Last week, we looked at the likelihood of a genuine turnaround in the US. Many people expect it. Many hope for it. And many believe Donald Trump is the man to do it.

The best case is a solid boom…like the one set off by Ronald Reagan in 1980…that lasted for 40 years. But if there’s a ‘best case’, there’s also a worst case; today, we begin looking for it.

Whatever else you can say about him, Mr. Trump is an unlikely Moses. He may want to part the waters of the Red Sea, but he doesn’t know where the Red Sea is.  A real reformer, such as Javier Milei in Argentina for example, knows where he is going.  ‘Not a penny of deficit spending’, says Milei. And he means it, brandishing a chainsaw to make his point.

Trump’s policy proposals are an incoherent jumble of fantasies, fallacies and frauds (tariffs, tax cuts, efficiency, war, deportations). And his team, or what we’ve seen of it so far, is an unruly collection of the good, the bad and the downright ugly.

How close will this motley crew get to MAGA? We don’t know. Anything is possible. 

But our main risk is not MAGA. We’d be as happy as anyone to see a smaller government, a reduced deficit, and a less confrontational (and less expensive) foreign policy. And while Moses did liberate the Israelites from the Egyptian yoke, it was no walk in the park. It took Ten Plagues before Pharaoh would give them up…and another 40 years wandering in the desert before reaching the promised land (where they massacred the natives to take it for themselves).

Our point: even with Moses in the lead, there were plenty of Big Losses along the way.

One of the dopiest headlines over the weekend was this from USA Today: “Trump inherits strongest economy in 50 years.”

Oh my. They’re tempting the gods. But Trump is not heir to a strong economy at all. He begins with a labour force that is struggling to keep up with inflation and the highest priced assets in history. And unlike Reagan, who came into office with an economy built on solid ground of low debt and low asset prices, Trump’s economy sits on the slopes of a rumbling volcano of debt ($36 trillion of government debt…$8 trillion of his own doing). And on the slopes of this Vesuvius stands the whole US capital structure — overpriced…overextended…and overdue for a correction.

Mr. Donald Trump may not have eliminated a single agency…but he’s now added one. The Department of Government Efficiency…or DOGE, using the same goofy meme that adorns the crypto currency of the same name.

In today’s news Mr. Ramaswamy, co-chief of DOGE, along with Elon Musk, suggests that one of his first objectives will be to ‘eliminate the Department of Education’.

Great idea. But it just goes to show how dysfunctional the US system has become. The Department of Education was created by Congress, supposedly reflecting the will of ‘The People’. It would have been abolished years ago if the feds were at all interested in ‘efficiency’.

The DOGE crypto has no obvious value or utility, either.  But it was trading at 10 cents in September. Last week, it went over 40 cents. Up 300% in less than two months. And here’s another weekend headline, CoinDesk:

‘DOGE Ascends Over 100% in Past Week, Traders Set $1 Price Target’

But it is not just DOGE that is partying. By almost any measure you choose, US stocks are near epic highs. This month, the Dow crossed the 44,000 barrier. The S&P 500 crossed the 6,000 line. Based on its P/E ratio, the S&P is the priciest it has ever been. Relative to bonds (known as the equity risk premium) stocks are also more expensive than ever.

And over the last twelve months, the number of ETFs making it easy to buy in and out of the stock market has approximately doubled.

Warren Buffett, who is probably the greatest equity investor ever, is pulling out. He’s selling big name companies — Apple and the Bank of America, for example — and raising cash. He now has $325 billion that is, effectively, ‘short’ the stock market… more than ever before.

Sooner or later the lava flows of red-hot credit are going to meet up with the cold reality of rising interest rates. When this happens, most likely, stocks, bonds, and real estate will all be buried, like Pompeii.

Some investors will take the Big Loss. Big deal. Markets correct all the time. But we’re not making predictions. We’re just looking for the worst-case scenario. And it could be far worse than just a market sell-off.

Stay tuned…

Regards,

Bill Bonner,
For Fat Tail Daily

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