a trading opportunity in a few names.

Sessions is clearly a patriotic and moral man but maybe a wee bit judgmental in my unenlightened view. Jesus had long hair and wore sandals. Short the pot stocks if he doesn't change his tune on weed.

By not discussing the truth about the bubble, Mr. Trump will soon become complicit with the long on margin speculators and casino operators on Wall Street -- something he repeatedly condemned on the campaign trail. It would be perfectly logical to expect a move higher short term. That said, gravity is rough.

The problem for investors with pumping the Super Bubble is that people see right through it. Interventionism, debt, and economic hand holding that lost the election for the Democrats. Hopefully, Trump doesn't make that same mistake.

Cutting corporate taxes will help the bankers more than the baristas and big rig drivers but in a competitive tax haven world, a 25% top rate with no loopholes makes sense. It will likely only mean a 10% or so rise in valuations over the long run, however, and I would argue the market is 70% or more too expensive. In other words, it's too little and will come too late. Cutting middle class tax rates makes sense.

Much like Calvin Coolidge (US President from 1923-1929) who said "the business of America is business" Mr. Trump seems content so far with the efficient market hypothesis view that no price is too high for equities -- can you blame the guy? He did build a truly great company and he knows that financial assets have a correlation of around 1 when the wheels fall off and things start plunging.

The always ever higher MBA view of stocks worked well until the late 1990's. Since then, the efficient market guys levered on too much debt based on the perma-bull thesis. This view did not work in Japan after 1985 or England after around 1900. Sometimes stocks don't go up 66% of the days (as it reads from on high in your CFA textbook). Permanently bullish thinking and overly optimistic investing is dangerous. It laughs at risk, and promotes hubris. It creates bubbles, higher diving boards, and chaos over the course of the business cycle.

The perma-bullish bankers have influenced D.C. big time. This extend pretend and spend bailout philosophy was the view of the Obama Administration, which created more debt than any regime in history. His cabinet was chock full of Wall Street guys.

It's the massive pile of debt that even military generals admit serves to undermine our national security. Everyone has nukes. A basket case economy is what Trump inherited, but instead of swamp draining he has so far hired a bunch of guys from the same Wall Street clubhouse who convinced us to borrow the $9 trillion in the first place.

He is making promises that everything is suddenly awesome, and stocks are surging. We even want to buy into the Trump stock market hilariousity, but alas we simply like our money too much to consider buying more stock at today's levels. We have been "wrong" but still making some money, so calling us bears is a little off kilter -- as long term investors, we have to own some stock and rebalance along the way. Right now, we think 30% in U.S. equities is ideal until we get a CAPE of around 20X or a price to revenue on the S&P 500 of under 1.5X -- the current price to revenue of the S&P 500 is 2X which is just too high for us.

Ok look, I'll level with you. Most of the rally happened before Trump got elected. It's not his fault, yet. It's just that going forward he begins to own Obama's already "Super" equity bubble.

All we ask Mr. Trump (and you are my president) is that you disavow bubbles:

What if Calvin Coolidge in 1927 or so came out and addressed the nation. What if he had warned the public against excessive leverage and speculation? What if he had worked to lower leverage ratios in the marketplace? What if he had tried to stop the bubble from getting bigger, fatter, and uglier? Well, my answer is that the Depression could have been avoided. Crashes only happen when everyone joins the same side of the tape on margin. Today, margin debt is near all time highs set in 2015.

With a CAPE PE ratio of 28.5X on the S&P (NYSEARCA:SPY), we are definitely revisiting the era of Calvin Coolidge -- indeed, in January of 1929 the CAPE was 28X or actually lower than it is today. Just keep in mind index fund investors had to wait 25 years to make back their losses from the big crash. Don't even get me started on the Nasdaq 100 (NASDAQ:QQQ) or Tesla (NASDAQ:TSLA) -- great growth ideas in hindsight but just too risky for me personally. Musk, who is now advising Trump, must know about the Martian civilization living under the crust of the red planet. Either that, or they hang out and talk about chicks together. Respect.

In our view, Mr. Trump has inherited an impossible situation, but blowing an even bigger bubble for Goldman Sachs to exploit is the wrong solution -- centrally managed, command and control economies (whether run by white shoe boyz or not) never benefit the little guy and often lead to dramatic boom and bust cycles that hurt average investors (like the ones buying stocks today, after the 300% rally). We commend the President for waking up this past weekend and smelling the "Goldman Guy" cologne.

We like the fact our President is trying to bring back jobs to the U.S. and is trying to lower health care costs. This is relatively bullish, it's just that the starting cards are so bad it might be just a drop in the valuation bucket. Once President Trump gets his nominees in place, maybe his priorities will change. Until then the Nasdaq madness may continue until hitting $6,000 while the S&P could hit $2400, or a 360% gain from the lows set in 2009 before imploding.

As a populist, one would hope that Trump would be not only aware of the already "Super Bubble" in equities but also that cramming more air into it makes no sense, especially considering we are already in debt up to our eyeballs as a nation. No matter what Trump does, I expect nosebleed valuations to Trump political rhetoric.

Since 1913, the FED has been poor at "taming the business cycle." Speculation today is as American as apple pie. Just take a look at Netflix (NASDAQ:NFLX) with a $4.5 billion dollar net deficit and an all time high stock price. BTW Narcos is so good that it single-handedly moved the stock 40% higher alone. We are only a few weeks in to the Trump administration but when will he paper bag Amazon (NASDAQ:AMZN) already? I am patriotically short a call option on the stock and awaiting for my main man to come through. An incredible business, yes, but also an incredible destroyer of U.S. jobs.

We admire Trump because of his Libertarian swagger and acumen. Studies have shown that Trump's approval ratings are highly correlated to the movements in the equity markets -- so long as investors like Trump, the bubble expands. Could the reflexivity principle save us down the road? Sure, anything is possible, but we tend to place trust only in people who have never ripped us off in the past.

Without stepping in to slow the advance of the already admitted bubble, the more and more establishment he becomes -- after all, it was Bill Clinton who repealed Glass Steagall and Trump is repealing the Volker Rule and the fiduciary rule. Sure, that is a "buy the rumor, sell the news" type of news flow that could continue to pump the market in the short run a bit further before the dump. That being said, we are likely climbing towards a higher diving board rather than establishing a real breakout for the long run.

Trump ran an anti-establishment campaign. To bulls, he has skin in the game and is "on the same side" as America. To everyone else, avoiding rigged stocks has cost investors dearly. Clarity on Trump's economic plans and less "bravado" will hopefully settle the stomach and calm the nerves of the investment community. Right now, the fervor over stocks is a little embarrassing. We love Trump, we hate his haters, but we recognize that talk is cheap while stocks are expensive.

The cabinet is seemingly stocked full of execs from Goldman, Exxon, Energy Transfer Partners, the Bush regime, etc... Rick Perry wanted to build a super highway from Mexico to Canada and have open borders. We like the wall.

Indeed, bravado and hyperbole are great traits in business but humility matters more in government. From the "Art of the Deal":

"The final key to the way I promote is bravado. I play to people's fantasies. People may not always think big themselves, but they can still get very excited by those who do. That's why a little hyperbole never hurts. People want to believe that something is the biggest and the greatest and the most spectacular."

The conservative investors waiting for a reasonable entry point to place their meager remaining savings into the market would buy if Trump talked down the markets to a reasonable valuation. Mal-investment would be purged from the current crony rally. Hyperbole and bubbles don't mix well.

Instead, to many outside observers Trump seems wholly focused on making his own revenue streams greater again, and a rising stock market is the number one variable affecting revenue growth at his high end luxury buildings -- in other words, we may have serious conflicts to consider when investing in today's inflated equity markets.

Even long time (like me) Trump supporter Alex Jones stated recently that while he hates bubbles, Trump is now fully committed and "all in" on creating a financial "Super-Bubble." Jones, who has been bullish gold and bearish on stocks and the economy since 2009 is now suddenly a screaming market bull -- so much for buy low and sell high. Indeed, Trump won the election by lambasting the Wall Street bubble boys. Once in office, however, talk of bubbles and conservative fiscal principals has turned to "never bet against Trump."

For our part, we are fiscally conservative. We are generally against mega-corporations (though I friggin love Costco (NASDAQ:COST)) because they conspire to limit competition through cartel behavior and by creating economic moats through monopolistic cut-throat competition.

Alas, we like guns, tractors, farmers, mechanics, bar tenders, cabbies, pickup trucks, and line workers better than put option sellers in suits... We thought Trump was like us at heart. We love the guy, supported him the whole campaign, but we think the Libertarian movement has been overlooked for "growthier" ideas. That would be really bad for the average saver, short term bullish, but a long term boondoggle in a rising rate environment with unimaginable debt and leverage to digest. He should put Carl Icahn in charge of the stock market 3 card monte -- someone who sees the downside risks who isn't a long only zealot. He is also aware of the corporate fraternity boardroom problem while also being charitable.

We regret that Trump might have abandoned Libertarian free market thinking for a "growthier" at any cost financial engineering policy that benefits guys in suits at the expense of guys like me in overalls.

The last straw for the Libertarian investor will be legal weed. If Sessions goes after the weed, modern libertarians will worry that guns might be next. Just think of what would happen to the pot stocks: Aurora Cannabis (ACB.N), Cara Therapeutics (NASDAQ:CARA), and Scotts Miracle Grow (NYSE:SMG). The whole legal industry is nervous about Sessions picking winners and losers. Deregulating the industry is what Trump's son has advocated, and cutting the red tape there would be beneficial for people, say, with cancer.

We are devout Trumpeters (have been listening to Infowars since 2009), but by appeasing the bullish investment bankers and the corporations first and not draining the swamp but merely walking carefully over the alligator's back, it may give the appearance that the Alex Jones aptly named "Super Bubble" is a conflict of interest in order to keep his own revenues at elevated, bubbly levels. Trump took the first step by publicly recognizing he is way too Goldman right now. That was good. The next step will be to go on TV to address the nation about our precarious fiscal situation.

This could, in turn, mean a one term President and an un-inflatable mega-bubble four years from now. Love Trump, Zerohedge, and Infowars but we know how rotten the rigged bubble is and that propping it up more is just bad policy and will make for bad investments in stock. In a rigged poker room, the idea is to steal from the "smart" players and hand the money to the idiots. The same thing is happening right now in equities.

Let's drop the "we're now in a supply side utopia" stuff -- we are in a bubble. Obama was good on some social issues but all we got for our 9 trillion in debt was a Dow 20,000 hat -- every thousand points in the Dow costs a trillion bucks of debt, apparently. A really good deal for the corporations.

Just remember, Mr. Trump, many of us in the business world supported you because Bill Clinton repealed Glass Steagall and we thought you were the party in opposition to the white shoe gang. Keep the Volker Rule or reinstate Glass Steagall, get going on helping farmers and flyover country which is hurting. Keep up the good work, and down with the player haters.

Finally, for the average investor, you can run with the lemmings for now and can have 60% or so in equities. Just bring a parachute with you in case everyone starts leaping off of the bear market cliff. The 50 day moving average on the Russell 2000 (NYSEARCA:IWM) is a good place to start looking -- a series of closes below the 50 day on the Russell will mean the trend followers have jumped ship, and so should you.

Disclosure: I am/we are long MARRIED PUTS, INDEX FUNDS, STOCKS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: we are net long stocks with married puts as insurance. Long acreage, lots, houses, tractors, pickups,gold, etc... (participating productively in today's economy) short calls on NFLX,AMZN