What we just saw last night was a minor market heart attack that was quickly defibrillated. The markets have regained a normal sinus rhythm, except for bonds, which are still crashing. Nasdaq futures were trading limit down when it became clear that Donald Trump would win the election and beat Hillary Clinton against almost all polls. Now stocks are flying high as traders may have realized it doesn’t make a difference who is president as long as the money is flowing.
And boy, is it flowing.
As of the last available money supply numbers from the Federal Reserve, the total amount of dollars in circulation is now over $13 trillion. This time last year it was only $12.25 trillion, for about an $800 billion gain in a year. This is an annual inflationary expansion of over 6%, and there are still trillions backed up outside the system thanks to years of quantitative easing by the Fed since the 2008 financial crisis.
During this time of year, money supply typically expands, so there really is little danger of a market crash until May or June at the earliest. Donald Trump will not end the Fed, he will not touch monetary policy, and if he cuts spending (very doubtful) the cuts will be so minor that they will not matter much. Any way you look at it, the United States of America will continue down its ever-quickening road to national bankruptcy.
Don’t look now, but yields on the 30-year just skyrocketed over 6%. The iShares Barclays 20+ Yr Treas. Bond (ETF) (NASDAQ:TLT) today is having one of its worst single days on record. The debt will keep climbing and eventually there will be a default, either hard or through inflation. There is no way either Trump or Clinton could ever stop the impending debt crisis that will hit the United States very soon, probably within Trump’s first presidential term, unless either was willing to cut government spending of all sorts immediately by 60% or more.
Neither of them are or ever were. Not even close.
The only substantive difference between the two was which countries they like and which they do not. Clinton, while not exactly China’s best friend, had no clear intention of initiating a trade war with the Chinese. Trump does, and probably will. Clinton did not like Russian President Vladimir Putin, and may have scuffled with Russia, a very dangerous game.
With Trump, a war with Russia is not going to happen, and that’s a very good thing. However, the chances of a confrontation, either economic or openly violent, with China is a much bigger possibility, and that is a very bad thing. It will start with tariffs, escalate into a war on its currency, and could devolve into an actual physical confrontation.
As cynical as it may sound, traders can take advantage of these trends by first, being long US stocks until and unless the money supply starts to slow its growth. Being short bonds or bond funds is also an option, just be sure to buy enough time for the trade to materialize. Traders can also buy Russian ETFs like the Market Vector Russia ETF Trust (NYSEARCA:RSX), and/or short Chinese ETFs like the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR), or Macau gaming stocks like Las Vegas Sands Corp. (NYSE:LVS) which is near 52-week highs.
While Gold and the SPDR Gold Trust (ETF) (NYSEARCA:GLD) fell back down to pre-election levels as the day progressed, gold stocks did not fall back down, holding their gains, indicating that the next leg up may be imminent for the metals. Out of all these trades, being long gold is the most conservative and safest of all.
Throughout it all, keep your eyes locked on inflation. Once it hits 3% things are going to get rough, especially for bonds and the dollar. That would be the time to exit everything and stay in real assets. It could happen quickly, and when it does, neither Trump nor the Federal Reserve nor anybody else will be able to stop it.
The celebration of the Fall of the Establishment is likely to be short-lived. The damage has already been done from decades of overspending and cannot be repaired without a default. National bankruptcy approacheth for the United States of America, and neither The Donald, nor anybody else, can stop it.
So we may as well invest accordingly.
Disclosure: At time of writing, the author was long gold and gold stocks.