It’s been a rather eventful month. In case you haven’t heard, Donald Trump has been victorious in the U.S. presidential election. It was a hard-fought campaign. Both candidates worked hard to lose, but in the end, Trump failed and came out the winner.
It wasn’t even particularly close in the end. And in hindsight, it’s a logical outcome. I’m certainly not a political analyst and I generally go out of my way to avoid politics. But just like everyone, I have my own views on what just happened and why. Here it is:
Many average Americans are hurting financially. A lot of the pain relates to this:
This is the consumer price index. A relentless march higher in the cost of living. Notice how it’s accelerated from 260-ish to 320-ish over the past few years – around 25% increase in the price level.
This is what inflation means to most people. Financial markets people like us can say “inflation is back to 2-point-something-%… that’s great progress!” But the accumulated inflation of the past few years continues to bite many. The American economy is quite strong according to the economic data. But the majority of Americans don’t “feel” it. Inequality continues to build.
The average American is despondent with the status quo. They aren’t feeling the prosperity. They look on social media and see others boasting about overseas vacations and new cars and wonder why they can’t do the same.
Then we have president Biden paying off student loans for fairly well-to-do white-collar workers. We have Democratic presidential candidate Harris campaigning on “more of the same” whilst Republican candidate Trump promises “something different”…
It’s going to be amusing to watch all this. Like last time, Trump is intent on running the country like a business. This time he’s taking some other prominent businessmen (such as Elon Musk) along for the ride. And like most “big personality” businessmen, they’re not worried about stepping on and offending a few people along the way.
This changes everything?
Financial markets reacted to Trump’s victory with enthusiasm. Before we take a look at the markets, let’s reflect on the general reaction from many financial commentators.
“The four-year-long Biden-Harris national nightmare is now over. Trump’s decisive win will be the beginning of a decades-long Golden Age of freedom, prosperity, economic growth, and a smaller, more accountable government that actually works for its citizens.”
“The Republican sweep is the best outcome for digital assets, bringing regulatory and other changes, with Standard Chartered projecting this to drive total crypto market cap to USD 10tn by end-2026 from USD 2.5tn now.”
These sorts of comments have been commonplace over the past few weeks – particularly during the week following Trump’s victory. I’d suggest it lifted sentiment (at least with respect to some specific assets) to a state of “euphoria”.
In that sense, I think it’s worth reflecting on where “euphoria” commonly sits in the market cycle:
Put another way, markets peak on positive sentiment. They peak on “exhaustion” – where everyone is confident the future is bright and have expressed this view in their investment portfolio. The “view from the top” is always good – low unemployment, robust corporate profits, the expectation for “more of the same” to come…
The Facts
If we actually look at the data, what’s interesting is that economic growth has been fairly consistent for decades:
Republican presidents… Democrat presidents… there’s no discernible differences.
Further, when we look at the data in more detail, the average growth rate of GDP has in fact declined in the last couple of decades. This is especially interesting in the context of the current “Artificial Intelligence” mania.
Think about it… What’s unfolded over the past 20 years? The internet, right? This thing that promised profound productivity gains. The world has certainly changed. Massive new companies have been built. Yet all this technology hasn’t boosted economic activity. Maybe everyone having a smartphone filled with social media isn’t a productivity boon after all.
Or maybe it has… Here’s another way to think about innovation:
The U.S. economy has been at the forefront of technological innovation for at least 150 years. Sure, there’s been some periods where technological advances have been more significant. But there’s always been advances. There will always be advances.
There are reliable (logical) long-term correlations between economic growth and corporate earnings growth. Economic growth is the product of worker productivity and labour force size. With near-full employment and demographic headwinds, there’s no reason to expect any dramatic improvement in economic activity under Trump’s leadership.
What’s that you say? Elon Musk and team are set to radically transform the U.S. government – massively cutting wasteful spending and cutting red tape, significantly increasing the economy’s potential.
This is unlikely.
To explain why this is unlikely, let’s cross to our man on the ground – veteran financial commentator John Mauldin. He recently said the following on the subject:
“In FY 2024, which just ended, non-defense discretionary spending was around $948 billion. That includes all the departments and agencies that comprise “the government.” Education, foreign aid, law enforcement, regulation, etc. Some of this is certainly wasteful and counterproductive. How much? I don’t know…”
“But we have other knobs to turn. Defense is huge—$849 billion last year—and some of it is wasteful, too. The conflicts in Ukraine and Israel are demonstrating how war has fundamentally changed. Relatively inexpensive drones, cyberattacks, and such are causing enormous damage at much lower cost than the conventional weapons the US relies on. The defense budget could certainly use a rethink. I doubt Elon and Vivek think the military budget is untouchable, but a lot of Republicans (and Democrats!) will oppose defense cuts.”
“Healthcare is another big chunk of spending. Medicare, Medicaid, and assorted smaller programs are nearly $1.7 trillion a year and growing fast…”
“None of this is new. People have known and talked about it for decades. Yet nothing happens because of another big barrier: one man’s waste is another man’s revenue. Much of this “wasteful” spending is also “income” for certain businesses and workers. Of course they don’t want it cut. And because they see the spending as existential, they fight hard to preserve it.”
“That’s what Trump, Musk, and Ramaswamy are up against. I wish them luck, and would actually enjoy participating, but it’s going to be tough.”
“Simply having slim Republican majorities in the House and Senate is not close to being sufficient. The spending impulse is bipartisan and pervasive. Just this week the House passed a bill giving government workers an increased $196 billion Social Security benefit, by a vote of 327-75. Republican Lauren Boebert screamed about raising the debt ceiling limit. She and two dozen of her fellow Republicans who voted against increasing the debt limit voted for this bill.”
“Congress actually controls spending bills. The president merely gets to propose or veto a spending bill. I imagine it will be high drama.”
The final line is the kicker. Trump and his team can’t just go in and yell “you’re fired” to whole government departments while also single-handedly reducing government spending on things they personally think are unnecessary. As John says, it will be high drama – a lot of shouting and name-calling. Will Trump be able to recruit sufficient Republican support to truly implement real changes? Time will tell…
But make no mistake – the future for the U.S. economy remains positive. The US economy will grow into the future. Corporate profits will grow along with it. It’s never a straight line, but those two things are certain.
But for investors, the journey ahead is always heavily influenced by your starting point.
Boom!
Turning to the markets, we see a sizeable surge in the markets following the election. Here’s the S&P 500 daily view:
The weekly view…
As noted in recent months, we’re keeping a close eye on the interesting chart patterns developing. As seen in the weekly chart above, the “RSI” continues to notably diverge from the price – a series of lower highs whilst the index makes higher highs. This is quite significant.
The monthly chart (not shown) is really quite remarkable. Gains month after month after month. Whilst not unprecedented, the monthly RSI around 80 is significant. As technical traders have been heard to say; “friends don’t let friends buy things with an 80 monthly RSI!”
It’s also notable that speculation has been quite targeted – we’ve not seen a “buy everything” mindset.
Tesla has been a major beneficiary. Highlighted there is the current “P/E ratio” – 92 P/E.
Tesla is in fact a great example of what’s going on right now. Look at that chart – it looks good, forming what could be an ascending flag pattern ready to spike higher. But the valuation – the fundamentals – are absurd. Enthusiasm and momentum – that’s what’s in charge right now. Fundamentals will matter when they matter.
And of course, Bitcoin:
Whilst investors might be selective in what they are buying, retail investors are certainly buying – they are “all in”:
Various sentiment measures are “off the charts”:
US$325 Billion
It’s been amusing to see the amount of coverage Warren Buffett and his Berkshire Hathaway has been receiving over the past 6 months. Cash on hand has been building significantly and now stands at around US$325 billion – a historic extreme.
What does it mean? What are their motives? Should investors be concerned? Those sorts of questions have been asked by many commentators.
When asked, Warren has said little more than “given market conditions we’re increasing cash reserves”.
I think most investors have at least a basic understanding of what Warren Buffet is about. He’s known as one of the greatest “value investors” of all time.
At its heart, value investing is pretty straightforward. It’s about investing in companies that have a solid track record of profitability and a strong probability of growing their profits into the future.
Another key aspect of value investing is ensuring you pay a sensible price for your investment!
Buffett has said on multiple occasions in the past that trying to “time” the market is silly and futile. Yet when you look at Berkshire Hathaway’s long-term track record, they have an admirable track record of timing the market – cash reserves have commonly grown leading up to major market peaks:
As we have discussed ad nauseam for several years now, valuations in the U.S. share market are at record-breaking extremes. One example we’ve cited is what’s known as the “Buffett indicator” – total market capitalisation to GDP. What Buffett has described as probably the best single measure of where valuations stand at any given moment.
Here it is currently:
Pushing 200% of GDP. Historically-extreme.
Investors would be well-served to stop for a moment and truly reflect on where things stand.
U.S. markets have had a spectacular year. It’s been a nearly-relentless march to the sky. Plenty of money has been made. Returns have surpassed even the most optimistic Wall Street pundits. It feels like it will go on forever.
Average returns over longer periods are grounded in inescapable mathematical realities – predictable relationships between economic activity and corporate earnings.
Valuations are extreme. The returns earned this year are not supported by fundamentals – it’s practically all the result of “margin expansion”. Said differently, the returns have been taken from the future – future return prospects are poor.
Currently, the typical retail investor is giddy about the near-future. Consumed by FOMO (fear of missing out).
Meanwhile, value conscious investors are having great difficulty finding investment opportunities that meet their criteria. Faced with this, they prudently tuck their money away in cash and wait for better opportunities to emerge.
Does Trump’s election change everything in terms of economic outlook and share market outlook? No. No, it doesn’t.
Whilst we’re not ardent value investors, we share the views implied by the actions of Warren Buffett. Better opportunities are around the corner. Don’t get sucked into the FOMO.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
Register your interest in this Fund
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.
This Changes Everything?
It’s been a rather eventful month. In case you haven’t heard, Donald Trump has been victorious in the U.S. presidential election. It was a hard-fought campaign. Both candidates worked hard to lose, but in the end, Trump failed and came out the winner.
It wasn’t even particularly close in the end. And in hindsight, it’s a logical outcome. I’m certainly not a political analyst and I generally go out of my way to avoid politics. But just like everyone, I have my own views on what just happened and why. Here it is:
Many average Americans are hurting financially. A lot of the pain relates to this:
This is the consumer price index. A relentless march higher in the cost of living. Notice how it’s accelerated from 260-ish to 320-ish over the past few years – around 25% increase in the price level.
This is what inflation means to most people. Financial markets people like us can say “inflation is back to 2-point-something-%… that’s great progress!” But the accumulated inflation of the past few years continues to bite many. The American economy is quite strong according to the economic data. But the majority of Americans don’t “feel” it. Inequality continues to build.
The average American is despondent with the status quo. They aren’t feeling the prosperity. They look on social media and see others boasting about overseas vacations and new cars and wonder why they can’t do the same.
Then we have president Biden paying off student loans for fairly well-to-do white-collar workers. We have Democratic presidential candidate Harris campaigning on “more of the same” whilst Republican candidate Trump promises “something different”…
It’s going to be amusing to watch all this. Like last time, Trump is intent on running the country like a business. This time he’s taking some other prominent businessmen (such as Elon Musk) along for the ride. And like most “big personality” businessmen, they’re not worried about stepping on and offending a few people along the way.
This changes everything?
Financial markets reacted to Trump’s victory with enthusiasm. Before we take a look at the markets, let’s reflect on the general reaction from many financial commentators.
“The four-year-long Biden-Harris national nightmare is now over. Trump’s decisive win will be the beginning of a decades-long Golden Age of freedom, prosperity, economic growth, and a smaller, more accountable government that actually works for its citizens.”
“The Republican sweep is the best outcome for digital assets, bringing regulatory and other changes, with Standard Chartered projecting this to drive total crypto market cap to USD 10tn by end-2026 from USD 2.5tn now.”
These sorts of comments have been commonplace over the past few weeks – particularly during the week following Trump’s victory. I’d suggest it lifted sentiment (at least with respect to some specific assets) to a state of “euphoria”.
In that sense, I think it’s worth reflecting on where “euphoria” commonly sits in the market cycle:
Put another way, markets peak on positive sentiment. They peak on “exhaustion” – where everyone is confident the future is bright and have expressed this view in their investment portfolio. The “view from the top” is always good – low unemployment, robust corporate profits, the expectation for “more of the same” to come…
The Facts
If we actually look at the data, what’s interesting is that economic growth has been fairly consistent for decades:
Republican presidents… Democrat presidents… there’s no discernible differences.
Further, when we look at the data in more detail, the average growth rate of GDP has in fact declined in the last couple of decades. This is especially interesting in the context of the current “Artificial Intelligence” mania.
Think about it… What’s unfolded over the past 20 years? The internet, right? This thing that promised profound productivity gains. The world has certainly changed. Massive new companies have been built. Yet all this technology hasn’t boosted economic activity. Maybe everyone having a smartphone filled with social media isn’t a productivity boon after all.
Or maybe it has… Here’s another way to think about innovation:
The U.S. economy has been at the forefront of technological innovation for at least 150 years. Sure, there’s been some periods where technological advances have been more significant. But there’s always been advances. There will always be advances.
There are reliable (logical) long-term correlations between economic growth and corporate earnings growth. Economic growth is the product of worker productivity and labour force size. With near-full employment and demographic headwinds, there’s no reason to expect any dramatic improvement in economic activity under Trump’s leadership.
What’s that you say? Elon Musk and team are set to radically transform the U.S. government – massively cutting wasteful spending and cutting red tape, significantly increasing the economy’s potential.
This is unlikely.
To explain why this is unlikely, let’s cross to our man on the ground – veteran financial commentator John Mauldin. He recently said the following on the subject:
“In FY 2024, which just ended, non-defense discretionary spending was around $948 billion. That includes all the departments and agencies that comprise “the government.” Education, foreign aid, law enforcement, regulation, etc. Some of this is certainly wasteful and counterproductive. How much? I don’t know…”
“But we have other knobs to turn. Defense is huge—$849 billion last year—and some of it is wasteful, too. The conflicts in Ukraine and Israel are demonstrating how war has fundamentally changed. Relatively inexpensive drones, cyberattacks, and such are causing enormous damage at much lower cost than the conventional weapons the US relies on. The defense budget could certainly use a rethink. I doubt Elon and Vivek think the military budget is untouchable, but a lot of Republicans (and Democrats!) will oppose defense cuts.”
“Healthcare is another big chunk of spending. Medicare, Medicaid, and assorted smaller programs are nearly $1.7 trillion a year and growing fast…”
“None of this is new. People have known and talked about it for decades. Yet nothing happens because of another big barrier: one man’s waste is another man’s revenue. Much of this “wasteful” spending is also “income” for certain businesses and workers. Of course they don’t want it cut. And because they see the spending as existential, they fight hard to preserve it.”
“That’s what Trump, Musk, and Ramaswamy are up against. I wish them luck, and would actually enjoy participating, but it’s going to be tough.”
“Simply having slim Republican majorities in the House and Senate is not close to being sufficient. The spending impulse is bipartisan and pervasive. Just this week the House passed a bill giving government workers an increased $196 billion Social Security benefit, by a vote of 327-75. Republican Lauren Boebert screamed about raising the debt ceiling limit. She and two dozen of her fellow Republicans who voted against increasing the debt limit voted for this bill.”
“Congress actually controls spending bills. The president merely gets to propose or veto a spending bill. I imagine it will be high drama.”
The final line is the kicker. Trump and his team can’t just go in and yell “you’re fired” to whole government departments while also single-handedly reducing government spending on things they personally think are unnecessary. As John says, it will be high drama – a lot of shouting and name-calling. Will Trump be able to recruit sufficient Republican support to truly implement real changes? Time will tell…
But make no mistake – the future for the U.S. economy remains positive. The US economy will grow into the future. Corporate profits will grow along with it. It’s never a straight line, but those two things are certain.
But for investors, the journey ahead is always heavily influenced by your starting point.
Boom!
Turning to the markets, we see a sizeable surge in the markets following the election. Here’s the S&P 500 daily view:
The weekly view…
As noted in recent months, we’re keeping a close eye on the interesting chart patterns developing. As seen in the weekly chart above, the “RSI” continues to notably diverge from the price – a series of lower highs whilst the index makes higher highs. This is quite significant.
The monthly chart (not shown) is really quite remarkable. Gains month after month after month. Whilst not unprecedented, the monthly RSI around 80 is significant. As technical traders have been heard to say; “friends don’t let friends buy things with an 80 monthly RSI!”
It’s also notable that speculation has been quite targeted – we’ve not seen a “buy everything” mindset.
Tesla has been a major beneficiary. Highlighted there is the current “P/E ratio” – 92 P/E.
Tesla is in fact a great example of what’s going on right now. Look at that chart – it looks good, forming what could be an ascending flag pattern ready to spike higher. But the valuation – the fundamentals – are absurd. Enthusiasm and momentum – that’s what’s in charge right now. Fundamentals will matter when they matter.
And of course, Bitcoin:
Whilst investors might be selective in what they are buying, retail investors are certainly buying – they are “all in”:
Various sentiment measures are “off the charts”:
US$325 Billion
It’s been amusing to see the amount of coverage Warren Buffett and his Berkshire Hathaway has been receiving over the past 6 months. Cash on hand has been building significantly and now stands at around US$325 billion – a historic extreme.
What does it mean? What are their motives? Should investors be concerned? Those sorts of questions have been asked by many commentators.
When asked, Warren has said little more than “given market conditions we’re increasing cash reserves”.
I think most investors have at least a basic understanding of what Warren Buffet is about. He’s known as one of the greatest “value investors” of all time.
At its heart, value investing is pretty straightforward. It’s about investing in companies that have a solid track record of profitability and a strong probability of growing their profits into the future.
Another key aspect of value investing is ensuring you pay a sensible price for your investment!
Buffett has said on multiple occasions in the past that trying to “time” the market is silly and futile. Yet when you look at Berkshire Hathaway’s long-term track record, they have an admirable track record of timing the market – cash reserves have commonly grown leading up to major market peaks:
As we have discussed ad nauseam for several years now, valuations in the U.S. share market are at record-breaking extremes. One example we’ve cited is what’s known as the “Buffett indicator” – total market capitalisation to GDP. What Buffett has described as probably the best single measure of where valuations stand at any given moment.
Here it is currently:
Pushing 200% of GDP. Historically-extreme.
Investors would be well-served to stop for a moment and truly reflect on where things stand.
U.S. markets have had a spectacular year. It’s been a nearly-relentless march to the sky. Plenty of money has been made. Returns have surpassed even the most optimistic Wall Street pundits. It feels like it will go on forever.
Average returns over longer periods are grounded in inescapable mathematical realities – predictable relationships between economic activity and corporate earnings.
Valuations are extreme. The returns earned this year are not supported by fundamentals – it’s practically all the result of “margin expansion”. Said differently, the returns have been taken from the future – future return prospects are poor.
Currently, the typical retail investor is giddy about the near-future. Consumed by FOMO (fear of missing out).
Meanwhile, value conscious investors are having great difficulty finding investment opportunities that meet their criteria. Faced with this, they prudently tuck their money away in cash and wait for better opportunities to emerge.
Does Trump’s election change everything in terms of economic outlook and share market outlook? No. No, it doesn’t.
Whilst we’re not ardent value investors, we share the views implied by the actions of Warren Buffett. Better opportunities are around the corner. Don’t get sucked into the FOMO.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
Register your interest in this Fund
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.