Everybody knows that sooner or later, Donald Trump’s stock market hubris is going to culminate in a disastrous Icarus moment when his ill-conceived economics collide with his balls-out foreign policy to send global equity markets tumbling 20% or more into a bear market befitting of a world where a WWE hall of fame inductee accidentally became the most powerful man on the planet.
That’s a foregone conclusion and we got a preview of it last week.
If you’re not a keen market observer, you might be inclined to attribute February’s crash in part to Trump, but that wouldn’t be entirely fair. Sure, there’s an argument to be made that his foray into late-cycle fiscal stimulus exacerbated the bond selloff (by skewing the supply/demand picture in the Treasury market at a time when the Fed is letting the balance sheet rundown) which in turn contributed to a tantrum-like dynamic that flipped the stock-bond return correlation positive and sent risk parity and 60/40 portfolios tumbling in early February. And yes, that fiscal backdrop amplified the AHE beat that accompanied the January jobs report (i.e. expansionary fiscal policy coupled with the first convincing signs of wage growth telegraphed a more hawkish Fed).
But the flash-crashing madness that characterized the week of February 5-February 9 was down to technical factors including the realization of the VIX ETP rebalance risk and a subsequent wave of systematic de-risking (some $200 billion of equity exposure was dumped by CTAs and risk parity). So really, it’s not fair to call what happened in February a “Trump crash”.
Last week was different. The Thursday rout and its Friday sequel were down to trade war jitters and also to concerns that Trump’s random Twitter threat to veto the $1.3 trillion spending bill was further evidence that the man in the Oval Office is becoming more unhinged by the week. His decision to use a press conference convened to discuss the signing of the spending bill to talk instead about “invisible” fighter jets and nuclear submarines didn’t do anything to allay people’s concerns.
Meanwhile, the durability of retail investors’ dip-buying habit has been thrown into question by volatility in the flows data, which suggests Joe E*Trader’s previously unshakable faith in the notion that stocks only rise has been replaced by the idea that day trading the Nasdaq is the way to go. In other words, retail investors might have ceased to be reliable as the “marginal equity buyer“. Throw in hesitancy to re-risk on the part of the institutional crowd, and we’re left to lean on the buyback bid. But what happens to that buyback bid if a global trade war effectively negates the fiscal tailwind for S&P EPS from the tax cuts? Who knows. Maybe that’s just further incentive to buy back shares (because there’s no “better” way to inflate the bottom line than reducing the denominator in the EPS equation). Or maybe they get gun shy and remove the only remaining pillar for a market that’s leaned heavily on the price indiscriminate corporate bid for years.
The point there is that there are concerns about who’s going to step in should President Dennison’s ongoing trials and tribulations end up triggering a deeper correction.
But the thing about waiting around for Trump to get his comeuppance for incessant stock market balderdash is that we all seem to be assuming he isn’t shameless enough to simply ignore a crash on the way to pretending like it didn’t happen by simply tweeting about the Dow the next time it’s up. Cue Trump from Monday:
I mean you gotta hand it to him. That’s a level of sheer brazenness that most Presidents could only dream of. For one thing, he’s tweeting about the Dow’s one-day point gain, which isn’t the same thing as talking about percentages. But more to the point, it takes a special kind of “very stable genius” to completely ignore the fact that the Dow fell some 1,100 points between Thursday and Friday (losses which were almost entirely attributable to him fumbling around in the dark on trade and then threatening to shut down the government) on the way to calling Monday “Great news!” and slapping a “#MAGA” tag on the tweet for good measure.
And he wasn’t done. Four hours later, he tweeted this:
That’s basically the same damn tweet. He is completely ignoring what happened last week (e.g. a dangerous tit-for-tat escalation with the Chinese on Thursday) on the way to pretending like the “numerous talks” his escalation necessitated are somehow good news. It’s like Trump’s version of the broken window fallacy except he never acknowledges that he broke a window in the first place.
Hilariously, it seems to be working. For now. Because between China’s retaliatory tariffs, his difficulty in finding a lawyer willing to represent him in the Mueller probe, and the Stormy Daniels debacle, everyone is just holding their breath for him to tweet something about job-stealing Asian devils, #loser lawyers, and/or lyin’ whores. So when instead we inexplicably get a correctly punctuated, two-sentence tweet about everyone being “happy”, everyone exhales and piles into risk assets.
I guess it’s possible that this can go on in perpetuity – he’ll just keep ignoring the shit he breaks on the way to taking credit for the clean up effort.
But you’ve got to think that one of these days, “he didn’t tweet anything crazy today” is going to cease to be a good excuse to buy stocks.