Are You Ready For The Trump-Driven Stock Market Crash?

"Goddamn! I didn't think it'd crash that soon!  The end of the year?"

The headlines in yesterday's Financial Times were uncompromising and ought to have sent a signal to any sane investor- whether invested in a 401k, or IRA or just ordinary mutual funds, and even stocks.  That is, the testimony of Fed Chair Janet Yellen that the economy faces an "uncertain path" under the Donald Trump administration, which will also affect fiscal policy. She also warned against raising interest rates "too slowly" in her appearance before Congress Tuesday.

Is she right? Or is this scare mongering? First, let me remind readers as I've posted about before, Trump's fiscal plans are inherently unstable.   The reason is that the plans as they are include virtually NO new revenue and monstrous spending including on increasing the military proportion of the GDP. He also wants an "across the board" tax cut starting with increasing the current standard deduction of $12,600 (for joint filers) now, to $30,000.  These deductions, by the way, are what you use when you don't itemize.   At the same time, Trump would dump the $ 4, 050 write off claim for each member of a household, e.g. the "personal exemption". He also wants to simplify the tax code by changing from the current seven brackets - ranging from 10 percent to 39.6 % to just three brackets.

In addition, if he gets the help needed from congress, he will scrap in turn: 1) the AMT or alternative minimum tax, 2) the estate tax and 3) the 3.8% surtax on investment income - as part of abolishing Obamacare.  As regards the corporate tax rate he would lower it from the current 35 % (actually few businesses pay that rate, most are effectively 5%) and replace it with a 15 percent rate.  He has also floated the idea of applying this not only to big corporations but small business owners and the self-employed, including dentists, law partners, and Trump himself.

While all this sounds terrific in theory it carries a steep price tag, which you can get an idea of by studying the graphic below. That is, the national debt as a percentage of GDP would explode through the roof - exceeding the size of the entire U.S. economy within ten years. See e.g.


But long before that staggering event to come, latent fiscal instabilities are bound to play havoc in a stock bubble environment. This includes not only Trump's spending plans but the enormous  uncertainty to do with the ACA and its repeal, and what to replace it with. As I posted on December 23rd, the two main hospital lobbies - the American Hospital Association and the Federation of American Hospitals-- have released dovetailing studies that their members will suffer more than $200 billion in potential losses if the health care law is repealed without restoring funding cuts that were used to finance coverage expansion.

In other words, the GOP and Trumpsters are in a real hammerlock. You can't just dismiss $200b in losses to one market sector and not create serious stock market instability. You can't just take away the coverage of 20 million people and not expect political blowback. In the first case, there is the potential for a major correction or crash given the bubble that exists in the DOW and S&P 500.

In addition, and definitely not to be discounted, there is a sobering assessment is from the American Academy of Actuaries. The organization said that delaying the effective date of a repeal while developing a replacement would trigger a crisis for the individual health care market.  This is where millions who don't have job-based coverage (including many unemployed Trump voters) can buy policies. This includes more than 10 million with current access to Healthcare.gov.

Factor into this that the current market is way overvalued with P/E ratios through the stratosphere, and you have the earmarks for a crash and even major recession. (This is what actually prompted George Soros for taking a "bear position" after Trump's election for which he is being mocked by the "smartypants" now with the DOW at 20,000 or higher. But what will this lot do when the DOW crashes to 10,000?)

This wasn't merely an abstract exercise for Charlie Farrell, the CEO of Northstar Investment Advisors LLC, writing in The Denver Post Business pages three weeks ago. ('Do You Have The Stomach For The Next Stock Crash?')  He wrote:

"For the past eight years, investors have enjoyed a steadily increasing stock market. Memories of the 2008 crisis have largely faded and many investors have forgotten that sinking feeling. But if you want to avoid the mistakes investors made during the last crisis, you should start thinking bad thoughts. Yes., bad thoughts. Start training your brain and your guts for the next stock market decline. Why? Because big stock market crashes and declines happen and they pose a big threat to your wealth."

Does he know something about the Trump agenda others don't. Hardly! Well informed investors would already have processed the Trumpies want to roll back the Dodd-Frank protections that were implemented after the 2008 crash and banking crisis. They'd also know how the fiduciary rule to protect investors has been diluted and some Trumpies want it gutted entirely. As finance columnist Jill Schlesinger put it in her recent column ('Vital Fiduciary Rule Under Fire', D. Post, Feb. 5):

"I thought of the word 'shame' when news emerged that the Republicans in Congress were launching an effort to delay and perhaps kill portions of the Department of Labor's fiduciary rule, which is scheduled to begin implementation on April 10. The potential about face is a slap in the face to anyone who cares about investor protections."

So those two changes alone, to banking regs and the fiduciary rule, could wreak havoc with many. NOw add in the fact the stock market is 250% beyond what it was in late 2009 and you have the makings for real worry. Why?  Because a market that has increased 25% or more a year is in dangerous territory.

Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warns (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

Interestingly, two of the largest stock market dives have followed two of the biggest bubbles: the first of 37.85 percent and on the heels of the bubble that formed from Jan. 14, 2000 to Oct. 9, 2002, and the second of 58.78 percent that formed (mainly due to the housing bubble) from Oct. 9, 2007 to March 9, 2009. People should also be leery of the S&P increasing beyond the range Silver notes over a 5-year period, and the DOW is also a proxy of that. In other words,   red alarms ought to have sounded after if it hits 20,000 - and especially if it rises further.  Are we in a "bubble"?  Check out some of the more current stats using Google and then you decide.  But bear in mind when most offerings are over-priced it is likely bubble territory.

All like now, specially with Trump's daffy economic plans in the pipeline (once he settles down,  if he ever does) and potential repeal of the ACA, people ought to be re-assessing their risk tolerance. Can you really afford to lose 75 percent of your 401k  if the market came a crapper again?

Author Farrell himself is blunt about how you will know if you're ready for stomach churning crash. He asks:

"Do you have the guts to see your stocks decline by 50 percent and stick with them? Most people don't".

He adds that if you are in the market - say with a 401k - and near retirement, you need to have at least three months of cash reserves. Some advisors like Schlesinger say six months is more like it.  She also insists those planning on hiring financial advisors need to grill them thoroughly about the investments being proposed and especially how they are being paid. If it is via commissions on sales, they may not have your best interests at heart.

See also:

http://smirkingchimp.com/thread/chuck-collins/71355/wall-street-hopes-you-ve-forgotten-the-crash-already

Trump's "American Carnage" - Methinks He's Got The Wrong End oF the Stick

As Trump crouched this morning in an Episcopalian church  pew trying not to let his mug be seen at a "national prayer service"   nearly a million women - many in "pussy hats" - are ripping him to shreds as they march in D.C. - and around the world. Trump yesterday used a 16 minute speech to howl that "American carnage" is about to halt under his watch, careful not to tell his groupies he will be the major source of it.  So,  why not rip a page from Hitler's playbook and use others as scapegoats for what is about to befall the millions who blindly voted for him? Works every time, at least for a while.

Don't take my word, just think of the coming consequences as a result of his assorted appointments of "despicables" and the announced policy changes  To fix ideas, consider his tax proposals alone. He has demanded an "across the board" tax cut. It starts by increasing the current standard deduction of $12,600 (for joint filers) now, to $30,000.  These deductions, by the way, are what you use when you don't itemize.   At the same time, Trump would dump the $ 4, 050 write off claim for each member of a household, e.g. the "personal exemption". He also wants to simplify the tax code by changing from the current seven brackets - ranging from 10 percent to 39.6 % to just three brackets.

In addition, if he gets the help needed from congress, he will scrap in turn: 1) the AMT or alternative minimum tax, 2) the estate tax and 3) the 3.8% surtax on investment income - as part of abolishing Obamacare.  As regards the corporate tax rate he would lower it from the current 35 % (actually few businesses pay that rate, most are effectively 5%) and replace it with a 15 percent rate.  He has also floated the idea of applying this not only to big corporations but small business owners and the self-employed, including dentists, law partners, and Trump himself.

While all this sounds terrific in theory it carries a steep price tag, which you can get an idea of by studying the graphic at top. That is, the federal debt as a percentage of GDP would explode through the roof - exceeding the size of the entire U.S. economy within ten years. The debt incepted - in order to be even relatively controlled- would necessitate draconian cuts in every federal "entitlement" program including: Social Security, Medicare, Medicaid, Tricare, and all VA programs, departments. With such astounding debt there will be no "winners".

You want carnage? That's carnage - and it ain't coming from the global trade order but from Trump's own administration!

Then there is the soon to come painful loss of health care by 18 to 20 million Americans, nearly two thirds of whom voted Trump.  Many of these people still can't believe it, but mainly because they confused "Obamacare" which they pillory and mock - with the ACA - which they somehow think is different. Hence, not realizing the ACA ("Affordable Care Act") and Obamacare are one and the same.

At the heart of the Trump signing repeal is to get rid of the mandate, through which those who have more health issues can be covered by those with fewer. Once that mandate is removed then the protections of the ACA fall through. First among them will be that pre-existing conditions will now be reckoned into charges or whether people get insurance at all. Oh yeah, you may get "access" - but have to pay $200k a year to get it!  Then  there is the other negative that young people currently allowed on their parents' plans to age 26 will no longer be covered.  They'd have to pay for their own plan. And what is on offer? Well, according to Rand Paul: "those taken off the ACA can get a high deductible plan or use tax credits combined with a health savings account".

If you believe that doesn't spell c-a-r-n-a-g-e, think again!

Now, if you want REAL carnage, watch spellbound as Trump's minions in the EPA (like Scott Pruitt)  enable wholesale fracking around the country, including in national parks- and try to extract every last erg of oil from the ground. This will come on the latest NOAA and NASA reports that 2016 was the third hottest year in a row and making the planet the warmest it's been in 125,000 years.

Carnage? Oh yeppers, plenty! From power grids going down from overuse during extended heat waves, to ocean bacteria and plankton decimated, to the spread of tropical diseases like dengue fever and worm infestations, including of the brain. It is expected that before the first year of no seasons (est. 2040) more than 3 billion humans will bear worms in their brains. Alas, these will likely infect - with their larvae- as many Trump voters as others.

Trump insisted in his spiel he could repeal the global trade order by simple decree or his imperious say-so, but if any believe that they are fully delusional. It is not going to happen. Trump, rather than find scapegoats, would have done better to level with his followers that they all need to make common cause with the rest of us (non-Trump voters)  - to halt the climate nightmare unfolding and threatening everyone.

Sadly, Trump's ego and Id were too inflated to do that.  Hence, when Gloria Steinem addressed the D.C. crowd this morning she commented on Trump’s inauguration speech yesterday.:

“Everything that happened before him was a disaster and everything that he would do would be fantastic, the best ever, miracles and all the superlatives."

Leaving out, of course, that he - Trump - will be the one to visit the carnage -  which will likely fall heaviest on his own voters.

Miracles? Trump's people, his voting blockade, will need them in spades within months.

Bank on it!

Clearing the Air On Social Security "Insolvency"

The Wall Street Journal front page story 'Stress Rises on Social Security'  is sure to bring out Tea Party nuts and other assorted deficit hawks and screaming meemies - but all for the wrong reasons. The article reports that the program will now become "insolvent" by 2033 as opposed to 2037, according to the Trustees Report. This Report also states that the funds that pay disability will be exhausted by 2016.  It also claims that the program's worsening outlook "comes from a combination of higher cost of living adjustments - pushing benefits up- and lagging wage growth holding down revenue". Of course, these are straw man arguments as I will show.

Now, let's try and clear the air here and separate the noise from signal. Included among the "noise" I list the following:

- the claim that Social Security is an "entitlement"

- the claim that there aren't "enough workers" to support current benefit recipients.
 
- The claim that Social Security and Medicare are adding to the deficits.

Let's knock these off in turn. First, Social Security and Medicare are NOT "entitlements" because workers have paid into them over 40 years or more. In many case, the 6.2% payroll taxes are the biggest tax hit most of the working poor suffer. But they do it because down the road, after their backs are nearly broken from toil and their hands can barely grasp a buck from arthritis, they will have some residue of dignity in their old age. Some semblance of financial independence.

Even then, there are no gifts or freebies! The seniors still have to cough up nearly $100 a month for Medicare premiums, which are deducted from their Social Security, making it even less - say if it's the only income they have. Next, we know that Medicare premiums have risen over 136% the past ten years while Social Security cost of living adjustments have increased barely 30% over the same time. In other words, seniors are losing out by having to shell out ever more. The WSJ claim of "higher cost of living benefits" therefore doesn't hold water, since they aren't high enough to assure avoidance of de facto Social Security CUTS! (In a separate Denver Post story it's claimed the Trustees attribute part of the shortfall to "energy prices suppressing workers' wages hence payroll taxes" - but that's also a dodge since it take no account of the $244 billion lost because the payroll taxes were intentionally discontinued for two years. Let's at least be honest if we can't be completely accurate! This also dispenses with the WSJ's canard of "lagging wage growth", again, yielding less payroll tax revenue - while overlooking congress' cessation of payroll taxes!)

Let's also bear in mind Medicare only pays 80% of medical bills, and the senior has to pay the rest - which can be significant if it's a serious operation like hip replacement, or an ongoing chronic illness. In addition, Medicare pays nothing for dental work or treatments or eyeglasses. And since dental health often under girds overall physical health then this can be a mighty bummer.

Next, there is the canard that Social Security is losing money because there aren't enough workers to pay in for payroll taxes. While this is a small element, it is maybe 5% of the whole story, the other 95% is the THIEVERY of  congress in raiding Social Security monies. The following data shows how much has been raided each year, the data from the same Trust Fund sources and GAO:

Year:  ................Amount raided

2011.................$67.0 billion

2010.................$87.0 billion

2009...............$137.0 billion

2008...............$180.2 billion

2007...............$186.0 billion

2006...............$185.5 billion

2005..............$173.5 billion

2004..............$151.1 billion

2003.............$155.6 billion

2002.............$159.0 billion

2001.............$163.0 billion

2000.............$151.8 billion
----------------------------

TOTAL:  $2.63 TRILLION

Now, any person with a single neuron for a brain would realize that it doesn't matter if you fill a one gallon bucket with a cup every day (equal to 6 oz.) if there are massive holes in the bottom that let out 12 oz. in the same time! 

Thus, the worker-to -beneficiary ratio is a red herring meant to deflect attention from the REAL problem which is the yearly raids on monies received from payroll taxes and intended to go to future beneficiaries! So long as these raids continue unabated, NO solution or "re-tooling" of the program will work, not raising payroll taxes, not making cuts, NOTHING!  The raiding has to stop first.

Currently a bill is before the Senate, designated S. 123 which would have the desired effect by protecting Trust Fund money instead of allowing it to be used for military occupations, military toys, tax cuts or other useless PORK. This bill will require all payroll allocations to go explicitly to pay benefits of both retirees and the disabled. It would, had it been enacted in 2000, have made available that $2.63 stolen trillions and we'd not now be hearing about "insolvency". Also, ONE less year's thievery - say from 2009- would easily have covered the $128.9 b allocated for disability payments last year (WSJ, p. A4), with change left over!

Last, let's dispense with the bull that Social Security is adding to the deficits. NO, it is not, because those deficits are tabulating PUBLIC debt not the private debt of the Social security shortfall - which is OWED TO BENEFICIARIES and no one else! No outside bond trader, bond pirate or other form of parasite such as now terrorizing the Eurozone nations.

The truth is that a holder of private debt, like a household, has a very different relationship to debt than a government like the United States, which issues its own currency. For families and businesses, paying back debt means they have to sacrifice current consumption (spending). But the government doesn’t have this same constraint. You’ll rarely hear this stated, but the government’s ability to spend now is actually independent of how much debt it holds and what it spent yesterday.

To put it another way: Technically one can remove the $2.63 trillion the government owes the Social security Trust Fund (because of repeated raids or "borrowings") from the total National Deficit because Social Security has no EXTERNAL  "collectors". It is the gov't that OWES Social security not the other way around. Thus, the alleged $15 trillion deficit is actually more like $12.3 trillion.

Contrary to Tea Party lore and the banter of the austerity hawks, it isn't Social Security that has created the massive deficits as money owed to outside agents, such as the Chinese, but rather the unpaid for Bush tax cuts, and the endless stupid military occupations - both of which have now contributed nearly $6 trillion.

Can Social Security be rendered whole and avoid shortfalls? Yes, but first the drain must be halted. S. 123 must therefore first be passed! After that, the sanest solution to preserve the integrity of the program is simply to increase payroll tax wage thresholds to the $300,000/yr. level. That simple increase will assure the program's solvency until at least 2067. Of course, the tax phobic repukes refuse any increase of revenue via taxes, even payroll taxes on the top 5%. But if they do, then neither Obama or congress must yield to any "cuts".

When more people finally pull their heads from where the sun doesn't shine they might be able to see these issues clearly, as opposed to reporting to hysteria.

Let's Clear the Air on the National Debt!

It seems Vladimir Putin has made some very untoward remarks about the U.S. in the aftermath of the debt deal. Despite the increase in the debt ceiling, Mr. Putin referred to the United States as a "parasite", one of the most infamous epithets circulated in Russia and historically used by Stalin as a synonym for Jews. He chose this despicable term because, in his address to a Youth Rally, the U.S. was carrying an unconscionable debt load that represented a drain on the rest of the world, hence parasitical.

Okay, as usual, we have to separate the wheat from chaff. We can't lay all the blame for this on Mr. Putin but a large measure on the Tea Party's tea Baggers who - in their casus Belli as montebanks of the moment - have conflated ALL species of debt in their rhetoric about deficit reduction. Thereby they've sown enormous confusion not only in the minds of foreigners, but in our fellow citizens.

Yes, the media ought to have parsed this for the public, but most fell down on the job. Only one tiny article over the W/E, this in Parade magazine, for god's sakes, clarified the issue though it's been known for some time - as reported in numerous pieces last year in The Economist and The Financial Times.

Here are the fiscal facts on the national debt:

- Of the $14.3 trillion up to today, only $4.5 trillion is owed to external nations

- $6 trillion is owed to individuals within the country - as in federal pensions ($2.9 trillion) and Social Security (to its Trust Fund) $3.1 trillion)

- Another $3.8 trillion is owed to investors within the country, including to bond holders (Treasury bonds and bills) and others.

Technically speaking then, the true national debt (as defined as being owed to outside nations, interests) is only 31.4% of the total. I mention this because this is how most other nations measure their national debt. They do not reckon in what they owe themselves, internally! (For example, Switzerland)

Obviously, as may be seen from the above, several things pop into view:

1) A good chunk of the money, e.g. for wars in Afghanistan and Iraq, was raided from Social Security monies, the Trust Fund namely - which trillions the government now owes beneficiaries.

2) The canard that the Social Security Trust Fund bonds are only "IOUs" cannot possibly be true if they are in fact counted against the debt! On the other hand, if they were "only" IOUs and possessed no fiscal gravitas, then that $3.1 trillion would be subtracted so we'd "only" owe: $11.2 trillion not $14.3 trillion.

3) Obama's stimulus money, as well as the bank bailout money (enacted under Bush in 2008) was borrowed from U.S. investors and taxpayers.

Bottom line? If we measured national debt and deficits in the standard ways other nations do there wouldn't have been half the kerfuffle about it.

One more item, if people check the "national debt clock" they will spot two stats-figures: one for the national debt, one for the U.S. "Total Debt". The former is predicated on immediate obligations, while the latter is a projection of unfunded liabilities (e.g. Medicare and Social Security benefits owed to future beneficiaries) into the future, generally up to 2030.

Both of these parlous figures can easily be changed with just small changes in revenue. However, expecting "spending cuts" to solve all problems is idiotic and as one Brit economist said:

"Expecting to bring a nation to prosperity using only spending cuts is like cutting off your right foot and expecting to run faster."

As for Mr. Putin, we hope in view of this he chooses his use of the term "parasite" a tad more carefully in future!