A year ago yesterday was the anniversary of the Trump election victory. So Trump -and his anticipated unfunded 2018 tax cuts- are the reason we’re told the stock market is higher. That’s easy to understand, and it’s repeated/parroted often enough by the financial media.
And now this…
In less than 2 hours of Mr Trump being declared the victor, the futures market had to be shut off to stop a calamitous crash from happening. SPX & Dow futures hit “limit down” (7% drop) in less than 2 hours. Dow futures were down roughly 1000 points before a self protection mechanism shut it all down. I don’t follow the Dow but I do follow the SPX (S&P500). Here’s what it did that night and the next couple days….
In the nearly 19 years of Greedometer data, this was only the 2nd time I had seen the futures markets shut off then jammed back up so violently. The other occasion was the May 6 2010 flash crash (fyi the Greedometers warned a week before that crash). The Dow dropped 1000 points that day, was shut off, then someone with a few spare $Bs began buying SPX futures like there was no tomorrow (almost certainly it was the Bank of Japan and Swiss National Bank — both have many $Bs in stocks and stock index ETFs on their balance sheet). Back to election night 2016 –after it was announced Mr. Trump had won I don’t recall anyone in the financial press claiming the expected Trump tax cuts were going to be awesome. They were too busy trying to pick their jaw up off the floor as they watched global futures markets crash.
With election night in the rearview mirror we head into 2017. 2017 has really only been about two things. Thing 1: more comments from Mr/ President Trump that tax cuts are coming. This you are doubtless aware of. Thing 2: you probably are not aware -> the Fed has done several unscripted comments/threats to keep spiking the punch bowl. I encourage you to read yesterday’s blog post and watch the video showing the repeated unscripted Fed threats and the reaction of the S&P500 and the mini Greedometer.
link to that blog post here….
These conclusions are supportable:
- The U.S. stock market is not random.
- If left unattended by central bankers for an appreciable amount of time, the (U.S.) stock market will begin crashing.
- Before every significant S&P500 drop (in the past 10 years) the Greedometers provided a warning.
- The Fed (and the other top global central banks) have a similar risk measuring / stock market timing mechanism to the Greedometers because they keep doing unscheduled threats to “do whatever it taxes”/ spike the punch bowl / do more QE / do less QE tapering / whenever the Greedometers suggest a drop is imminent.
- One of the greatest safety nets for the S&P500 (and thus global risk assets) is the ability of regulators and market operators to shut the market off when the market is inconveniently going the wrong way (down).
- So far, there has been no limit to the ability of central banks to stop crashes. However there has been a cost.
Those costs are:
- Central banker credibility and the credibility of their institution has been reduced. You can’t say the economy is awesome so we’re raising rates then also keep repeatedly doing surprise threats to do more QE because something is worrying you about the economy. Only one of these memes can be true. I suspect Bill Dudley is retiring early because he’s worried he won’t be able to keep saying the economy is awesome but then also keep threatening to spike the punch bowl.
- The longer central banks keep propping up global stock markets (and European sovereign bond markets), the more wildly overvalued these markets become. Depending on whether you use price to earnings or price to sales, the S&P500 is either the most or second most overpriced it has ever been.
- The U.S. housing market is in its largest bubble ever. The mean house price to income has never been higher. Second place goes to 2006-2007 –and you recall what came next.
- The U.S. banking system grows to ever riskier size relative to the economy. U.S. economic growth over the past 40 years has been increasingly based on personal, corporate and government debt growth. So it comes as no surprise that debt to GDP is at record levels. Effectively we are borrowing from the future. As we collectively do this, understand that our debt is seen as assets to banks. This chart shows how bank assets (the size of the banking system) has grown relative to the size of the economy. If you understand this chart correctly, you reach the conclusion that the U.S. banking system pretty much now is the economy.
And thus we come full circle. Since the U.S. banking system is now the economy, we cannot afford to have a recession ever again. Even a mild 2 quarter drop in GDP growth will see consumers stop borrowing and bank assets begin dropping. Since banks are leveraged off their asset base, you get a gearing effect / multiplier effect when their assets start dropping in price that fairly quickly makes them insolvent.
With next year seeing the retirement of two of the most effective stock market drop preventers / bubble blowers (Bill Dudley and Janet Yellen), next year has more built-in risk than any other year in the past 19 years of my data. And what do you know, the past month has seen the highest Greedometer and mini Greedometer values ever.