Teflon Don(ald) and the Market Face Their Most Serious Test
"... You have to stand the road map on its head and accept that things are better because business is better here and abroad. You can't dust off the old playbook because rates are unprecedentedly low, so as they go higher the only thing that happens is companies make more money. Business has momentum. This market is saying that momentum will not be broken up by three rate hikes and won't be stopped by a president or a Fed or Congress. It's a rising tide that's lifting almost all the boats except those that were lifted under Obama. And that's what this tectonic shift of a levitation is all about."
--Jim Cramer, "It's the First Day of School"
No one has been more correct about this bull market than Jim "El Capitan" Cramer. His persistent "buy the dip" strategy has been flawless.
But, with the market's advance now moving ever higher on a daily basis, where do we go from here?
In "It's the First Day of School," Jim details a persuasive case about a new market playbook, making three key points (my brief response to those points are in parentheses) that lead him to believe we have higher to go:
Point #1: The Fed no longer has a critical role in our economy and markets. (I agree with Jim that the Fed no longer has a stimulating influence, but hiking interest rates and an end to balance sheet reinvestment may be major headwinds during a difficult baton pass from monetary to fiscal stimulation.)
Point #2: We have a pro-business president, which will free industries (especially of a financial kind) from the regulatory albatross they have had around their necks for a decade. (Maybe, but the road to implementing the three legs of the Trump economic policy stool could be less steady and more hazardous than consensus expectations.)
Point #3: The president is no longer the focus when domestic and overseas businesses are improving. (From my perch, the global growth expansion remains fragile and subject to policy errors, as well as political and geopolitical disruptions.)
I certainly get Jim's first point -- monetary policy for some time has lost its stimulative impact. But there is no free lunch to the massive monetary accommodation that is now reversing, however slowly.
In the absence of monetary policy as a growth catalyst, stimulation falls into the fiscal sphere. For some time, I have felt the pivot from monetary to fiscal stimulation to be far more problematic than the consensus expects, reflecting in large measure the deepening animus between the two parties, which will linger after the bitter presidential campaign.
Moreover, the requirement by the Republican leadership for revenue neutrality is also a potential headwind. Relatedly, yesterday afternoon, Rep. Devin Nunes (R-California) said on CNBC that there will be no broad tax reform without the border adjustment tax. In its extreme, no tax reform or even a regressive border adjustment tax (BAT) with tax reform are both potential tinder for trouble.
It remains my view that the market advance is materially a function of the three stools to growth -- overseas cash/profits repatriation, a reduction in costly regulations and a slashing in the effective corporate tax rate -- that Jim and others have highlighted as keys to resuscitating domestic growth, upon which the markets are dependent.
I apparently place more emphasis on valuations than the bullish cabal, viewing global economic growth (current and projected) as still substandard and not supportive of a 27x GAAP multiple, CAPE multiple in the 98% decile or (Warren Buffett's favorite) a very stretched market cap/GDP ratio. Tepid growth remains vulnerable to continued policy errors as well as geopolitical and political revelations and risks.
Russia Is No Nordstrom
"I don't know about it, I haven't seen it...."
--President Donald Trump (referencing reports of Michael Flynn's pre-inauguration conversations with the Russian ambassador about sanctions)
During the first several weeks of the Trump administration, there have been numerous and significant dysfunctional moments (Sen. John McCain's words, not mine). Some are as trivial as lying about inaugural crowds and the existence of millions of fraudulent votes cast in the November election as well as Twitter wars with Arnold Schwarzenegger, Dallas Mavs owner Mark Cuban and several U.S. senators (Republican and Democratic) and with Nordstrom (JWN) , the department store chain that dropped his daughter's line of products. Other moments in the last month have been more worrisome. They include the ban on travelers from Muslim majority countries and undermining the judiciary by firing the acting attorney general for refusing to defend his immigration ban, only to watch the federal courts call the ban an unconstitutional use of executive power.
Most recently, Vice President Mike Pence advanced false narratives for two weeks as he was uninformed by the president and seemingly lied to about the facts surrounding what ultimately led to the Flynn resignation as national security adviser. This is a fundamental breach of trust (and/or lack of knowledge) between the president and vice president in an administration only 26 days old. Equally worrisome was that it was only until leaks circulated about the nature of a series of telephone discussions between Flynn and the Russian ambassador Sergey Kislyak that the administration was forced to reveal and address the problem.
O'Reilly: "Putin is a killer."
Trump: "There are a lot of killers. We have a lot of killers ... Well, you think our country is so innocent?"
--Fox News, Bill O'Reilly interview with President Trump
Concerns with Russia have plagued the Trump candidacy for months. Now it plagues the Trump White House even more as there is little explanation for the administration's bizarre political positioning vis a vis Russia.
The most recent Flynn situation (and resignation) could fall into a more serious category of problems that could inhibit or delay the aforementioned growth initiatives.
Republican stalwarts Roy Blount, Lindsey Graham and Mitch McConnell already seem to be leaning toward an investigation even without the unsurprising insistence of their Democratic counterparts.
The deposed Mike Flynn now becomes a wild card, as he knows all that happened in the conversations, some which have been said to have been recorded or are available in transcript form.
The press, the FBI and/or a bipartisan congressional intelligence or special committee now are likely to move through a lengthy discovery process and investigation regarding the relationship between the administration, Michael Flynn and Russia initially aimed at determining whether there has been a cover-up that may have compromised U.S. security during that telephone call. But, it also seems inevitable that these hearings finally could address and unveil the depth of the relationships between Putin, Trump and past (e.g., Paul Manafort) and current Trump operatives and their potential collusion with Russia in the presidential campaign, because if there are more dots they are likely to be connected.
Bottom Line
"We need to change this behavior in Washington. D.C. We need to get rid of the corruption .We need to bring honesty and trustworthiness back to the American people..."
--Mike Flynn (on the stump)
Based on yesterday's column, Jim Cramer believes that there are several other factors beyond the timely and effective implementation of President Trump's policy initiatives that have been important reagents that have nurtured the bull market over the last two-and-a-half months.
By contrast, I believe the foundation of the market advance principally is the by-product of the president's fiscal policy promises -- overseas repatriation, lower tax rates and massive regulatory changes -- that now may be delayed in their introduction and even in magnitude.
In other words, we could have no tax reform or a watered-down version at the same time global monetary policy is a headwind.
The Trump presidential campaign was based on the notion that the Republicans held themselves to a higher standard and more transparency than the Democrats (see the Flynn quote above). We have seen little of that standard nor have we witnessed the promised transparency.
The promise of change has more resembled confusion and disorder.
Rather than nonstop wins, the administration seems to be having difficulty getting through the day in an environment of tumult and chaos -- something that few had envisioned and, surprisingly to date, something that our markets have dismissed as unimportant or irrelevant.
