The (un-) Affordable Care Act, better known as Obamacare, will remain in place due to the ‘Freedom Caucus’.
The Freedom Caucus, according to Wikipedia is ‘…a congressional caucus consisting of conservative Republican members of the United States House of Representatives.’
The Democrats and the Freedom Caucus combined to give the thumbs down to US President Trump’s replacement American Health Care Act.
Back on 30 January 2017, when Trump was issuing decrees faster than he could tweet, I wrote in The Markets & Money:
‘Anyway back to Donald’s decrees, sabre rattling and general musings.
‘Executive orders can be challenged in the courts, in Congress and by the next President.
‘So we’ll see whether all this headline grabbing activity gets ground down into inactivity.’
We are seeing — and, more importantly, the Donald is seeing — the limit to his powers. There are checks and balances in the system.
The market worked itself into a lather over the prospect of Trump cutting taxes, building walls and undertaking various other infrastructure projects.
There’s nothing quite like the sound of ‘money and jobs’ to make Wall Street hum.
The post-election spin was ‘Trumponomics is the revival of Reaganism’.
However, as I mentioned before, never let the facts get in the way of a good story.
The fact the economic conditions that existed when Reagan was elected were vastly different to today appears to have been totally discounted.
Debt levels were low. Interest rates were high. The S&P 500 index was trading on a cyclically-adjusted PE (CAPE) of under 10-times. Boomers were 35 years younger and entering the high-consumption phase of their lives.
Compare that to today. High (and rising) debt levels. Ultra-low interest rates. The S&P is trading on a CAPE closer to 30-times. And boomers are entering retirement phase.
The two periods are not even remotely alike.
Yet Wall Street has spun it magnificently…getting investors to believe Danny DeVito and Arnold Schwarzenegger really are twins.
The Trump rally — based on nothing more than ‘big talk and promise’ — has been one to behold for those who actually prefer to make considered investment decisions based on fundamentals.
In The Markets & Money on 30 January 2017, I also wrote:
‘The US share market appears to have suspended — or more accurately, continues to suspend — any connection with reality.
‘A couple of weeks ago I had the privilege of chatting with internationally renowned economist, Nouriel Roubini. In a nutshell he said Trump would enjoy a honeymoon period and then watch out for the shocks. His advice — and these were his exact words — “Go to Cash”.
‘To date Nouriel’s forecast has been on the money. The Trump rally has definitely stirred the animal spirits.
‘The US market has breached the 20,000-point level and very few are prepared to buck the momentum behind the trend. We could well see the Dow add a few thousand points before reality sets in.
‘What’s that reality?’
That reality is that investors are being led into one of the greatest bear traps of all time.
The fact Congress showed Donald he is not going to get his own way hasn’t changed the message from Wall Street. It’s still ‘game-on’ for the market.
This was Wells Fargo Asset Management’s assessment:
‘It looked like the market was worried that the Trump agenda would get completely bogged down in the healthcare issue, and now that they’ve taken the healthcare issue off the table, I think the market is more optimistic that they can do other things that are more doable that are not so complicated, such as regulatory reform and lowering taxes.’
The fact that repealing Obamacare was supposed to free up around US$500 billion from the budget to help fund the tax cuts seems to have been omitted — or not even considered — in the ‘market-forever’ missive.
The ‘Border Adjustment Tax’ — a tax on imported goods, which includes a tax break for exported goods — is, in theory, meant to raise US$1 trillion. The Freedom Caucus is against the border adjustment tax.
Hmmm, the budget could be short US$1.5 trillion. But, what the heck, Wall Street tells us the tax cuts are coming.
And who knows, with enough arm twisting, the Freedom Caucus may change its mind.
The problem is that none of this happens tomorrow. Politics is a slow-moving business. Even if tax cuts and an infrastructure spend-a-thon become reality, it’s still a long way down the track.
Meanwhile, Wall Street needs something to sell in order to keep the punters interested.
The industry is highly-proficient at convincing punters that a cow paddy is in fact a fillet steak. Therefore, I fully expect the market to have one final surge before people realise what they’ve been served.
Can someone from Wall Street please explain how the reported earnings across the S&P 500 can fall from US$100.20 per share in 2013 to US$94.54 at the end of 2016, and yet the market rises over 20%?
In my strange and detached world, I thought astute investors paid more for increased earnings, NOT decreasing earnings.
Bridgewater Associates — the world’s largest hedge fund manager — recently published a lengthy research paper titled ‘Populism: The Phenomenon’.
While Wall Street tries to justify ‘paying more for less’ by making a nonsensical comparison between Reagan and Trump, Bridgewater Associates are more circumspect, looking at history for cause and effect. The hedge fund explains:
‘…we will convey the economic/social context of the 1930s. It’s no coincidence that populism emerged then. The Great Depression, beginning late in 1929 and not reaching its bottom until 1933, created extremely painful conditions that drove people to blame establishment politicians and seek answers from outside the political mainstream. Over the last 10 years, much of the developed world has seen the same dynamic — the end of the debt supercycle — play out again (though not as severely). The following charts convey the rough sequence of events. We’ve previously shown you these charts, so we won’t go into much detail again, but in brief, the analogue is as follows:
(1) Debt Limits Reached at Bubble Top, causing the economy and markets to peak (1929 & 2007)
(2) Interest Rates Hit Zero amid Depression (1932 & 2008)
(3) Money Printing Starts, Kicking off a Beautiful Deleveraging (1933 & 2009)
(4) The Stock Market and “Risky Assets” Rally (1933–1936 & 2009–2017)
(5) The Economy Improves during a Cyclical Recovery (1933–1936 & 2009–2017)
(6) The Central Bank Tightens a Bit, Resulting in a Self-Reinforcing Downturn (1937)…’
The comparisons between the period leading up to and during the Great Depression and what we have experienced since 2008 are eerily similar.
We have a massive debt problem — far greater than the one that caused the Great Depression.
We have a central banking system that operates in denial of its role in making this bubble worse and, in fact, aids and abets the accumulation of more debt with low interest rates.
We have a financial system — banking and investment — that has a vested interest in not scaring the punters (borrowers and investors, alike).
We have a problem.
This problem is not going to fade away silently into the night.
Debt crises never do.
This ‘mother of all cow paddies’ is going to explode and fling its stinking contents into every single corner of the world.
The warning signs are there…nothing is making sense.
Record-breaking asset prices against a global economic background that is, at best, stagnating. Take out the trillions of dollars in debt that’s added to the system on an annual basis and you actually have an economy that’s shrinking.
This is madness writ large. Yet most people remain oblivious to it all because the longer it goes on, the greater the level of complacency.
Which is why, when the cow paddy does hit the fan, the impact will be so devastating.
Take Nouriel Roubini’s advice: Go to cash. And then read this. It could be the most important decision you ever make.
Editor, Markets & Money