Trump In 2017 * IS NOT EQUAL TO * Reagan In 1981

Since the November 8^th election, the NYSE has seen seventeen trading sessions with the Dow Jones closing at new all-time highs in nine of them.  I’m not going to argue with success, but seeing the stock market do so well after an election does nothing to change my bearish outlook on the stock market.  Still, as we see in the table below (left side) on November 25^th (last Friday) the major market indexes I follow saw fourteen new all-time highs.  This week (right side) ended with none of the major indexes closing at a new all-time high.  But most are not far from doing it again, and they most likely will go on to new highs before we get a new president.

When looking at their gains of the past 24 months, the mediocre market advances made since the last month of QE3 (November 2014) proves this isn’t a hot market.  That isn’t just my opinion.  In the late 1990s, seeing so many new all-time highs in the major market indexes would have dominated the news and popular culture.  Today who cares?

Another problem I have with this market, and it’s a big one, is how since January 2000 the Dow Jones developed this annoying habit of turning the law of supply and demand upside down.  It advances on declining trading volume, and declines on advancing volume.  I have NYSE trading volume going back to January 1900. For the one hundred years from January 1900 to January 2000, it rarely did that.  After January 2000, it can’t seem to stop doing exactly that. 

The chart below shows the Dow Jones with its trading volume going back six years, and true to form we see the latest batch of new all-time highs in the Dow Jones (Blue Plot) with its trading volume (Red Plot) declining.  What does this mean?  That market valuations are being manipulated by someone with a lot of money is the best explanation I can think of.  And the only people with pockets that deep work on Wall Street; people with access to inflationary funding from the Federal Reserve.  I’ll make a prediction; on the Dow Jones’ next market decline, it will happen on increasing trading volume, and the more severe the decline, the higher trading volume will rise.

Below we see how the Dow Jones reacted to Trump’s victory at the poles; shot up from 4% from its last all-time high to a new all-time high in only three trading sessions.  Would that have happened had Hillary won?  Most likely it would have as Wall Street doesn’t want to get on the wrong side of the incoming president if they don’t have to.

Next is a chart for the NYSE Margin Debt going back to 1979.  I noted how NYSE Margin Debt peaked for the high-tech and mortgage bubbles, only to decline by a significant amount during the bear markets.  For our current market bubble that hasn’t happen yet.  After its current peak in April 2015 it started to.  The two 14% declines seen in the Dow Jones above, one in August 2015 the other in January 2016 provided excellent motivation for bulls on margin to reduce their leverage.  But then in March 2016 margin debt began increasing again as the market recovered.

To refresh your memory, the 14% decline in the Dow Jones last January was the result of the FOMC raising its Fed Funds rate 25 basis points last December.  Let’s see what they do at this year’s December meeting.  Politically speaking, the month after a presidential election is the best time for them to do something that may have a big impact on the financial markets, as we are years from the next election.

This market isn’t hot, or cold, but lukewarm; just the way the big houses on Wall Street like it to protect their multi-trillion dollar OTC derivatives exposure to the stock market.  Still I see some troubles ahead.

The stock market is very vulnerable to trends in interest rates and bond yields.  If you have any memories of the 1990s high-tech market bubble, you must remember how the Greenspan Fed shamefully manipulated the stock market ever higher with ever declining interest rates. 

Once on a bad day in the market, CNBC went live to of all places a golf course to get a live interview with former fed governor Wayne Angell , who at the time was standing in the middle of a fairway. How did that happen?  Angell, golf club in hand, assured the audience the Federal Reserve was going to cut its Fed Funds rate in the very near future.  He couldn’t have putted his ball in before the market rebounded.

But that was twenty years ago, when bond yields were still declining from their double digits of October 1981.  Today, it appears that bond yields (Red Plot below) bottomed in July 2016, and now have no place to go but up.  When this 30-yr bond was issued in August 1991 it had an 8.125% coupon.   The 30-yr bond issued just this this August had a coupon of only 2.25%.   The way I look at things, there is something wrong with that.

What’s the problem?  For one thing having the latest long bond issued with a coupon of only 2.25% forces the yields all previously issued T-bonds down to unrealistic low levels.  Take the T-bond above for an example, it was issued as a 30-yr bond, but now has only five years to maturity.  However its payout is based on its 8.125% coupon from 1991.  To drive its current yield down to 1.84%, someone (central banks and leveraged hedge funds) had to be willing to pay 128 for it.  That’s 28 above its par of 100, the 100 the US Treasury is going to redeem this bond for in August 2021. 

Five years of receiving a 1.84% return on its current price of 128 will only pay its owner 11.76 over the next five years, producing a guaranteed loss in total return of 16.45 when they redeem this bond in August 2021.  It could be worse.  Someone could have purchased this bond in June 2012 at 160, when its current yield was 1.23%.  As of today; this bond has already taken a 20% loss in principal since June 2012.  As it approaches its redemption, its price has nowhere to go but down.  What kind of “safe risk-free” investment does this T-bond really offer people?

Donald Trump, and the alternate media who supports him (include my name on the list) have made much that Ronald Reagan got the economy going by cutting taxes.  But it wasn’t just that.  Reagan’s first year in office saw T-bond yields over 15%.  He departed office eight years later with T-bond yields of just under 9%.  Look at my chart plotting mortgage rates below to see what I’m saying. 

The national debt was less than $1 trillion dollars when Reagan entered office, it will be over $20 trillion when Trump is sworn in.  Bond yields and interest rates were at historic highs in 1981.  In 2017 they are near historic lows.  There was no multi-hundred trillion dollar OTC derivatives market over hanging the big financial houses on Wall Street in 1981.  There is in 2017.  The economy and financial markets Trump must work with in 2017 is a completely different animal than the one Reagan had to deal with in 1981!  It’s Herbert Hoover, who was sworn into his presidency just months before Wall Street crashed in 1929 that history may compare President Trump to if the Donald isn’t careful.

The economic function of the entire bond market has been totally perverted.  Long ago the bond market functioned to provide government and industry with long-term financing for civic infrastructure and capital project.  Bond buyers enjoyed a reasonable return with minimal risk to principal.  Today, who knows what Washington is doing with all the money it’s borrowing?  Corporate American now uses the bond market to fund their share buyback and dividend programs.

Bond buyers today are mostly central banks, using bonds to execute “monetary policy” and hedged funds for short-term leveraged speculations.  As a consequence of allowing academics and politically-connected speculators to dominate the debt markets; grand-ma now has to purchase junk bonds if she wants to lock in the 5% she used to get risk-free from her bank in a savings account.  Does she understand the interest-rate risk her savings has in the bond market?

Rising rates will impact more than just stock and bond prices.  Real estate valuations (and Trump’s Empire) are also vulnerable to rising interest rates.  Below I noted mortgage rates peaked in October 1981, with their nadir in October 2012.  Using an amortization table to determine what a $1,000 monthly payment would finance (table on chart) we see how in 1981 it could service a $64,500 mortgage.  In 2012 a $1,000 a month would service a $255,500 mortgage.  The real estate bubble of the past four decades can be understood as a manipulation of interest rates by our engine-of-inflation: the Federal Reserve.  The coming bear market in real estate will be the result of rising interest rates.

Look at the chart; mortgage rates bottomed four years ago and are increasing.  As with T-bond yields, Donald Trump’s nomination last summer resulted in a sharp increase in mortgage rates.  It’s just a matter of time before they rise to the levels seen just prior to the 2008 sub-prime mortgage crisis, something over 6%.  The real-estate market will find it impossible to maintain current market valuations as this trend develops.  Ditto for the stock and bond markets.

If I were Trump, I’d recognize two obvious facts his presidency must deal with:

• that January 2017 is two years away from the next election;
• that during his term of office the economy and financial markets are going to crash;

I wouldn’t wait for Mr Bear to come to town in his own good time.  Trump should invite him in and let him go to work deflating overvalued asset prices and sweep away the trash on everyone’s balance sheets.  Especially Wall Street’s!  It’s going to be painful, but it’s going to happen with or without presidential permission. 

Just how successful history sees his term in office largely depends on the ability of Wall Street and Washington’s establishment to pin the tail on the Donald when this heap of stinking garbage comes tumbling down.  I hope Trump understands that is exactly what those scoundrels are planning to do to save themselves – at his expense. 

Donald; be ruthless, and don’t play by their rules!  Use Weiner’s computer, you know the one with 650,000 emails on it with compromising information on the high and mighty and their pizza eating ways.  I don’t know exactly who is involved in this ring of pedophiles.  But I know pure evil resides in Washington and walks on Wall Street, and the main-stream media is covering for them.

If President Trump finds it necessary to pardon every inmate in Leavenworth federal penitentiary to make room for current and past members of Congress and their staffs – do it!  If that’s what it takes to force the Republican National Committee to stop calling me for money to save America from their dear friends in the Democratic National Committee, it’s a sacrifice I, and millions of other Americans are willing to make.

On that cheerful note, let’s move on to gold and silver; first gold’s BEV chart.  Uggh!  There seems no end to this, but this too shall pass.

Silver’s BEV chart is worse.  But for all the huffing and puffing the “policy makers” have done to the old monetary metals since last summer, they’ve yet to drive them down below the lows of last December.  I expect those lows to hold, and we’ll see some surprises in the precious metals markets in 2017.

No step sum box for gold in the chart below.  Gold’s step sum (market sentiment) is in sync with gold’s declining price trend.  I’m still a bull on gold and silver.  With the national debt going above $20 trillion by the time Trump is sworn into office, and interest rates now trending higher, gold and silver are the best hedges to protect investors against the coming deflationary disaster in the financial markets.  However I learned long ago not to predict when the metals will reward their owners.  Doing so only makes this prudent decision look foolish when predicted dates pass without the promised market reversal.

Everyone believes that in an emergency, like a selling panic in the stock and bond markets, they will be able to liquidate their positions on Wall Street and buy physical gold and silver.  But like two tiny barnacles on a giant blue whale, gold and silver are tiny markets compared to what’s traded daily on Wall Street.  One of these days a few trillion dollars is going to attempt to squeeze into physical precious metal, and people are going to discover there isn’t any gold or silver for their money to buy.  What price will the old monetary metals be then?  Well, there are always those gold and silver miners to buy, but people won’t be able to purchase shares of the miners at today’s prices!

Gold and silver’s 15 counts are deep in the negative – again.  I don’t know when this is going to change, only that it will.

I have an update for my readers who followed me into Eskay Mining (ESK: TSXV).  I talked to Mac Balkam; ESK’s CEO, asking what the company’s plans for 2017 are.  The company has in hand permits for drilling 50,000 meters over the next five years.  To have permission from the environmental authorities to proceed in a big drilling program is no small thing; 50,000 meters equals 31 miles of core samples.

Also, the company is exploring ways to move their program forward; it takes money to make money.   Still, Mac is optimistic Eskay will begin explorative drilling this coming summer in what may prove to be the best land package in Canada, maybe even in North America.

This is a speculative venture, not one for widows and orphans.  But as the old saying goes; the best place to find gold is to look where gold has been found before.  Looking at the graphic for Eskay below, the lower portion shows British Columbia’s Golden Triangle, the stars indicate where gold, and silver has been found in economic grades. 

Many of these discoveries are huge precious metals ore bodies, located just beyond the periphery of Eskay’s vast land package.   Take a look at the map.  Does it seem reasonable that Eskay Mining’s property may also contain a similar ore body, maybe even several?  Speaking for myself; it does to me.

Mac is directing the company’s geologists to focus on their SIB LuLu target (upper left side star) in the map.  This target has given the company’s geological staff solid indications that something is there.  But until the Eskay has analyzed sufficient  core samples from its upcoming drilling program, they can’t say, because they don’t know if the SIB contains an economic ore body or not.

It’s fair saying that shareholders of Eskay Mining expect the company’s exploration program to place a star or two on its property in the map over the next few years.  But only hard work and time can tell whether or not that is the case.

Management currently holds a 20% stake in the company, a personal stake that cost management millions of dollars by purchasing their shares in the open market.  That’s a good thing to know. 

If the company is successful in discovering a major precious-metal ore body, buying Eskay Mining at today’s prices may become the most profitable financial decision of your life.  Then again they may find nothing and you would lose all of your money.  That’s the truth of it, so either way don’t stake any more than 5% of your capital.  Keep in mind it may take a few years for the company to find something; so don’t confuse this with a quick trade in the market.

I anticipate the bull market in gold, silver and their mining shares to resume in 2017.  Before the precious metals bull market is over, gold and silver miners will become the hottest stock sector on Wall Street, and these little exploration companies can absolutely detonate in price in a hot market.  Patient investors who believe in the future potential of gold and silver, really want some exposure to precious metals exploration companies, and Eskay Mining is as good as exploration companies come.

I hold a significant position in Eskay Mining, also purchased in the open market; so do your own due diligence.  If you have any questions, feel free to contact Mac Balkam at (416-907-4020) or send him an e-mail at [email protected].  Mac’s a good guy, always happy to talk to people about his company.

Mark J. Lundeen

[email protected]