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Hard Economic Data Does Not Support Trumphoria

By Richard Cameron

In our recent first in the series on the investment mania nicknamed by market observers as Trumphoria, we looked at the psychology of the effect, which runs on a binary track with the extreme enthusiasm for Trump as a national repair guy for the economy. Nothing solid in the way of underlying economic metrics renders Trumphoria anything other than a high stakes Casino bet.

Investors who hang their hat on Trump’s extravagant promises of cutting taxes and regulations along with pumping billions into infrastructure and defense spending, run the gamut from individuals to corporate CEO’s who are already counting their chickens, because the value of stocks has a factor of future earning projections, priced in.

Some are raising sober notes of caution regarding all of this irrational exuberance. In the first article we discussed “soft data” – the surveyed effects of Trumphoria – consumer confidence surveys, economic confidence indexes, gut instincts, etc. Now we are going to evaluate a set of statistics that signal a contrary picture – “hard data”.

During the presidential campaign, Donald Trump confidently predicted that under his leadership, economic growth would rebound from anemic numbers that betrayed all the puffery of a “recovery” under Obama, (1.6% for all of 2016) to 4% GDP (Gross Domestic Product) growth.

This, in economic terms, would be like hot-rodding a car that barely hit 60 mph on the freeway, to juice the top end speed to 175 mph. Trump was promising a new engine, drivetrain and chassis. A rebuild from the ground up.

But now Donald Trump is in office and his Goldman Sachs retread, in charge of the Treasury Department, Steven Mnuchin is singing a much more muted and demure song about GDP prospects. Mnuchin told reporters including FOX Business Network’s Maria Bartiromo late last month that Trump administration policies will only have a limited impact on the growth of the economy, expanding to 3% at best. “Regardless of when they go in place, this won’t really impact the economy until next year when you begin to see changes in behavior,” Mnuchin explained. “And it will take a couple years to get growth.”

And a number of fund managers agree with him.  “The stock market is completely wrong,” said Douglas Kass of hedge fund Seabreeze Partners.

My view is that the fiscal path and regulatory reforms coming out of Washington and the new administration are likely to provide a lesser and later contribution to economic and profit growth than the consensus expects. I don’t think it should be friendly to the markets.

There is a wide misconception among the public that the pace of growth on the stock indexes – for example, the Dow having hit 21,000 – is a benchmark of the performance of the economy and its overall health. That notion had a fair amount more validity in previous eras than it does now. One indication that contradicts it is the fact that stocks more than doubled between Spring 2009 and Summer 2015 – but during that period of expansion in the markets, the economy itself only grew approximately 18 percent.

The real economy seldom follows a bull market on the way up, nor does it always lead a bear market on the way down. Even more revealing of the unreality of the psychological effect of Trumphoria is the gap between actual average earnings per share (EPS) of the S&P 500 and the average stock price. The growth of stock prices (based on subjective assessments – ‘soft data’) don’t line up with the actual performance of the stocks. This chart illustrates that:

So with the above graph, you can see that what analysts project as future values (soft data) – represented by the dark blue line and the earlier estimates (lighter blue gradients) are far apart and not tracking, much less keeping pace with the actual pricing of the stocks.

The most graphic – and most extreme example of how economic fundamentals and stock values can diverge is visible in the Venezuelan stock market. The value of the Venezuelan currency – the bolivar has plummeted, the economy itself is contracting, unemployment is soaring and inflation is spiking over the past 4 years. But the stock market? It has been consistently going … up. Why? Because people are less frightened of holding stocks than they are of holding cash.

So, with regard to the US economy, what is the hard data telling us about the reality or unreality of Trumphoria. One interesting indicator is the movement in the price of Gold. People don’t buy Gold when they think the economy is headed in a positive direction, they buy it as a hedge against turbulence ahead. Where is Gold going? It was $1,150 the day after the election and today it is $1,215 per ounce.

How widespread is the “wealth effect” triggering Trumphoria? Gallup’s most recent survey shows that only 53% of Americans have any holdings in equities and most who are not among the 1% – are people with retirement accounts. The 53% is the lowest in 19 years and down from 65% in 2007, just before the economy cratered.

The main driver of the markets has not been small investors rushing into them.. It has been instead, corporate stock buybacks.

“Corporate repurchases are the main source of net demand for US stocks,” noted a team of Goldman Sachs analysts led by David Kostin. Demand stemming from stock buybacks, they tell us, will help push up share prices—boosting the S&P 500 to a flat return of 2100 by the end of 2016 as the markets contend with weak growth and a messy earnings outlook, according to the Goldman analysts.

This brings us back to GDP – which betrays the entire notion of Trumphoria. There is nothing that evidences that the anemia of GDP (the real economy) is about to benefit from a plasma injection of Trump’s vague, uber-optimistic economic proposals – and, as we pointed out earlier, even Trump’s Treasury Secretary is downplaying expectations.

But what we have outlined here is only the most obviously visible contradictory data pointing to the false assumptions behind Trumphoria.  In the next report, we will look at some of the most ominous red flags that are not being widely reported – factors that are beyond the grasp of Trump’s economic policy projections, but are very susceptible to any of a number of missteps he may make.

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