Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Nexus Between Politics and Economics

Politics / US Economy Feb 21, 2017 - 03:24 PM GMT

By: Michael_Pento

Politics

President trump made the following crucial statement on February 9th: "We're going to be announcing something I would say over the next 2 or 3 weeks that will be phenomenal in terms of tax." To be sure, the nucleus of the President’s economic plan is the simplification of the tax code. To get this accomplished means everything for the stock market. Without a reduction in tax rates the air compressor that has been blowing up equity prices to near record and unsustainable valuations will explode.


To be a successful investor requires the knowledge that there exists a strong nexus between economics and politics. In just a few short weeks we will get Trump’s details on the tax plan. Understanding what form the tax plan takes shape, or if there is any such plan enacted at all, is essential to your portfolio’s health because it will have a huge effect global currencies, bond prices, commodities and equities.

Getting tax reform passed is going to be complicated and will involve the following issues that need to be hashed out: border tax adjustments, trade tariffs, repatriation of foreign earnings, limiting the deductibility of net interest expense and eliminating other deductions, allowing companies to fully expense, instead of depreciating capital expenditures, an infrastructure spending package, and will the plan use dynamic or static scoring.

But the most important take away for investors is to determine which one of the following 3 scenarios the final plan entails: will it be neutral to the deficit, accretive to the deficit, or does the bill just die in the Senate.

The first outcome: Trump pushes through a simplification of the tax code that is done in a revenue neutral fashion through the use of a border tax adjustment or import tariffs. This may be a preferable course for Trump and the Republican Congress to pursue because it can be accomplished through budget reconciliation, which only requires a simple 51 vote majority in the Senate. In theory, this would lead to a stronger dollar because our trade deficits would shrink. Bond prices should fall (yields rise), but only moderately due to rising import prices and a bit more growth resulting from tax simplification. Stock prices should rise immediately after the passage of such reform but much of this has already been priced into shares. Precious metals could suffer from the rising dollar and the move into growth stocks. Finally, the Fed would remain on course for 2-3 rate hikes during 2017.

The second scenario is that Trump gets his tax overhaul done with the help of Democrats, which would require a 60 vote majority in the Senate. If the proposed reduction in corporate and individual tax rates were to be accompanied by infrastructure spending—especially the type that would be most amenable to Senate Democrats—he may get it through; even though he will lose the most fiscally conservative members. The major investment takeaway from this scenario is that deficits would absolutely surge and that bond prices would crash. Equity prices would most likely rise in the short-term because trading algorithms are programed to love fiscal stimulus that is not offset by a reduction in write-offs. However, stocks could run into a major sink hole once bond yields soared past 3% on the Ten-year Note. The dollar’s value should get hurt by rising deficits but get a boost from the perceived rise in growth and the realized rise in bond yields. Therefore, I find this scenario slightly dollar bullish. Precious metals would benefit from rising debt and deficits but would at the same time get hurt by rising long-term rates and the impetus of the Fed to increase its planned 2-3 rate hikes to 3-4 hikes. Although this is the least likely outcome it is still one that merits preparation.

The third possible outcome is that Trump’s tax overhaul gets severely diluted, or that it cannot get passed through Congress. The market will perceive the paralysis in D.C. as extremely bearish for economic growth and that should put the Fed on hold for the rest of 2017. The investment strategy for this scenario is clear: Bond yields would crash along with the U.S. dollar. But perhaps the most salient ramification for the inability to push through tax reforms will be that equity prices plummet just as precious metals soar.

Why will stocks crash and gold skyrocket? Because the stock market rally is predicated on the hype and hope provided by President Trump that the U.S. economy can finally escape the anemic 2 percent GDP growth experienced over the past eight years.

Just how extended have stock market valuations become riding this anticipation of surging growth? According to famed investor John Hussman, the median price/revenue ratio of individual S&P 500 component stocks now stands just over 2.45, which is easily the highest level in history. The longer-term norm for the S&P 500 price/revenue ratio is less than 1.0. Even a retreat to 1.3, which we’ve observed at many points in recent cycles, would take the stock market to nearly half of present levels.

Robert Shiller, the esteemed economist from Yale indicates that the S&P 500 now trades at 28x their trialing 10 year average earnings. This is the same level as seen in 1929 and far higher than it was in 2007, just before the Great Recession began. The average 10 year trailing earnings PE ratio is just 16.7, which according to the professor's data would require a 60% haircut in prices just to put the market back to historical norms. In addition, the tailing 12 month PE ratio of the S&P 500 is at the 90th percentile; meaning that 90% of the time observed over the past 80 years the PE ratio was lower than it is today.

One last overvaluation metric to share. The total market cap to GDP ratio now stands at 130 percent.  The normal level is closer to 50 percent. The stock market stands at a precipice virtually unparalleled in history that absolutely requires radical growth measures to be adopted in order to keep the air flowing into this bubble.

Investors have to pay close attention to both the economics and the politics if you want to get your investment allocations correct. This has never been truer than now.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento

President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.
       

© 2017 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules