Byline: By Ross Powell, Contributor, USDR
As the seconds ticked by the night of November 8, the world held its collective breath as it awaited news of who would be the next President of the United States. Those paying attention to corporate media outlets were left in suspended animation for hours as results were stalled and states uncalled. Meanwhile, asset prices gave away the game. At around 8:00pm eastern something dramatic and historic began to unfold. Over the course of the next four hours Trump’s win probability went from nonexistent to virtually certain. This led to massive swings in every asset class globally. Dow futures were down almost 1,000 points and paper gold rallied over $60.
Trump’s victory was declared and then, suddenly, something even more unexpected began to happen. While America slept, the entire move in stocks and gold reversed. It turned out that Trump’s election was a multiplied version of Brexit in more ways than had been expected. After the Brexit vote succeeded and shocked pundits as well as the markets, there was follow through to the downside in stocks for two days before the V-shaped recovery came into play. On the heels of Trump’s triumph, the reversal was well underway two hours later. This dramatic turn of events caught many professionals and prognosticators offside. Is this just an example of what Trump means when he declares that he finishes projects under budget and ahead of schedule, or – once we dispense with the sarcasm – is there something more going on here that has yet to fully play out?
These new all time highs in the Dow are brought to you by the Plunge Protection Team, the Federal Reserve, the Exchange Stabilization Fund, and high frequency momentum trading algorithms. There have been many attempts to construct a narrative that justifies these dramatic events. The most common explanation is that the immediate reaction was due to a framework that viewed Trump as disastrous and unpredictable. The stock plunge was exaggerated by momentum algorithms and people rushing to close out bets that they had placed on the ‘sure thing’ of a Hillary Clinton presidency. Once the initial dust settled, investors realized that Trump’s plans to rebuild infrastructure and strengthen the military would require massive fiscal stimulus. This blasted stocks higher – particularly the industrials – crushed volatility, boosted the dollar, eviscerated foreign currencies, and dumped precious metals.
There is a pervasive tendency for humans in general and financial commentators specifically to explain asset prices due to events. Whenever stocks move the financial press must justify why they did. This enterprise is mostly a fool’s errand full of sound and fury and signifying nothing. I’m a bit skeptical of a tall tale involving everyone who believed that Trump’s election would lead to nothing less than the destruction of the global economy immediately inverting to thinking that President Trump will create an economic boom. We could run around in circles describing various aspects of the wild disconnects and fluctuations that are taking place, but for the sake of everyone’s sanity there are a couple concrete dynamics that should be prioritized.
Courtesy of Finviz.com
The daily chart shows the parabolic retrace of the dramatic drop in the Dow in the form of a green candle with a serious wick going below 17,500 on election night. Professional traders know that gaps tend to be filled sooner or later. This has been particularly true in the past several years with the advent of high frequency trading algorithms that hunt out stop orders in order to make a quick buck, or penny, or fraction of a penny. Even a fraction of a penny is a good gain if you can replicate it a billion times. Thanks to this machine intervention we’ve also seen unexplained spikes in various assets that have serves as pointers. These substantial moves are often rapidly unwound but end up serving as a magnet for price action. This ‘President Trump’ spike will likely be no different. While it doesn’t meet all the criteria to be termed a gap or a pointer that must be retested, it is reasonable to expect the bottom of that wick to be revisited at some point in the future. It could happen quickly, but it doesn’t have to.
Saving the most significant for last, Trump’s election has led to a hard selloff in bonds:
Courtesy of Finviz.com
US Treasuries have been in a bull market for several decades. As the national debt has exploded exponentially it has been financed by money printing and currency debasement that has thus far managed to be camouflaged by the more severe depreciation of other fiat currencies and the total lack of money velocity in recent years. A longer term chart demonstrates that a multi-year uptrend in bonds and that the corresponding downtrend in yields is in the process of breaking.
Courtesy of Finviz.com
There is international selling that exacerbates this move as we careen towards a time when the petrodollar is declared obsolete and the next necessary monetary reset occurs. Our debt cannot be paid back honestly, so the paper will inevitably become toxic. Our interest payments have grown alongside our debt, but it hasn’t reached the terminal stage yet because of the sustained emergency level monetary policy of near zero interest rates. As rates turn around and the selling of bonds forces the market to adjust, our debt will no longer be able to be serviced. The choices are still default, restructuring, or dramatic inflation where we print the money to pay off the debt. The dollar has lost over 95% of its value since the Federal Reserve came online in 1913, and we’re now staring down the barrel of the loss of the remaining purchasing power as default appears still to be off the table politically.
If real solutions are not implemented soon, then the Venezuela scenario will increase in likelihood. At this point, paying attention to bonds and currencies is a better use of time than focusing on the manipulated barometer of stocks.
Ross Powell is the Founder of Survival 401k, LLC. He graduated from the University of Texas and is a veteran Naval Officer. Ross worked in banking and finance for almost 30 years including some of the largest banks and insurance companies in the country. His intimate knowledge of the inner workings of financial institutions helps him direct clients into Solo 401k products to take control of their retirement funds and escape the pitfalls many see in modern Wall Street centric retirement portfolios. He can be reached through http://survival401k.com.