When the vote totals were coming in and indicating a Trump victory, the stock market futures were way down. There was an assumption that a Trump victory was bad for stocks.
What stock investors don’t like is uncertainty. Within 24 hours of the Trump victory, stock investors seemed to lose all worry about any ramifications of a Trump presidency. In fact, it may be helping stocks right now.
We are close to Dow 20,000. This would have been impossible to predict in March 2009, when the Dow bottomed out at around 6,500. At that time, Dow 20,000 in fewer than 8 years looked highly improbable. Then again, in September 2008, a quintupling (five times) of the monetary base seemed improbable.
The latest consumer price inflation (CPI) numbers are also in. In November, the CPI was up 0.2%. While the rate of increase declined from the previous month, the year-over-year is now at 1.7%. The median CPI is stable at 2.5% from the previous year.
There is no major price inflation according to the government’s statistics. But there is a slight uptick from the last few months.
Still, just because consumer prices are not rising at a significant pace, it doesn’t mean that there isn’t asset price inflation. It doesn’t mean that there aren’t bubbles. It doesn’t mean that we can’t be in an artificial boom.
To the average American middle class family, we are not in a boom. They mostly see stagnant wages with rising healthcare costs, particularly insurance premiums.
But in terms of assets, there does seem to be something of a mini-boom going on. And I don’t say this in a positive light. This is a mini-boom that is built on artificial stimulus from the past. Most of the boom is not a result of an increase in savings and capital investment that has led to greater productivity.
The biggest bubble seems to be in stocks. Many will say there is a bond bubble, but that is taking a much longer-term vision. Interest rates have gone up over the last couple of months, but they are still very low by historical standards. And if there is an economic downturn, people seeking safety will buy bonds.
The only time low-interest bonds are not in demand in a fearful environment is when price inflation expectations are high. Since there is little fear of price inflation outside of some gold bugs and advocates of the free market, we shouldn’t expect a massive spike in interest rates any time soon.
If there is a recession, people will buy bonds and the long-term rates will fall. It will be stocks that take the biggest and most immediate hit.
The other major asset is real estate. We already went through a recent bubble and bust. Now we are back into a bubble phase in some areas, but it is not as widespread as before. I think California will likely get hit the hardest.
Overall, I do think we are in a bit of mini-boom that is artificial. It is the result of an extremely loose monetary policy from 2008 to 2014. And while we can’t time anything with any certainty, it is hard to imagine the boom will last for long because the Fed’s monetary policy is currently tight, at least in terms of the monetary base.
The excess reserves held by banks have come down a little, which means a little more lending and more fractional reserves. This could be contributing to the mini-boom. But the Fed is now paying a higher interest rate on bank reserves, which should incentivize banks to keep those excess reserve levels high. We’ll have to keep an eye on these numbers though, because they are very relevant to our short-term economic future.
I am very bearish on stocks right now, with the full realization that we will likely get Dow 20,000 and beyond. I don’t know when and where it will end, but it isn’t going to be pretty when it does end.
For Donald Trump’s sake, I hope it ends quickly. If the market crashes in 2018 or beyond, he will take a lot of the blame for it.
Despite the relatively lackluster performance of the Permanent Portfolio, it is still my favored investment strategy, at least for a good portion of your financial assets. It will lessen the blow of a crash in stocks.
When the bust comes, it may be bigger than the boom that preceded it.