Trump is coming to drain the swamp – will he succeed?

Dear Trading Diary: It is almost two weeks since the Trumpquake and already he seems to be serious about draining the Washington swamp with his ‘controversial’ (aka usually effective) appointments. But he is dealing with the well-anchored leftist blob and it would be almost a miracle if those new brooms at the top can effect meaningful change on the decks down below – at least in the near term. We can only hope he will do it as you would while ripping off a very sticky plaster – with utmost haste.

Remember, George Washington chose that swampy location for the new nation’s capital on the banks of the Potomac River in an especially boggy low-lying area (one neighbourhood is still called Foggy Bottom) which had to be partially drained. So is this to be the Draining 2.0?

But right now, the markets are getting the message loud and clear that Trump 2.0 is very serious about cutting government waste with the respected and highly effective Elon in charge of the new DoGE (see later) brooms and shovels.

It is also clear Trump is serious about introducing widespread import tariffs and mass deportations of illegals (previously labelled ‘new Democratic Party voters’). But in reality, the gargantuan tariff proposals will be watered down in practice and was really intended as a ploy to get the parties round the table next year. Crafty, eh?

That much is clear and US shares have been MAGA zooming especially compared with its trading partners China, EU and UK – until yesterday. But this is occurring after a lengthy historic bull market with valuations already at or near extremes for the leaders.

The question is inevitable: Is this latest two-week sharp rally the start of a new major bull phase taking valuations to even greater extremes. Or is this just a sugar rush that is about to wear off? Is there something heading our way out of left field to shake up the extreme market complacency?

One clue may lie in the Treasury bond market where the Bond Vigilantes lurk and who are finally flexing their muscles. I have before highlighted the highly unusual phenomenon of the Fed cutting short term rates by 50 bps last month as the long bond yield surged. The much-discussed yield inversion has now disappeared and that is my signal to expect a recession ahead.

As I write, that yield is still surging – and stocks falling hard. So the Fed has options – but very few. The 6-month T-Bill yield (that the Fed tries to match) has been flat for two months now making the long/short yield gap ever wider to reinforce the recession message.

This ‘higher for longer’ could be signalling an imminent surge in consumer inflation ahead and/or a massive jump in the US national debt (already at record highs). But with the dollar in almost an exponential rally phase, it is confirming the rise in Treasury yields. Now that national debt interest is making new ATHs and is already greater than the budget for the military (which has bases all over the world), the scene is set for an almighty reckoning.

But Trump has promised no more foreign wars but that is unlikely to reduce the size of the military esp overseas soon. With China/Taiwan tensions still alive, is that likely?

In other words, a very confusing picture for the paths ahead for US markets if you base your prognosis on macro.

But with the Fed’s Powell now signalling rates will stay higher for longer on Thursday, the Trump Trade is in real danger with expectations so high (see below).

My outlook: That knee-jerk bullish reaction to the Trumpquake is the final flourish of the bull market in equities. We are at the end of the Elliott waves of fifth degree in all time scales off the 1932 low (not a mis-print). It is now downhill for years to come.

It has been one heck of a ride for asset owners. The top 1% have seen record growth in their wealth while the bottom 90% have not with house price multiples to earnings reaching extremes and rent to earnings likewise for those non-homeowning families. The haves have it all and the have-nots are left picking up the crumbs. But that is about to change.

And here in the UK, the approaching Trump Tariffs are putting sad faces on business executives with confidence being hit and already the latest weak GDP data shows the UK economy is on the verge of its own recession. With massive tax rises planned, it will not take much to tip it over.

Update on my Stock Index campaign: I resumed by bear campaign last week in the US indexes. I was guided by the signal in the Dow (and Russell 2000):

On Monday it rallied to meet my major trendline on a huge mom div in what looked like a small scale five up off the 3 November low. It then developed a small Head and Shoulders reversal pattern and on Thursday it broke below the neckline to give me my sell signal, It fell hard on Friday to confirm the reversal in what looks like an impulsive move with new trend down. My first major target is the pink zone around the 42,000 area with much lower potential.

And what a perfect time for this reversal! Remember, shares top out when all investors are convinced they can only go up – and bottom out when they all give up in despair.

I remain bearish and will only amend my stance if the US indexes rally above their ATHs.

Investors are all in riding the bull: Just about all of the technical measures of ebullience I see are off the scale but this one chart sums up how crazy manic is the investor mood. This is DOGE coin that was set up initially as a wry joke on the masses of amateur ‘investors’ in anything crypto that moved in the ‘leap before you look’ school of investing.

Cryptomania got a major boost from the Trumpquake with Bitcoin as the biggest pushing to new ATHs above $90k. But even the minnows like Dogecoin were not left behind pushing up to a mighty $0.43 (that is 43 US cents!). ‘Investors’ in this coin have stars in their eyes as they believe it will emulate the path of BTC that rose from mere cents at launch to today’s stratospheric heights.

This rush into a joke ‘asset’ is a true symbol of how extreme has positive social mood become – and very likely at its height. It’s truly a ‘can’t lose’ environment. But experience tells us that such rocket launches in an ‘asset’ never ends quietly.

Here is Goldman Sachs’s latest prediction: “The key challenge heading into next year is to maintain upside exposure to US equities given the friendly US macro environment while limiting exposure to the major tail risks”. That statement can only be made at or near the end of a historic bull market – you will never see it at near the lows. It is like preaching to the converted.

If my analysis is correct, I fear Goldman may have to change its tune and pay a lot more attention to the ‘tail risks’. And that tail will likely have quite a sting.

The great British Pension Pot – will it go to pot?: This week, the government has announced it would like to be more like Saudi Arabia, Australia, Canada and Norway among others to lump all private and public pension pots together and create a few Mega Pots where they can ‘invest in the biggest infrastructure projects’. Hmm.

Forgive me for noting the timing – it is probably exquisite but in the unintended way right near a major top in asset values. With their well-established record of creating a trail of white elephants, will they be buying at the top into this idea? Dare I mention HS2 here?

And who will be the managers? If skilled people like Warren Buffet, Millennium or Elliott Management, then fine. But if drawn from the City and/or civil servants, then the odds for significant losses magnify.

I am putting money on this being a call near a major top in infrastructure asset values. Remember, the government is a huge machine with masses of departments and committees holding endless useless meetings, not to mention the armies of ‘special advisors’. Getting a decision on something major takes weeks, months and often years. This is the blob effect. This makes them always very late to any party. What looked good at the start may not be so rosy when the plans are finally announced. But by that time they are committed. They often end up fighting the last war and produce the famous ‘unintended consequences’.

Update on my US Dollar campaign: Or rather, non-campaign. Sadly, I totally missed the Trumpian rally to Make the Dollar Great Again (MADGA) but I have a (rather lame) excuse: it was the ‘obvious’ Trump Trade. Remember, I have a natural aversion to the ‘obvious’ trades. Many of my most successful campaigns have been on the basis of fading the obvious.

but at least I lost no money – a prime objective of all traders, surely? In fact, it is Buffet’s top answer to when asked how to make money in stocks!

When Trump won the election, it was clear that the dollar would likely rally but I believed the Trump Bump would be short-lived since the Fed was about to keep cutting rates further, o so they said.

But I failed to take into account the bearish stance of traders at the time of the election. I should have realised that it was primed for a hefty short squeeze along with new buying no matter who won, This is the result:

Note the unusually sharp slope to the rally off my B wave low and it appears in a possibly complete five waves. It is possible that my C wave is complete – or at least the market is due a decent pull-back into next week. If so then my first target is a kiss on my trendline.

Update on my Gold campaign: I have been on the sidelines since taking profits near the highs, But with last week’s $250 plunge, I am ready to start looking again. But the market is in the early stages of a wave 4 correction that will be very tricky to time – and will last for weeks. I plan to only trade nervously if at all for now.

Update on Nvidia: This has been the bellwether AI share that everyone must own – and tech in general – for some time. Bullish enthusiasm remains high but the charts are telling a different story

From the deep September low (wave 4) is has rallied to a new ATH at $150 and in the trading channel between my excellent tramlines in five clear waves. Odds are very high that is the final wave 5 of 5 top. Late last week it fell back to the lower tramline with the Nasdaq falling hard. A good break will set up my pink target around $112 on my long term trendline.

And this company has fallen off the MSM radar lately – another sign something dramatic is afoot.

Incidentally, the most famous and one of the most successful investors ever – Warren Buffet – has just unloaded a ton of Apple shares as he builds up his record high cash pile. What does he know that the bulls don’t?

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Markets are on the cusp of major shifts of direction and historic opportunities await.

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Update on the Net Zero revolution: Now that Congress will soon have a gargantuan pile of new brooms, the boondoggles that comprise Biden’s ludicrously named Inflation Reduction Act are in peril.

Incidentally, I have often wondered why the eco save-the-planet movements have labelled everything anti-fossil fuels as ‘green’. Surely, just a basic recall of school biology (they did go to school, didn’t they?) would tell them that ‘green’ implies more CO2 in the atmosphere since that molecule is an essential plant food. Without it we humans nor the plants would not be here. It’s that simple. The gas that makes up 0.04% of the atmosphere is what is greening the earth and elevating agricultural crop yields. Isn’t a greener earth a good thing? Economic and intellectual confusion reigns in eco-land unabated.

Random thoughts: With the sudden firm control of the US political landscape wrestled from the Democrats, Republicans can wreck havoc on the colossal costly government waste of taxpayers money. I am very hopeful that great nation will be able to re-invigorate the pioneer can-do spirit for today’s world where failure is not rewarded any more and genuine productive effort is.

But with the prospect of much wasteful government projects being dumped, we will see unemployment rise with Federal and State government posts slashed. Interest rates will stay higher for longer as the economy grows and this will put pressure on the mortgage market (rates are already climbing). Visions for more stock market gains will be dialled down.

Already, consumers are overloaded with debt and defaults will continue to rise from the pandemic low base. And mortgage delinquencies will also continue to rise. bank re-possessions will rise.

With the recent sharp re-inversion of the yield curve, a US recession is now baked in.

Buckle up your seatbelts, it’s going to be a bumpy ride!