International Forecaster Weekly

Post Election Market Volatility

A president may have a different plan for creating jobs and getting industry going again, but there is no magic wand that will solve this central-bank created bubble problem.

James Corbett | November 16, 2016

As election night unfolded and it became clear that the bankster shoo-in, Hillary Goldman, was not going to take the Oval Office after all, the market began a sell-off. Futures for the Dow Jones Industrial Average in particular took a hit as results started pouring in from key battleground states like Florida and Ohio, and surprising Trump victories in Wisconsin and Michigan. Dow futures were down 750 points at one point in the evening and 728 points by the end of the night.

Unsurprisingly the Twitterati immediately took up their keyboards and began predicting the end of the world. A surprising number of Democrats suddenly became economic analysts, boldly prognosticating on how far the markets would plunge and wringing their hands about America will ever recover from this calamity. To be fair, they were in good company. No less a personage than Nobel prize winning economist Paul Krugman – yes, that Paul Krugman – issued one of the starkest assessments of all:

“It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?” he asked in his election night article, before answering: “If the question is when markets will recover, a first-pass answer is never.”

Well, if “never” means less than 24 hours then Krugman really is deserving of that Nobel. The very next day the markets averted the massive sell-off that many of the newly-minted disaster pundits were expecting. In fact, they didn't just avert a sell-off; they actually rose. The S&P, Nasdaq and the Dow all ended up over one percent higher on the day. The Dow even surged above its all-time closing high before wrapping up trading just below that point.

While it might be tempting to take some partisan stance here, or at least soak in the schadenfreude of perpetually-wrong Krugman being wrong yet again, there's actually an entirely different lesson to be learned from all of this. It is that the markets, too, seem to think that the presidential (s)election is itself going to fundamentally solve (or create) the market's own mess.

But as we've discussed in these pages before the current state of the markets, hovering near all-time highs despite slowing global growth and the non-recovery “recovery,” is itself an illusion. Or, more accurately a bubble created by the massive global injection of trillions of dollars of liquidity into the banks by the world's central banks. Again, this is not “conspiracy theory” but a simple description of the post-Lehman economic reality. Not only has recent research determined that 93% of the US market's post-Lehman rise has been directly caused by the Fed, but now central banks are directly purchasing stocks and ETFs, as in Japan where the BoJ is already a top 10 shareholder in 90% of Japanese stocks.

A president may have a different plan for creating jobs and getting industry going again, but there is no magic wand that will solve this central-bank created bubble problem. The truth is that there's only two ways out of the bubble: expand the economy enough to fill it or wait for it to pop. And barring the discovery of zero-point energy or some other game-changing technology, it seems unlikely that the economy is going to fill the bubble.

So the bubble pop will likely happen on Trump's watch. The real question is how his administration will respond to it, and what kind of a leash they'll be able to (or unable to, or unwilling to) put on the Fed.