Continuing this series on the economic impacts of Trump’s “administration” and how to survive financially, we start by examining how markets unravel due to his deliberate cultivation of chaos and disruption. Everyone’s 401ks, IRAs, pensions and even insurance payouts for life, health and property insurance depend on investments in stock, bond and commodity markets. The stability of the banking system relies on banks managing risk and return, with the critical help of enforced regulation, as we learned in 2008-09. The 2020-2021 pandemic disrupted supply lines and markets globally.
We all felt that impact.
Trump shook markets in 2018 with his initial foray into a tariff skirmish. Now he’s promising outright trade war. Trump caused serious disruptions in supply chains with his assault on the China trade in 2018-19, beginning the inflation that exploded with the pandemic.
Now, Trump assumes power with a war in Ukraine and rising tensions all along Russia’s European border. China and N. Korea are effectively backing Putin’s efforts to bring down the American created world order of sacrosanct borders codified in the first article of the UN Charter. Trump and his allies appear bent on assisting him in doing so.
Biden shored up this order temporarily.
It will unravel under Trump, and that will hit markets, hard, and soon.
First off, the US stock market is at all time highs, not just in nominal terms among various indices, but particularly in P:E terms (price/earnings ratio) and in dividends to price of the stock. The long term average P:E for the S&P 500 is about 15. The median value is 17.92. Since 1990 it’s averaged around 24 times earnings, with notable exceptions in 2008-09 and 2019-2020. https://www.stockmarketperatio.com/ The ratio this week was 30.6 and rising, well above even the 1990 to present average.
It may well go up more before coming down, but it will come down.
Many market analysts expect the overall market to hit one of its, sometimes decade long, lulls in real growth. For example, in inflation adjusted terms, the peak of the S&P 500 index in December 1968 was not matched until December 1991, a 23 year lull. The August 2000 peak was not seen again until May 2015, a nearly 15 year lull.
The lull after the 1929 peak was nearly 30 years.
And that was made much worse by a trade war which led to global war.
Tariffying Prospect
Trump is deliberately trying to “tarrify” that is, use tariffs to terrify markets, as the first articles in this series examined in detail. The market appears to believe Trump is bluffing, and is calling his bluff by assuming he won't follow through. But to keep his threats respected he must follow through on at least some of them. He must impose at least some tariffs to 'tariffy' people into giving him bribes and favors and praise in exchange for exceptions and relief from his tariffs. When that happens, as in 2018 when he started using tariffs against China, the market will plummet and disruptions will start multiplying.
We’re at all time highs in the market now; a pause for a decade or so shouldn’t surprise. I think a pause in the real rise in the market is the best case scenario.
This pause in the overall market high adjusted for inflation is not the same as returns which include dividends and those dividends being reinvested. In this case, the market (speaking broadly, some indexes do better or worse than others) managed between 3 and 4% returns annually above inflation, with overall steady growth of the invested funds.
The key is regular reinvestment and dividends. And, what you pay for the dividend paying stock or ETF initially, as well as the ability of the companies in the ETF to increase those dividends steadily over time.
Non-dividend paying stock does not match this record.
That is why in retirement I prefer dividend stock and spending only dividends, and preferably, taking out less from dividends than you earn so you can reinvest and grow your capital. I also monitor stocks first for whether their dividend growth is slowing down, and second, once purchased, for whether the price of the stock has appreciated so much the capital value accrued far exceeds possible dividends plus price growth.
My rule of thumb is if I have gained 20 years or more of dividends equivalent at the 20 year dividend average growth rate (which is around 5% growth in dividends per year on average for most companies), I’ll sell all or part of that stock and find another investment that is better priced. For example, if a stock bought at $10 returning a 5% dividend per year (50 cents) in the first year were to increase its dividends by 5% every year, its dividend after 20 years would be $1.33 per share. But if in the meanwhile the share price grew by 20% per year, each share would be priced at $366.85 after 20 years, and the dividend would be only 3.6% of the share price, well below what that principle would earn in a simple C.D. So, time to sell and find shares paying 5% dividends and which have a record of increasing dividends at 5%, or if we’re in a downturn, even more.
This is basically what Warren Buffet does. He has bought and sold Coke and Apple, depending on circumstances. Now, he has the largest cash pile ever. But for him, as for me, 4.5% money market return barely exceeds inflation and we know interest rates on cash tend to drop over time, whereas stock prices and dividends tend to rise.
He’s expecting a drop in stock prices. Then a recovery. Usually he’s right.
That means dividend paying companies will get cheaper to buy. But that also means they, along with all other companies, are in for a rocky period.
Top down market disruptions
For the next four years, the market will suffer interventions and manipulations by two “businessmen” known for erratic, risky behavior. Volatility will go up; it already is and Trump hasn’t taken office.
Consider the stock most closely associated with Trump and Musk, his unofficial “co-president” as some put it. Tesla’s P:E ratio hovers between 91 to 100. That is, its current price represents around 100 years of earnings. It pays no dividends. All gain or loss is in the price alone. The average since 1990 is for a company’s stock price to be about 24 years of earnings. DJT stock (Truth Social) P:E is -8.65 early this week. In other words, it is losing money at a pace over 8 times what it earns in sales, yearly.
Good luck owning these stocks.
Tesla must either radically lift earnings or the price will go down. Same goes in spades for DJT stock. Effectively, DJT appears to be a money laundering vehicle, more of a fraud than an actual company, just as so many of Trump’s previous ventures turned out to be. Tesla’s capital “value” measured by the stock price exceeds that of all other US car companies combined (and many foreign companies). Toyota’s P:E ratio is below 8.6, for example, less than a tenth of Tesla’s. Volkswagen is at 2.8. https://www.statista.com/statistics/232958/revenue-of-the-leading-car-manufacturers-worldwide/
Tesla stock holders are effectively believing Musk can put all other auto companies out of business and become nearly a US monopoly. It needs to sell nearly as many cars as the rest of the US industry does now. Or that Tesla’s other businesses, battery manufacture, solar panels, A.I., neural implant computers, robots and robo-taxis will spin off and boost earnings well above what they, in combination with the auto manufacturing side, earn currently.
Trump and Musk, as “businessmen” are running their companies at extreme levels of risk. Given that Musk managed to knock nearly 80% off the value of what he paid for Twitter, the risk to Tesla shareholders may be higher than they understand. On the other hand, losing roughly 35 billion to gain control over the US government’s nearly 7 trillion dollars a year budget looks like a decent tradeoff.
But that was not a business transaction as we normally understand the term.
That’s if Musk actually does have that control. He may have lost that money for literally nothing. Trump could revert to his EV hating ways and toss Musk out along with all the other “green” stuff he wants to get rid of. That is highly likely.
Then where will Tesla stock be?
Given Trump’s trait of throwing people under the bus as soon as they become irritating or embarrassing, I wouldn’t count on Musk retaining his influence.
The bottom line: Risk is elevated for market indexes generally. And as for the “running government like a business” BS MAGA folks believe, they have handed the business of the US over to one businessman known for fraud and bankruptcy and to another who takes breath-taking risks and slave-drives his workers, and who fires thousands of them, as he did at Twitter and recently at Tesla, on a whim.
Market Fundamentals
While another tax cut could boost earnings for companies and justify a higher P:E ratio and thus higher market stock prices, the effect of other promised Trump actions, like tariffs and deportations, will increase inflation, hike interest rates and depress consumer expenditures, resulting in an overall drop in spending and most likely, a drop in earnings for companies.
As earnings go, so goes the market.
Trade wars are easy to win, Trump once said. They aren’t. And they aren’t easy to control, either.
Trump can possibly control his trade war with China. China’s trade surplus is enormous. Nearly 170 countries have trade deficits with China. Much of the world wants trade with China rebalanced. Most also want the manufacturing that flooded to China 1985-2020 returned home. But this means competition among those 170 countries for manufacturing coming out of China, and disruption of supply chains and trade and finance in the meanwhile.
Throw 25% tariffs on Canada and Mexico, our two largest trading partners, and you have a recipe for chaos. Toss in the EU bloc, and that’s trillions in trade gone haywire. Unemployment under Biden hit record lows for a record time. Mexico’s President wrote Trump, telling him 25% tariffs on Mexico would cost over 400,000 American jobs, just to start.
That may be one reason he backed off hitting Mexico, for the present. Canada is still targeted. But Trump finds attacking Mexico nearly irresistible; his MAGA followers want a literal war with Mexico.
Musk is running Twitter with roughly 20% of the personnel it had. The user experience has gotten so bad, because no one is there to fix things, that millions of accounts are moribund from tech glitches. He routinely cuts thousands of jobs without notice or cause in his other firms. If Trump and Musk axe scores of thousands of civil servants, they will discover that contrary to myth, many government departments operate with very low overhead. Civil servants tend to accept lower wages in return for security, healthcare and decent retirement plans. Privatizing services—the inevitable case for most government services—will raise cost and/or lower responsiveness.
Voters, unhappy now, will be furious with the service mess that is coming.
It is Trump’s attempt to privatize and cut the VA all over again. It is hard to get help with Social Security now, particularly disability (SSI). Medicaid is also a maze to sort through. Dumping services on the states, particularly the ill-governed, starved for funds Republican ones, will not make voters happier either.
What’s coming (and in follow up articles in this series)
And we haven’t begun to discuss the economic effect of massive deportations of illegal aliens, or the Dreamers, or those on various forms of compassionate visas as temporary protected persons, or those denaturalized (their citizenship taken away) for mistakes or fraud on their citizenship applications.
The market effects of NATO disruption, loss of Ukraine or war sweeping into the rest of Europe would have major effects. The dismantling of DEI is going to have disruptive effects, more than might be realized. Ending the ACA, slashing Medicaid, “reforming” Medicare and reversing many of the changes Biden has introduced will greatly impact healthcare sectors, which affect nearly 25% of the US economy.
Businesses react badly to being blind to economic risks building up. What mucking about Trump and Musk plan for the statistical compilation agencies that provide critical economic data is unknown, but could be a catastrophically stupid thing to do.
We may have the worst case in housing, with high inflation, high mortgage rates, low building starts due to tariffs hitting building supplies and deportations hitting labor supply, and high unemployment in other sectors depressing ability to buy. We will have increasingly frequent and worse climate change related disasters hitting, with a man in charge who failed to provide adequate relief every single time it happened in his first term. Insurance rates are soaring; they will rise further.
Social Security already faces imminent cuts without reforms; Trump’s actions will make cuts come sooner.
That will affect demand, and family budgets, deeply. When parents and grandparents are pushed to the wall by SS cuts and inflation (SS CPI adjustment, already inadequate, will be mucked with more you can bet on it), financially stretched children, now parents with their own families, will face unbearable stress.
And one other contributor to a crash overlooked by many: destaffing the regulators and fraud investigators, like W. Bush did, will result in massive fraud and consequent business collapses.
Crypto is custom made for this. Expect it.
Trump’s sons are supposedly looking to start a crypto venture as part of the DJT company. That is scam piled on scam.
Even big companies are going to get tossed about in this economic storm.
Hurricane MAGA is about to hit, and with this hurricane, it really is manmade and directed not by Democrats, but by Republicans. This is no conspiracy theory or scientific impossibility, as with MAGAs imagining Democrats directing storms.
This storm is coming and it will hit us all.
Next Week: More on the mechanics of a crash and how to survive it.
