It’s one year since underdog reality-show champion Donald Trump won the White House. Against all odds, equity markets have reached new highs despite his poll numbers hitting new lows.
This is an important fact the media ignore: Political emotions have nothing to do with market realities. According to the media and public perception, it wasn’t supposed to be like this.
Go back to the first debate between Hillary Clinton and Trump in late September 2016. These are the facts. Across the business media spectrum, financial experts laid claim that a positive economic and equity-market future hinged upon a Clinton victory.
Without question as to the efficacy supporting such claims, pundit predictions were parroted as economic gospel. In fact, with Clinton the major-media favorite to win going into Election Day, Dow futures plummeted nearly 900 points when vote tallies began to show a Trump victory.
One year later, the Dow Jones Industrial Index is up some 30 percent, the highest one-year gain since the market surged following the last election of Franklin D. Roosevelt. There’s been a global market surge as well.
And those same pundits, who got it wrong right up to Election Day, have been loudly warning since the year’s start that a market crash was imminent.
With the Trends Journal being the only magazine that predicted a Trump victory and the first magazine to call the Trump Rally real, here are a series of Globalnomic® forecasts for the months ahead.
MARKET CRASH OR CORRECTION?
Absent a wild-card event, such as Middle East war or a monumental natural disaster, we don’t see a market collapse any time soon. However, we do see a correction of up to 10 percent next year.
There isn’t a lot of high anxiety among traders, but there is concern that markets have topped. We reside in that camp. Yes, earning seasons have been relatively strong, but current equity market valuations are stretched by historical terms. Liquidity has been the main driver of the market surge.
And now, with the new Trump tax bill, corporations would benefit from lower taxes. And there are high expectations for even greater earnings. This may boost the stock market, but not the general economy. The trend line to invest profits toward corporate buybacks rather than capital expenditures in investment in new plant and expanded operations will continue.
The proof is in the past. Since the Panic of ’08, US companies have bought back some $5 trillion of their own stock. Without the stock buybacks, stock values would have been negative from then to now.
This year, stock buybacks are expected to top $570 billion and, with tax reform, we expect buybacks to remain over $500 billion next year.
Concurrently, while this massive trend of corporate stock buybacks accelerates, passive investing declines. Therefore, while equities certainly will spike at certain junctures, profits are not trickling down to Main Street, nor fueling the economy at large.
Again, the proof is in the numbers. Despite the stock market surge, US wages remain flat even while the jobless rate moves lower. Traditionally, low unemployment drives higher salaries, but in America, as in many nations across the globe, the profits are increasingly concentrated in the hands of a few. The wealthiest 1 percent of the world’s population owns more than half the world’s wealth. And in the US, Bill Gates, Jeff Bezos and Warren Buffett have more wealth than half the American population combined.
Therefore, markets’ overall strength is being driven by corporations and a small-investor segment that, considering valuations and investment concentration, is taking above-level risks. With near certainty the Federal Reserve will raise interest rates this year and possibly three more times next year. What will happen when interest rates go up and the cheap money that artificially juiced the markets dries up?
The concerns are real and growing. The Bank of International Settlements has sent out a warning signal. It said the world has become so used to cheap credit that higher interest rates could derail global economic growth.
Indeed, not only will companies — which amassed enormous debt when money was cheap — find it difficult to repay their loans when interest rates go up, the same holds true for market gamblers who drove up equities with cheap money in high-risk investments.
According to a Bank of America Survey, 48 percent of its investors believe equities are overvalued. And, 16 percent say they are taking above-normal levels of risk in making investments.
Further, Shiller’s price/earnings measure is the highest it’s been since the years leading up to the 1929 market crash, and just before the dotcom bubble burst in early 2000.
WHY THIS CORRECTION WILL BE DIFFERENT
I call it a top-down correction. When the dot-com bubble burst in 2000 and the 2008 housing crisis hit the nation, it affected both Wall Street and Main Street.
As noted, most wealth in equity markets is concentrated in the top income bracket. What Wall Street feels won’t be felt on Main Street. For example, 84 percent of stocks in the United States are owned by the top 10 percent of households by net wealth. The bottom 80 percent of households owns only about 7 percent of stock.
And, what the bottom owns, compared to the top, is miniscule. The 10 percent’s portfolio is worth some $350,000; those in the bottom 80 percent have a portfolio valued at about $15,000.
Yet, although the bottom 80 percent won’t feel the financial pain of diving equities, they will feel it psychologically. That will trigger real impact. Negative market news will influence how the general population perceives the economy’s health. In turn, it will affect the retail and real-estate sectors as fear and caution replace irrational market exuberance.
Concerned the stock market is “dancing on the rim of a volcano,” financial services firm Société Générale forecasts that the S&P 500 will fall 22.5 percent from its highs by the end of 2019.
Again, we see a correction and agree in principle with Societe Generale. But having been in the trend-forecasting business for nearly 40 years, it’s evident no one can accurately project a market’s value two years forward because no one can predict the cost of wild cards, either made by man or by Mother Nature. Indeed, there is, and was, not a greater current wild card than the “Trump” card. And his presidency was not in anyone’s future forecast two years prior to the 2016 election.
Globally, the other markets will follow a Dow downturn. They too have been pumped up by merger-and-acquisition activity and stock buybacks fueled by cheap money streams.
A BUBBLE-BUILDER NEVER TAUGHT IN ECON. 101
Coming as no surprise, the European Central Bank said in October it would reduce the size of asset purchases to maintain the moderately growing European economy’s pace. It said it would continue them for nine months while maintaining its negative interest-rate policy, with expectations that rates may not rise until 2019.
In nations around the world, quantitative easing and negative/zero interest-rate policy are now accepted as a sound economic principle rather than being denounced as outright fraudulent.
Therefore, it goes with little question that the higher interest rates rise, economic growth slows, and downward pressure on equity markets increases. When markets fail, one of the main culprits is central banks aggressively raising interest rates.
The International Monetary Fund has warned that longer-term risks are increasing because of $135 trillion in debt amassed by G20 nations from corporations and consumers already finding it difficult to repay. “While the waters seem calm, vulnerabilities are building,” the IMF warned, suggesting that Europe and emerging markets would be hit harder than the US.
There are warnings China’s financial sector faces economic-bubble risks. The IMF forecasts that China’s non-financial sector could exceed 290 percent of GDP by 2022, compared to 235 percent in 2016.
And in November, even a top Chinese government official warned of a worrisome buildup of debt in the economy and a bubble risk in the financial sector.
The ratio of China’s financial sector to the overall economy “is the highest in the world,” said Huang Qifan, vice chairman of the National People’s Congress Financial and Economic Affairs Committee.
The excessive level of M2, a measure of money supply, brings risks of “inflation, primarily reflected in housing prices, which have risen about eight-fold in the past 10 years,” Huang said.
Following the vice chairman’s warning, China’s central bank injected $47 billion into its financial system to ensure investors that the liquidity flow would continue despite fears of a slowing economy and the realization that the easy-credit policy has masked the escalation of bad debt. By mid-month, the People’s Bank of China, in five days straight, injected another $122.4 billion of liquidity to boost equity markets.
Putting its money where its fears are, the Chinese government just halted a nearly $5 billion metro subway project.
THE PETRO-YUAN VS THE PETRODOLLAR
The petrodollar was established as the major global-exchange currency during Richard Nixon’s presidency. Global importers of oil had to pay OPEC in US dollars. And because the world had to use US currency, the US controlled a substantial portion of the global economy for a half-century.
But China, the world’s largest importer of oil, gets most of its crude from Russia. In an unprecedented about-face, China announced it no longer wants to pay for oil in US dollars. Instead, it will pay for it in yuan. And, to make its currency even more attractive, those who trade product for Yuan can convert the currency into gold.
Beyond Russia, China announced that its energy suppliers will be paid in yuan. This includes Iran, Venezuela and even Saudi Arabia — the nation strong-armed by the US, which is primarily responsible for the birth of the petrodollar. And while the yuan is down slightly in value compared to the dollar, it recently has gradually ascended. In 2016, the currency lost about 6.5 percent of its value against the dollar, the biggest annual loss since 1994. But it gained 4.7 percent this year against the dollar.
On a grander scale, the petrodollar will slowly but steadily lose its dominant-currency grip due to China’s actions.
ECONOMY’S DEATH KNELL
The death of the petrodollar will be the death of the American economy in many ways. For starters, the more the dollar sinks, the less it will allow the US to print all the money it needs to finance its $20 trillion debt and budget and trade deficits.
However, while the yuan is in the early stages of eroding the dollar’s dominance around the world, it has a long way to go to become the reserve currency it envisions.
Currently, only 16 percent of Chinese trade is settled in yuan. The share of global payments in yuan ranks sixth at around 2 percent. The dollar is still No. 1 at 40 percent of all global payments, and the euro is No. 2 at 30 percent.
But with the business of China being business and the business of America being war (see Celente on China’s rise, America’s decline), China’s grand design of a One Belt, One Road Initiative could change global currency’s balance of power. Again, the yuan has something the dollar does not: its solid-gold base that favorably shines among nations that want to bypass the US dollar and reduce their reliance and vulnerability on it as the world’s dominant reserve currency.
Gold is always a safe-haven asset from geopolitical disruptions and severe market corrections. But it currently has more downward pressure than upward opportunity due to expectations of three Fed interest rate increases in 2018.
As the dollar strengthens, gold’s price trends flatten or drop slightly. Higher interest rates tend to lift bond yields, supporting the dollar and making non-yielding bullion less attractive to investors.
There is an opportunity cost of holding gold because it pays no interest and incurs cost to store and manage. And as bond yields increase, bonds are a more attractive investment than gold.
However, we forecast over the long term there will be growing acceptance of the yuan as a major reserve currency. That forecast is being downplayed in the business media, because of their general disconnect to gold’s historical significance.
The yuan is convertible into gold, reaffirming its safe-haven status, and that will push up gold prices. Also, factors that could destabilize world markets and push gold higher include Middle East turmoil; wars in Yemen, Libya and Syria; tensions with Iran; and internal disruptions in the Saudi government (see Megatrend: Middle East war drums beating).
We maintain our trend forecast that gold has a downside of about $1,150 per ounce and must stabilize above the mid-$1,400 per-ounce range for it to gain strong traction. Once it stabilizes, we forecast it will rapidly spike to $2,000 per ounce and higher.
As we also have noted, cryptocurrencies will be sought as safe-haven assets in times of economic and geopolitical uncertainty (see Cryptocurrencies: Believe the banksters or trust the trends). TJ