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It’s funny how an election can change the way a man sees the world. Before the election, Donald Trump thought that stocks were dangerously inflated. In an interview on CNBC, he said “I hope I’m wrong, but I think we’re in a big, fat, juicy bubble.”

That was Candidate Trump. President Trump sees things differently. Here’s what he tweeted on Tuesday:

“Since November 8th, Election Day, the Stock Market has posted \$3.2 trillion in GAINS and consumer confidence is at a 15 year high.”

See the difference? So when Trump was running for office, stocks were headed for another thundering crash. But now that he’s president, Happy Days Are Here Again. The question is: Which Trump do we believe? Are stocks in a bubble or not?

Stocks aren’t just in a bubble, they’ve completely detached from reality. According to the Wall Street Journal:

“The stock market’s valuation is now in the 96th percentile of all observations in the past 135 years based on a cyclically adjusted measure used by Yale professor Robert Shiller…. is no surprise that most of the S and P 500’s 17.1% annualized price gain since the bottom in 2009 has come as a result of valuation rather than real earnings growth or inflation. Justin Sibears of money manager Newfound Research calculated that a larger portion of the current bull market’s returns have come from valuation gains than any since the 1920s bubble. Perhaps not coincidentally, the Shiller price-to-earnings ratio is at the same level as observed in July 1929.” (“Economy Up, Stocks Down? Don’t Be Surprised”, Wall Street Journal)

Read that clip over again. So not only are stocks inflated to 1929-levels but, also, the bulk of corporate earnings is currently coming from higher stock prices. In other words, fatcat CEOs are making more dough jacking their share prices via stock buybacks than they are by selling widgets or providing services. It’s crazy. What was it that John Maynard Keynes said? He said:

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.”

Was Keynes right? Is the Trump Rally a sign that the markets have become a “whirlpool of speculation”?

The Yale economist who predicted the bust and the 2008 financial crisis seems to think so. Check out this excerpt from an article on CNBC:

“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.

Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.” (“Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008”, CNBC)

It’s worth noting that the article was written in early December. Since then, stocks on the Dow have added another 2,000 points which means that we have definitely entered the Danger Zone.

Of course high stock prices aren’t a problem if they accurately reflect the underlying strength of the economy. But do they?

Look at the economy. Business investment has been abysmal, wages and incomes have either flatlined or dropped outright, personal consumption has remained weak throughout, bank lending is still well-below 2007 levels, and GDP has been stuck in the 2 percent doldrums for the entire eight years. There are actually fewer people working now than in 2007 and 95% of all new hires are crappy, part-time, service sector jobs that don’t even pay a living wage.

Does that sound like a strong economy to you?

Of course not. The economy is mired is a permanent state of near-Depression. Anyone can see that. According to CNBC: “The economy grew 1.6 percent for all of 2016, its worst performance since 2011.”

1.6%! The US economy is on life support and barely breathing. But if the recovery is fake, then why are stocks in the nosebleed section?

Three reasons:

1/ Cheap money

2/ Financial engineering

3/ “Irrational exuberance” or “animal spirits”.

For eight years, the Fed has kept interest rates below the rate of inflation which means the Fed provides a small subsidy on every dollar that’s borrowed. This ‘underpricing of money’ creates a powerful incentive to borrow, but borrowing is pointless if there are no investment opportunities. And when growth is slow and wages are flat, consumption stays weak which reduces demand. Companies don’t invest in their businesses when demand is weak, because there’s no one to buy their extra widgets. So why borrow more money and pile on more red ink?

Ah, but that’s where the magic of financial engineering comes in, because even if demand is weak, companies can always borrow money at ridiculously cheap rates and repurchase their own shares. That pushes up stock prices, rewards shareholders, and allows cheery CEOs to walk away with a bundle. And the whole shebang can be carried off even when the economy is in the shitter.

It’s magic!

And we’re not talking chump change here either. According to the WSJ: Companies “have been purchasing their own shares furiously. Companies in the S and P 500 have spent more than \$2.5 trillion on share buybacks in the five years through 2016’s third quarter, according to FactSet. In the third quarter of 2016 alone buyback champs Apple Inc. and General Electric Co. repurchased \$11.5 billion worth of their shares combined.”(Wall Street Journal)

It’s a buyback feeding frenzy and it’s going to get a lot worse under Trump because now we’re adding irrational exuberance to the mix of cheap money and financial engineering. So now we’re talking about some serious blowoff bubblemaking, the likes of which can take down the entire fragile economy.

Check out this blurb from the PBS News Hour: The Dow Jones Industrial Average has risen “from just over 18,000 on Election Day to breaking 21,000 this week. In fact, it jumped by 1,000 points in just 24 days.”

We are experiencing the biggest post-election day rally on record. Stocks are grossly overvalued, traders are euphoric, and Wall Street is in a state of pure rapture.

“Stock prices have reached what looks like a permanently high plateau,” said the jubilant Yale economist Irving Fisher on the eve of the 1929 stock market crash.

Is that where we’re headed? It sure looks like it to me.

How do we explain the hysteria that has swept across the country and pushed stocks into the stratosphere?

Two words: Donald Trump.

Trump has promised the investor class unlimited accommodation, more treats and less rules for Wall Street. He’s promised behemoth tax cuts, massive government spending, and fewer regulations. He’s transformed a heady “easy money-poorly regulated” environment into the Wild, Wild West where anything goes and the sky’s the limit. He’s going to dump \$1 trillion into fiscal stimulus to rev up consumer spending and beef up corporate profits. He’s going to allow tax cheats to bring \$2 trillion in corporate profits back into the country to accelerate stock buybacks and stretch prices to the limit. He’s going to slash corporate tax rates and fatten the bottom line for America’s biggest businesses. And he’s going to gut Dodd-Frank, the “onerous” regulations that were put in place following the 2008 financial implosion, to prevent another economy-decimating cataclysm.

That’s why stocks are on a tear, it’s because Uncle Sugar is back in town and everyone is going to get well again.

But how does all this square with the astute observations made by Candidate Trump? Is this is the same Donald Trump who, before the election, said that conditions were so perilous that the country was headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market? Is this the Donald Trump who said “I think we’re in a big, fat, juicy bubble”? Is this the Donald Trump who said, “if you raise interest rates even a little bit, (everything’s) going to come crashing down?”

It is. It’s the very same person.

Isn’t it amazing how things change when a man becomes president?

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at [email protected].

(Republished from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Donald Trump, Wall Street 
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  1. Miro23 says:

    Isn’t it amazing how things change when a man becomes president?

    Populism doesn’t have anything to do with logic.

  2. what is it with you mike?

    the stock market is not in a bubble or anywhere close to a bubble.

    let me explain to you why irrespective how many conventional (usual suspect) sources you quote you’re mistaken ….. and by the way trump has NOTHING to do with the stock market going higher or lower.

    1. all the sources you quote speak in terms of ‘domestic’ economic activity.
    2. capital flows across border seamlessly negating any and all analysis of stock markets using ONLY domestic economic activity.
    3. to grasp the stock market rallies the past few years you must take into account cross border capital flow. have you mike? have you even thought about cross border capital flow?
    4. what is happening to the dow 30 is simple. it is going higher and will go incredibly higher still before finally topping out at levels which will give you heart failure …. because foreign capital (european for the monent) can see the the euro and its political union collapsing soon and need to find a place to park and wait out the return of the german mark, lira, french franc etc etc.
    5. there are VERY few places for trillions of euros to park safely .
    6. the dow 30 IS the international standard for non usa capital to park ….while here….not the nasdaq except for a few stocks and not the sp 500 except for a few stocks. its the dow 30. get used to high levels going higher. domestic activity has nothing to do with this rise…. YET.
    7. there as yet very few retail buyers in the stock market, they will not arrive until the dow 30 is several thousand points higher. they were burned during the ramp into 2008 and are still scared. no dow 30 bull market has EVER ended without retail participation.
    8. what you need to worry about is NOT the stock market but the appreciation of the us dollar against all other currencies as foreign money pours into the usa to park safely. a very high dollar exchange rate is what will kill the usa economy rendering our exports very uncompetitive. this is our achilles heel but not for some time in the future.

    trump is the start of a counter revolution in america against the socialist left which has run this country for decades and under obama was rapidly running it into the ground. in the 21rst century in the first world revolutions and counter revolutions are not fought with guns and tanks. they are fought on the internet and on twitter for the control of mass opinion. trump is a master persuader with some very powerful forces behind him who choose to remain hidden and quiet.

    the hysterics of the left….. in the media, some in the fed bureacrcy and intelligence agencies is indicative of their grasp of how far out of power and control they have come in such a short time. they are all the sound and fury signifying nothing.

    wake up mike, the successful counter revolution against a corrupt democratic party and deep state ended in november at the election of trump. as the days, weeks and months pass and power solidifies around this new reality. trump does not need sycophants around, he needs patriots who believe in american sovereignty, american manufacturing power, jobs for americans and a defensible border. all to be achieved in peace not war.

    • Replies: @bluedog
  3. Is this is the same Donald Trump who, before the election, said that conditions were so perilous that the country was headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market?

    Well, I suppose he might reply that with him winning the elections the conditions stopped being perilous.

  4. Interesting comments, paraglider, so I did a little research.
    Here you go:

    “The euro area has been characterised by capital outflows since the end of 2012, predominantly driven by bank-related outflows (loans and deposits) in 2013-14, which might have been the result of global bank deleveraging in relation to the euro-area’s sovereign and banking crisis. However, this trend reversed in 2014Q3 and other investment is flowing in again, including an unusually large inflow in 2016Q1, though in 2016Q2 such inflows moderated.”
    From: “Analysis of developments in EU capital flows in the global context – third annual report ” Bruegel

    That’s the most recent data I could find.

    In any event, I couldn’t find any data to support your opinion that “because foreign capital (european for the monent) can see the the euro and its political union collapsing soon and need to find a place to park and wait out the return of the german mark, lira, french franc etc etc.”

    And, as you know, your opinion is very much in the minority since all the major financial media attribute the stock surge to Trump’s promises of fiscal support, tax cuts and fewer regulations.

    Of course, you could be right, but I haven’t found anything to support your view.

    • Replies: @paraglider
    , @paraglider
  5. @Mike Whitney

    being in the minority regarding the stock market and why it is rising validates matters.

    the market is a zero sum game ergo the majority have to invariably if not always be wrong.

    by the time the majority come around to my thesis much if not most of the future value of the dow will be visible in only your rear view mirror. this is not say the dow 30 will experience drops in level. nevertheless the trend is strongly up and over the next few years once the dow 30 reaches 23000 we transition into a rocket ride upward potentially carrying the dow 30 well into the 30,000 plus level in a fairly short amount of time. retail participation imo will not arrive until the dow 30 is above 23000. at the point you should begin to see all the usual suspect sources you quote and trust turn bullish and tell you its safe to go into the water.

    good luck in going with the majority position.

    as regarding the dow 30 it is going to work out as well as expecting a hillary presidency.

  6. @Mike Whitney

    in sum mike the majority are ALWAYS wrong and have to be in the stock market because THEY ARE THE FUEL (their buying) that propels the dow into the final rocket enormous ride higher which culminate EVERY bull market going back many decades.

    this is historical fact.

    the public and many institutions are simply no where to be found in this bull market YET.

  7. You could be right.
    My ability to predict the direction of the market is shaky at best.

    But—when you consider that the Dow touched bottom on March 9, 2009 at 6,547 and settled at 21,005 on Friday –that looks like a bit of a bubble to me—especially when you consider that the economy has been flat as a pancake throughout (The lousiest recovery in the postwar era)

    • Replies: @paraglider
  8. Looking at this (from wikipedia), and considering that the P/E ratio has risen to 27 today, it appears that there might be a bit of a bubble indeed, but nowhere near the tech bubble of 2000. Rates will go up, stock prices down. It might crush, or it might slide down gradually.

    • Replies: @Joe Franklin
  9. @Mike Whitney

    mike, you are absolutely right about the illusion of the post 2008 economy.

    in part this helped propel trump to the WH.

    the problem the world faces is the rapid emergence and ongoing perfecting of AI and robotic technology both of which are likely to render obsolete entire job sectors over the next 30 years maybe less.

    when you add this job destroying technology with the undeniable fact of the bell curve of human intelligence (irrespective whether its fair, just or spread across all races and creeds all left wing views of life) we are left with hundreds of millions of people going forward with no reasonable prospects for employment in their lives and no reasonable way to earn a living to survive let alone marry and create a home for children to be reared.

    this is the real nightmare we face going forward.

    globalism has undeniably helped to move forward faster throughout the west this nightmare some of us can see for all our fellow citizens, friends and family members.

    ……………….globalism was and and is all about maximizing profit for the owners of capital at the expense of the producers of capital………………..

    another reason why so many outside the west and east coast voted for trump. they can see what has happened since nafta even if the guilded ones on both coasts have benefited SOMEWHAT thus far from globalisms song.

    i have grandsons living in such a guilded community whom i have strongly suggested they attend tech high school rather than going to upmarket college bound high school and then to some ivy league and obtain an essentially worthless liberal arts degree at great cost.

    the bell curve, robotics and AI will make sure……..short of global mass death……….only the right side of the bell curve have a great chance to benefit at high wage. the middle of the curve will find it increasingly difficult, short of entrepeneurship, to find good wage employment. the left side of the bell curve which is most inner cities, and many other non urban parts of all western nations cut out of employment at all at any wage. this is social dynamite and the stuff of blood revolution.

    it is for this reason plumbers, electricians, many if not most trade skills are and will become increasingly valuable and a road to middle class living standards for people anywhere on the bell curve of intelligence apart from the extreme left side where iq falls under 90. general liberal arts college degrees are NOW and will continue to be worthless for all but the lucky few and any college peddling social justice over real education has become for astute parents leper institutions to be avoided at all cost for their kids to attend as their degrees are already devalued in the marketplace.

    trumps victory is a collective effort by many able patriotic americans from all job sectors, races, religions most of whom still remain anonymous…. to try and save capitalism and the living standard benefits it provides for americans……….first!

    the borderless world obama (romney) and there ilk have tried to sell is rotten fruit NOW dying on the vine because it leaves everyone but them and their kind with no future apart from neo feudalism.

    i am a retired engineer but if i had it do over again living here, now i would obtain my plumbing license. as anyone knows on a sunday night when you have a leak in the bathroom you can’t wait till wednesday for a plumber to fix it. it is this sort of advice i give to my grandsons.

  10. bluedog says:

    Indeed the EU is collapsing and we are three steps behind, the run up in the casino has been about zero interest by the Fed. ,and in fact at time direct influence by the Fed. for as Greenspan said we the Fed. will not permit the market to fail, so companies and corporations borrowed that endless cheap money to buy back trillions of dollars of their own stock which of course did nothing but goose the market ,and out of that has come all the bubbles in the market from the bubble to the housing bubble wiping out trillions in the process, to our present bubble and friend if you can’t tell a bubble from a rain drop you shouldn’t be commenting here..

  11. @Mao Cheng Ji

    Price-to-book ratio is equally terrible too.

    Dividend yield performance is more important than P/E.

    The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some investors as indicative that the market is still overvalued.[citation needed]

    • Replies: @Mao Cheng Ji
    , @paraglider
  12. @Joe Franklin

    I’m not an expert, but I have the impression that P/E is the most basic and straightforward method of this sort of evaluation.

  13. @Joe Franklin

    i realize i am probably talking to the wall …. but here goes

    1. pe ratios of any kind, interest rate levels, short interest, et al et al are one dimensional metrics at best used to obfuscate either out of malice or plain butt ignorance to confuse investors

    any cursory graphic study of market history will reveal instantly that the stock market has NEVER peaked OR bottomed at any consistent level using ANY of the metrics in bullet point 1

    for those with an 8 year old market understanding history reveals there is now and never has been
    a red flag level for prime rate, pe ratio of anything, short interest rate level etc etc etc

    because something looks bad now and worked in 2000 does not mean squat here in 2017

    single dimensional metrics are useless when market levels are the compilation of perception of all players DOMESTIC and FOREIGN

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