THE BLOG
12/21/2016 03:20 pm ET Updated Dec 22, 2017

When will the Dow Jones crash? The fake Trump rally.

The media coverage of the so-called endorsement of the new administration by Wall Street is a combination of misinformation, politics and ignorance.
Misinformation: the interest rates are exploding
The explosion of US Treasury interest rates under the largest sell-off of distrust to the new administration has already created widespread damage. The interest rates on 10-year bonds have increase from 1.80% to 2.60% (+ 50%). The 30-year mortgage rates followed course, to 4.20%, initiating the beginning of a softening of residential prices. This is a dramatic change that will increase the budget deficit from 390 to 650 billion (everything being equal).
The first effect of Donald Trump on the US markets has been to disenfranchise the US households' access to housing and weakening the credit of the United States.
Ignorance: the Dow Jones Index is insignificant
The Dow Jones has become a joke. The largest stock (8.33%) is Goldman Sachs while Microsoft while the one before last, General Electric, is 1.11%. The latter is 287 billion and the former 97 billion. It does no longer represent the market capitalization of the companies let alone their significance. No Goldman is not 1/12 of the US economy. The weighting of some sectors is also unbalances. one fifth is in financial services. It rallied 8% in 42 days.
The S&P 500, much more representative of the US economy, is only up 5% from 2,163 to 2,268 in 42 days. Nothing to parade about.
Misinformation widespread among media
The misinformation by many media has given the impression of a gigantic rally. The dream of the Dow at 20,000 that would be a panache for Mr. Trump, would not mean anything, but it does not stop them from making headlines. The show continues to be better than substance.
The US equity market will imminently correct substantially
The combination of the increase of the US equity market and long term interest rates are contradictory. A clash is inevitable. Unless you really believe that a decrease of corporate tax rates will compensate for it. Nobody believes that this decrease will be combined with the same shrinking corporate tax basis: it would increase the budget deficit and the level of indebtedness.
The meaningful 20,000 number is billions of dollars of debt.
We are now close to $ 20 trillion of debt. If we add the $ 1 trillion infrastructure, we are at 100% of GDP. It will happen in the next few days. The increase of interest rates will soon be unbearable, and the rating of the country might not resist one year of the Trump-economics (assuming they exist). Will the GOP congress that stopped any increase of the debt ceiling of the US under the Obama administration sell its soul to Donald Trump or maintain financial discipline? It is too early to say. The reality is that the US is on the verge of a precipice, and thanks to Donald Trump, getting even closer to the cliff.
When will serious media send the warning signals that will advise investors to be prudent and not believe that the Dow at 20,000 would mean anything?