Did President-Elect Trump Just Inadvertently Kill The Golden Goose?

By: Gordon Long | Tue, Nov 15, 2016
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President-Elect Trump may have just unwittingly sowed an equity market draw-down which will send even more protesters into the streets of America. Donald Trump's stated economic policies are clearly pro-growth and if he manages to implement his pro-business, anti-regulation agenda, in  the longer term they have the potential to surpass the bold and successful initiatives of Ronald Reagan. However, in the near term he has already unknowingly just shot himself in the foot.

To understand this we need to look at some charts from the FRED system which we unearthed in trying to understand what the future presently entails for corporate stock buybacks and dividend payouts. Shown in the chart below we see how Corporate CEO / CFO's have increased their debt loads by historically unprecedented levels of 20-30% Y-o-Y since just after the GFC (Great Financial Crisis). You will notice that in the last year that rate of growth has gone negative.

Nonfinancial Corporate Business; Corporate Equities; Liability Level

The next chart we found astounding regarding the degree of correlation of the above corporate debt growth (primarily being used for buybacks and dividend payouts) compared  to the movement of the S&P 500 on a Quarterly Y-o-Y change basis. There can be little doubt about what has been sustaining the artificial levels of US equity markets!

Nonfinancial Corporate Business; Corporate Equities; Liability Level versus S&P500

You will also notice that recently this correlation has begun to falter, as equities diverged staying positive from the falling rate of debt growth.

To put this into perspective our analysis  indicated that corporate cashflows (EBITDA) and debt levels had now reached a level where they were potentially impacting corporate credit & lending ratings. As you would suspect, corporations as a consequence have began to slow their rate of buybacks (shown below).

Backing Down on Buybacks


Swiss National Bank  (A Likely Proxy) Temporarily to the Rescue

The question is; what allowed US equities to continuing  rise?  We sense this can best be answered by showing how mysteriously, at the same time as the above divergence, we witnessed the Swiss National Bank buying US stocks. The SNB acquired to  almost the exact level required to keep markets temporarily levitated. Obviously nothing more than a coincidence and certainly not something that anyone might suspect they could be potentially acting as a proxy for the US Federal Reserve or US Treasury?

Value of Swiss national Bank US Stock Holdings


Enter President-Elect Donald Trump

But now we have a new President and the political pressures on the Federal Reserve to keep markets from falling prior to the US Presidential & Congressional election are over. Based on President-Elect Trump's campaign rhetoric, Janet Yellen knows she is likely not to have her term renewed in 2018 and knows the Fed's historical independence may in fact be exposed.

IMMEDIATELY on Trump's victory we have witnessed A Global Bond debacle as yields have shot skyward. Suddenly corporate borrowing has become even more expensive and most importantly, perceived low-risk Treasury yields are now the same or slightly higher than stock yields!  Investors have been forced to buy US equity stocks (other than the FANGs & NOSH) for the dividends in a yield hungry world controlled by policies of Financial Repression.

10-Year US Treasury Yield versus S&P500 Dividend Yield
Courtesy of ZeroHedge.com

This dramatic post election development may be the "spanner" in the corporate stock buyback program that many have been anticipated, but were unsure what exactly would trigger it.

Trump's aggressive $1 Trillion Infrastructure Plan may have released the "inflation genie" based on his vowed spending and tax cut programs.

Inflation Expectations


Bottom Line

With bond prices having removed $1 Trillion globally the expectations and pressures are now for the equity market correlation to more closely align with bond values.

SPY versus TLT
Courtesy of ZeroHedge.com

Expect the correction of an over-valued US Equity market to be summarily and quickly blamed by the liberal media on the new Trump Administration before it has even taken office.

 


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Gordon Long

Author: Gordon Long

Gordon T. Long
Publisher - LONGWave

Gordon T. Long

Gordon T. Long has been publically offering his financial and economic writing since 2010, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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