Saturday, November 5, 2016
Over the past week I have noticed many big speculators of the Wall Street ilk expressing, via their monetary and personal wealth actions, that if Trump wins the general elections that they think the market will tank. It was cool for a while with everyone thinking Hillary had this election in the bag but recently it appears the fear that Donald Trump could win has set in on Wall Street. Some of the experts say that a Trump victory would most definitely reduce the value of the S&P 500 and other global stock markets by 10-15%. Given this, it wouldn’t surprise me if the largest panic attack is occurring in the equity market arena.
Seems major global financial institutions are afraid of what an unscripted President Trump would do. Would he tear up trade agreements? What would that do to world markets? Will our trade partners cause a trade war as a retaliatory action? What we do know, based on his position papers is that a Trump presidency would likely mean a major tax code transformation, the ending or renegotiation of NAFTA and taxing hedge funds, among other things.
The first sign for me was the dollar. The dollar has been slipping to yen and the euro been slowly moving up. The dollar has also added to the Mexican Peso. While at the same time, we see bond yields going down along with stocks. Even before this, all the chatter should have given warnings of such with so much attention being placed on interest rates and inflation. Around the globe, the feeling is that a rise in inflation is on the way. Warnings of bond market inflation have been uttered from Germany to Canada. If this true then our currency will purchase less and prices will be going higher and higher.
This is what I have to say, just because the markets panic, you should not. When that piercing immediate sell-off on the markets that is bound to happen if Trump wins according to the mainstream (see Brexit) then jump in and buy, buy, buy if you got any spare loot. What I anticipate is that we will see and experience what we observed after Brexit. The market will go through a massive panic sell-off due to perceived future uncertainty and eventually bounce back. We saw this with the Brexit vote when the pound dropped sharply after the vote to leave the EU. Now some months later we see the pound jumping to an almost one-month high against the dollar. In fact the same experts are outing a similar outcome with a Trump Victory as they did with a Brexit vote – that if fully implemented, Trump's economic policies will result in a loss of any where between 4 and 11 million U.S. jobs. The main stream media is serving as an echo chamber for these sentiments.
Even before Brexit, when the first steps towards a European currency were taking place in 1972 history saw the Sterling drop out after only six weeks, weaker than ever, bowing to the dictates of the markets. In 1976 we saw the pound fall below $2 for the first time but eventually the Sterling proved too strong. What will likely happen, is that Central banks around the world will intervene to keep whatever currency that is on top from becoming too strong. Martin Weitzman in his 2007 paper "Subjective Expectations and Asset-Return Puzzles," noted that most of the time such economic disasters (like a 10-15%) drop on a given index like S&P) did not occur. Although it is possible theoretically that the S&P could fall by X percent for any given number of months, in economic reality you are sure to lose loot in the short-term, but eventually your expected upside will always be greater. Even if inflation runs well above its target or above short term bond/stock yields.
So I say if there is a Trump effect in the markets, it will prove from now to be a great time to buy s we saw after the crash of 1929.