Donald Trump’s political suicide !

Jacques Mechelany

Published in

Mechelany Advisors

26 min readSep 10, 2018

Weekly Markets Review.
Sep 8, 2018

In this issue

Donald Trump’s political suicide !
Inflation is back !
Shorting Oil again ?
The Week in Review
The Markets in Charts

Donald Trump’s political suicide

In a week full of negative news on the political front for President Donald J. Trump, his renewed threat to impose additional tariffs on China on Friday sent the world equity markets roiling.

For the first time though, US equities were directly affected and the Nasdaq ended the week sharply lower.

In light of the upcoming Nov. 8 mid-term elections, the one thing that could seriously derail Donald Trump’s political strategy would be sharply falling equity markets.

Can he afford to continue confronting China and the rest of the world without causing a massive political backlash for himself and the Republican Party ?

Last week was probably unique in the history of US politics. Rarely in history has a US President been so directly contested from within America and on the public arena.

On Monday, an anonymous op-ed by an administration official appeared in the New York Times harshly criticizing the White House tenant’s methods, leaving a sense that even within his closest ranks, dissent was the norm.

Later in the week, and for the first time in the history of US Politics, a former President took a public stance to criticize the ways of his successor handled his mandate and to urge the American people to vote in the November elections and restore a sense of sanity to US politics.

In an unusually blistering attack on his successor, Obama said Americans were living in dangerous times and accused Republicans of threatening democracy, dividing the country, undermining global alliances and cozying up to Russia.

Finally, George Papadopoulos, a former campaign adviser to U.S. President Donald Trump, was sentenced to prison for lying to the FBI during the agency’s investigation into Russian meddling in the 2016 presidential election.

Last Friday had started relatively well though, as markets were coming to terms with the so-called “contagion” effect and emerging markets and currencies were finding a bottom after a devastating week.

It even began with sunny signs for the labor market before Trump’s hawkish trade-war rhetoric clouded the outlook.

But President Donald Trump could not resist raising the stakes in his gamble that the world will line up behind the U.S. to take on China over trade.

The administration will act on the $200 billion “very soon depending on what happens,” Trump told reporters on Air Force One. “I hate to do this, but behind that there is another $267 billion ready to go on short notice if I want.”

The important words in that sentence are “If I want”. Donald Trumps’ extreme personification of the Trade Wars, something that is not the main priority of the average American, may turn savagely against him.

If the president followed through, the threatened tariffs and those already in place would more than cover the value of all goods the U.S. buys from China. The U.S. imported $505 billion of Chinese products in 2017.

Until now, US equities had been relatively isolated from the turmoil caused by Donald Trump’s aggressive stance on the rest of the world in his Trade Wars campaign.

The Nasdaq was up + 14.5 % and the SP500 +7.5 % in the first 8 months of the year and both were making new all-time highs, making American people richer and more confident.

But things changed last week and US equities took a plunge with the Nasdaq falling by more than 2 %.

Uncertainty and confrontation have never been good for the financial markets and last Friday’s un-necessary threats may have been the one attack too many that is making American investors realize that they may stand to lose more than to gain in these Trade Wars.

China will remain relatively immune to the US sanctions as a large part of the Chinese goods sold in the US are components of American made products or even products made by American companies in China to be sold in the US.

In no way can they be replaced and outsourced elsewhere swiftly and the ultimate cost of the additional tariffs will be felt by the US consumers themselves or, even worse, in the profit margins of the US companies themselves.

Last week’s breakdown in US technology stocks, and semi-conductors in particular, may be a very strong warning signal that Donald Trump should change strategy.

Moreover, Donald Trump’s aggressive rethoric does not go well in China and the Chinese culture is not one to be dealt with through confrontation.

The Chinese hate conflicts and hate being attacked. The “Lost Century” of the 19th century where parts of China was occupied by foreign powers left deep scars in the Chinese psyche and until now the Chinese Government has refrained from playing the Nationalistic sentiment in the Trade Wars.

But the reality on the ground is that and anti-american sentiment is developing fast in China, as well as in the rest of the world, and there will come a time where campaigns of boycotts of the US and US products may suddenly appear.

China is the largest foreign market for most US made products and certainly the one that has the most potential for growth in the future.

As we highlighted many times in our various posts on the Trade Wars, it would take very little for China to close its doors to American companies and American products and not much more for Chinese individuals to stop travelling to the US or study there.

The impact of such developments would be highly negative for the US stock markets.

Donald Trump was elected in 2016 with a deficit of more than two million votes when compared to his opponent Hillary Clinton.

Since his election, his Republican Party has been highly divided and is today wary of the consequences of Donald Trump’s ways at the helm of the US on their electorate.

One thing is for sure, is that the American voters who voted against him will continue to vote against him.

Another that is not certain but highly probable is that a proportion of the US voters that did not vote in the Presidential elections will vote against him.

Finally, it is also highly likely that a number of Americans that have voted for him in 2016 may change their views and line-up against him.

Coming into the Nov. 8 mid-term election, Donald Trump’s strongest — if not only — political asset is the economic track record since he was elected, which translates into a strong labor market and flying stock markets.

Most people realize that these dynamics were largely attributable to the successful handling of Barack OBAMA’s administration of the 2008 financial crisis and that Donald Trump’s tax cuts were the icing on the cake that made things accelerate upwards at the end of the move.

But one thing is for sure, considering the personification by Donald Trump if the Trade Wars is that if the US Stock market were to fall and a global financial crisis unfold between now and the US mid-term elections, he will be held responsible personally for the debacle.

Americans voters don’t like to see their 401K fall in value and their 401Ks are much more important to them than any trade agreement with any foreign nation

The fall in US equities may actually have nothing to do with the trade wars themselves but with the resurgence of inflation and a rout in the bond market, but American investors will nevertheless attribute it to the confrontational attitude of their President if it were to happen.

In other words, we may well have reached the tipping point where if Donald Trump does not tone down sharply his agenda on the Trade Wars and does not deliver successes in peaceful trade negotiations, he will actually be committing political suicide.

Inflation is back !

As our readers know, we have been advocation for months that inflation was back in a sustainable way in the US as well as in the rest of the world, and that the most worrying aspect of the current financial markets was the utter dis-belief of bond investors about a sustainable return of inflation.

Most commentators, and the FED itself, have been justifying this lack of fear by the weak wage numbers until now.

Things changed last week with the publication of the US employment numbers on Friday

American wages unexpectedly climbed in August by the most since the recession ended in 2009 and hiring rose by more than forecast.

Average hourly earnings for private workers increased 2.9 percent from a year earlier, the Labor Department report showed Friday, exceeding all estimates and the median projection for 2.7 percent.

Nonfarm payrolls rose 201,000 from the prior month, topping the median forecast for 190,000 jobs.

The unemployment rate was unchanged at 3.9 percent, still near the lowest since the 1960s.

The jobless rate remains well below Fed estimates of levels sustainable in the long run. The latest figure reflects a decrease of 46,000 unemployed people in August and a 423,000 drop in the number of people with jobs.

The FED is expected to raise rates again in September and one more time in December.

A lack of wage gains has been a major blemish on an economy that is currently being boosted by Donald Trump’s tax-cut stimulus.

Some investors had speculated the Fed would pause after this month given an escalating trade war and turmoil in emerging markets.

But, labor slack in the US has now diminished to a degree that is finally having an impact on wage pressures. And wages are the only self-feeding component of inflation.

Once wages start going up, it is extremely difficult to tame inflation and the current US monetary policy is way too accommodative to slow any gains once they will have started.

They signal to the policy makers that the economy is operating in the vicinity of full employment, thereby vindicating those Fed officials who have suggested that the neutral unemployment rate has probably drifted down relative to previous cycles, but has now been reached.

Another worrying aspect is that Donald Trump’s Trade War may, in effect, end up boost inflation higher in the short term.

Tariffs applied to imported goods from China or other countries, such as Mexican made American cars, will either end up in higher prices for US consumers or lower margins for American companies.

If one adds to that that US bond yields are barely at 3 % for the 10 year and at 3.10 % for the 30 year Government bond, something is definitely not right in the financial planet when labor costs are increasing at 2.9 % per annum

Bond investors expecting that inflation will remain tamed in the coming 30 years are living in cuckoo land, and the biggest risks for the financial markets ahead is a significant break down in the US bond market.

A sharp rise in US bond yields would then send the US Dollar flying against most currencies. But it will also probably send stocks sharply down, paving the way for the next recession.

Shorting Oil Again ?

Something is changing in the Oil market complex, and the decision of Saudi Arabia to postpone the IPO of ARAMCO may have something to do with it.

As our readers know, we have been developing for many years the “ End of the Oil Era “ theme whereby the gradual phasing out of fossil-fuel energy in favor of clean, renewable, zero-marginal cost energies..

Oil was the energy that powered the economic development of the world in the 20th century in exactly the same way Coal powered the industrial revolution of the 18th and 19th century and we are now moving into an era of infinite, low cost and non-polluting energy that will make demand for oil diminish considerably over the coming two decades.

Already, 93 % of the investments in new electricity generating power plants are clean energy plants and the rapid development of Electric Vehicles will cut further into final demand for Oil.

At the same time, the development of shale oil has added a significant element of supply to the equation as producing oil no longer require 500 Million US Dollars of investments and land or sea exploration rights on vast territories, but simply US $ 5 Million of investments and oil can be fracked form almost everywhere on the planet.

We successfully predicted the fall in oil prices in 2008 and then again in 2014, and since 2016 oil prices went back up from US$ 25 to the current 70 US $ level, despite the very tame final supply-demand equation.

The main driver of the rise was an OPEC agreement in November 2016 to reduce the output at the world’s major producers, Saudi Arabia, Russia and the United Arab Emirates, and the decreasing efficiency of oil drilling in countries like Venezuela, Libya, Iran and Iraq.

Saudi Arabia and Russia have a vested interest in having Higher oil prices as their economies are heavily reliant on oil revenues. Managing their output and their reserves and maximizing the amount of US Dollar received per barrel sold is definitely sound management on their part.

However, the share of these countries and of OPEC in the global output of oil has been decreasing substantially and now only accounts for 1/3 of the total supply.

America became the world largest producer of Oil in the past two years and it has now resumed oil exports after a 30-year ban. Shale oil was the most significant component of US production growth and massive drilling is taking place in the US.

In a report published last week, JP Morgan estimated that the banking market for reserve-based lending — i.e. lending collateralized by proven oil reserves — is as strong as it was in 2014 when oil topped US$ 155 a barrel.

In addition, there are US$ 150 billion in private equity funds that are looking for a home in North American oil and natural gas investments, an “obscene” amount of money.

In the past two years, the only restraining factor in US oil production has been the fully loaded pipeline network that is operating at full capacity and cannot ship more oil to sea terminals.

But significant investments in new pipelines have been made in the past two years and new pipe line capacity is expected to come on stream in the coming months.

We are now past the summer season with the extremes of temperatures that made 2018 an exceptionally hot year, and the oil market is coming back to a more balanced stage.

As we highlighted many times in the past, massive existing and potential supply is soon to be met with declining final demand as the spreading of Electric Vehicle takes off in 2019 and 2020.

An important feature of the past few months behind the rise in the price of oil was the Plans of Saudi Arabia to float ARAMCO, the state-owned oil company based on a US$ 2 trillion valuation, itself based on oil prices at around 80 $.

The shelving of these plans for technical and legal reasons for the time being has removed a tailwind in the oil price and it may not be a coincidence that Oil prices stopped rising since the announcement and the technical configuration become more bearish.

In other words, the long-term outlook for oil is bleak and prices should fall structurally in the coming two years. In the short term, it is still two early technically to call the end of the bull phase that started in 2016 but we are getting closer to the point where shorting oil again will be warranted.

The unpredictable factor though is an increased tension between the US and Iran that would lead to military confrontation in the straits of Hormuz, where any disruption of the oil flow would send oil prices sky-rocketing.

The Week in Review

EQUITIES

The first week of September saw a sea of Red in equity markets as investors came back from their summer holiday.

Equity Markets fell sharply as fears of contagion from Emerging markets filled the press and the release of sharply higher number than expected in labor costs questioned the calm of the bond market.

For a little while on Friday, it looked like some of the most beaten-down markets would get a reprieve. Emerging markets were managing a mild bounce, until a President Trump declaration on tariffs quashed any budding optimism.

According to Bloomberg data, news stories mentioning “contagion” have spiked to the highest level since May 2012.

European and Japanese markets were particularly hit, Europe because of weak growth and political uncertainties, Japan because of the JPY strength, but the most salient feature of last week was the sharp fall in the Nasdaq Index, which was one of the worst segment of global equity markets.

Are things finally turning for Tech ?

CURRENCIES

In a rare occurence, the US dollar Index and the EUR Both FELL at the same time, with a sharp reversal of the EUR on Friday following the publication of strong employment costs in the US, weak economic growth in Europe and fears of an extreme-right victory in Sweden’s elections on Sunday.

The eurozone economy grew at 0.4 percent in the second quarter, European Union statistics agency Eurostat announced on Friday, as business and other investments rose sharply while net trade was negative.

Eurostat confirmed its first estimate that the economy of the 19 countries sharing the euro currency increased by 0.4 percent quarter-on-quarter, while revising its year-on-year figure to 2.1 percent from an initial 2.2 percent.

Among eurozone countries, growth was strongest in Malta, Estonia and Slovakia, at 1.9, 1.4 and 1.1 percent respectively, and weakest in France, Greece and Italy, all at 0.2 percent. The German economy expanded by 0.5 percent during the quarter.

These disappointing numbers, especially for France, coupled with extreme short US dollar positions by hedge funds have taken the EUR sharply lower on Friday.

COMMODITIES

Commodities are Back ! After their massive sell-off in August, Hedge funds are piling back into metals and soft commodities. Aluminium, Copper, Palladium, Sugar and Coffee were all up as we expected last week.

It is only a matter of time before Gold and Silver follow suit.

The downtrends in many commodity contracts are nearing historic proportions in terms of their persistency.

There is the possibility that a structural force is at work now — maybe the fears of Trade wars — and recent evidence is leaning that way, since most contracts simply cannot hold any kind of a bounce.

That is a once-in-a-generation kind of move, however, so assuming we’re going to have at least some resemblance to history, commodities should bounce strongly in the months ahead.

BONDS

As we predicted all along and as early as in December 2017 in our OUR SEVEN INVESTMENT CALLS FOR 2018, inflation is back for good !

For months the market has been wondering why US labor costs were not rising while unemployment was at a multi-decade low and Economic strength was exceptional.

We always argued that it s only a matter of time before it happened and last week’s Labor costs number finally shot up to 2.9 %, way above expectations.

US Bonds are truly on the edge !

The Markets in Charts

EQUITIES

MXWO — MSCI World Equity Index

Short term oversold, still in its uptrend, the MSCI world equity index is re-testing the previous resistance prior to its summer break-out.
The index should bounce in the next couple of weeks.

A break of the 2018 uptrend of higher lows. would signal significant pain ahead.

MXEF — MSCI Emerging Markets Index

Emerging markets have sold off sharply but have been bottoming out in the past two weeks. Although a long term SELL signal has been confirmed, They are likely to bounce in the coming weeks.

MXAP — MSCI Asia Pacific All Country Index

Asian markets have sold off sharply and were tentatively bottoming out in the past two weeks. A long term SELL signal has been confirmed, but these markets are oversold in the short term.

AMERICAS

USA — Dow Jones Industrial Index

Loss of momentum, negative divergence, high concentration, the internal dynamics of the US equity markets are weak and a change in leadership has taken place last week with the NASDAQ falling sharply while the Dow Jones defensives held up much better.

However, the technical configuration is still positive for now.

USA — S&P 500 Index

After its August break-out to a new all-time high, the SP500 is normally re-testing the break line.

If it bounces off that new support line, then the configuration remains very positive. If it breaks to the downside and closes below 2770, then a new downtrend will have started.

USA — Nasdaq Composite Index

Although we are still in the uptrend and last week’s fall is until now simply a re-test of the new support line, the diverging momentum between the Nasdaq and the Dow Jones, and the weakness of the internal dynamics of the tech sector are telling us that something is happening.

The long term chart is scary !

Canada — TSX Index

Rolling over and with a clear SELL signal on the MACDs. The 2016 uptrend must hold !

Mexico — MEXBOL Index

Contagion did you say ? Mexico held pretty well last week and a trade agreement with the US bodes well for Mexican stocks and the currency ahead

Brazil — IBOV Index

Contagion did you say ? Brazil held well last week and there again the technical picture is improving.

EUROPE

Europe — EUROSTOXX 50 Index

Europe fell sharply last week and although some additional weakness could take place in the short term, the technical configuration remains positive and a break above 3500 would send European stocks flying.

Europe — Bloomberg European 500 Index

The larger indexes suffered more than the large caps and the tentative break down below the 2016 uptrend is a bad sign. However, there is a strong horizontal support at the current levels and there again the long term picture remains constructive, for now !

Germany — DAX 30 Index

Sharp fall last week and probably some more downside on the short term. However, the long term uptrend is still very much in place.

UK — FT 100 Index

Rolling over and sell signal with divergence. However, things are looking better on the BREXIT negotiation front and 6980 should provide a strong support.

Switzerland — SMI Index

BUY on weakness ! Unless the long term uptrend is broken but we seriously doubt it !

France — CAC 40 Index

Additional weakness is possible in the short term, but the technical configuration calls for buying more on weakness.
Very strong support at 5'000

Italy — FTSE MIB 30 Index

A SELL signal confirmed. Italy’s political woes public debt and upcoming budget are weighing on confidence. Wait for a clearer political picture at the end of September

Spain — IBEX 35 Index

Sharp fall last week, but the remaining downside is limited.
BUY strongly at 9'000.

Portugal — PSI 20 Index

Sharp fall last week and now standing on the 2016 uptrend support. It must hold and we expect a rebound next week.

Greece — ASE Index

Week economic numbers sent Greek stocks plunging last week. Unless the index rebounds next week, the technical picture is ugly and calls for a test of 600.

The Netherlands — AEX Index

SELL signal confirmed and more downside to 490 in the short term.
But the long term picture remains constructive

Austria — ATX Index

Stay away for now !

Sweden — OMX Index

The uncertainties surrounding the Swedish parliamentary elections this week-end and the potential victory of the extreme right weighed on Europe and on Sweden last week. But the long term configuration is still positive.

Russia — MOEX Index

Contagion you said ? Russian equities have been consolidating horizontally quite nicely despite the bleak prospects of the currency.
PUTIN must get closer to Europe and the rest of the world to re-build Syria.
We could have a buy signal soon if commodities start flying as we expect.

MIDDLE EAST

Turkey — Istanbul 20 Index

BUY TURKISH STOCKS — The Turkish Lira is turning as well

ASIA

Australia — ASX 200 Index

Australia took a beating last week, putting and end to its strong performance since the beginning of the year. A SELL signal is forming.
SELL

India — NIFTY Index

Overbought. Still holding well but likely to see a correction at some point in the near future. Still constructive for the long term.

Japan — Nikkei 225 Index

Japan suffered last week as the Yen remained strong.
A 10 % additional downside is possible in the short term and a SELL signal is in formation. However, the long term picture remains very constructive and a break down in the value of the Japanese Yen as we expect will send Japanese stocks flying.

Japan — TOPIX Index

The TOPIX suffered last week as the Yen remained strong.
A 10 % additional downside is possible in the short term and a SELL signal has been formed. However, the long term picture remains very constructive and the 2015 per provides significant support at current levels.

A break down in the value of the Japanese Yen as we expect will send Japanese stocks flying.

Korea — KOSPI Index

Limites additional downside. ACCUMULATE ON WEAKNESS

China — FT 50 China Index

Hedge funds are trying to short ! But the support is holding well. A BUY signal is developing at the MACD level. Next week will be crucial.
ACCUMULATE

China — SHCOMP Index

The Index is trading on its long term moving average, Portfolio flows and valuation should favor inflows into China, but one cannot exclude another 10 % fall in the value the index. ACCUMULATE

China — CSI 300 Index

The trend is still down but the Index failed to make a new low last week and a BUY signal is developing at the MACD. Another 10 % fall in the value the index cannot be excluded, but weakness will not last. ACCUMULATE

China — HSCEI Index

Hedge funds are really trying ! But the index failed to make a new low last week. A BUY signal is forming. Another 10 % fall cannot be excluded. ACCUMULATE

Hong Kong — HSI Index

Hong Kong stocks are suffering from the US tightening in monetary policy. How long will the HK$ peg to the US dollar be justified. HK real estate prices are falling. Technically the trend is still bearish ! but last week’s price action was less negative than it appears. A short-term bounce should take place.

Taiwan — TWSE Index

Taiwan has been extremely resilient and is consolidation horizontally, usually a positive development. A SELL Signal is in formation on the MACD but only a clear break below 10'000 would change the constructive long term picture.

Singapore — STI Index

UGLY ! Avoid and even SELL SHORT

Indonesia — JCI Index

Indonesia held well last week despite the attacks on its currency. A strong consolidation is building up at current levels. ACCUMULATE

Malaysia — KLCI Index

A nasty reversal last week after the strong advance of August. However, the two moving averages should provide support a bit lower down. Remaining constructive for the long term.

Thailand — SET Index

Very strong support lower down. ACCUMULATE

Vietnam. — VN Index

We could see a re-test of the 900 lev el on the index, but the big correction of Vietnam is over . ACCUMULATE

Philippines — PCOMP Index

Holding well despite last week’s sharp fall. the long term picture remains constructive.

BONDS

USA — 30 Year Government Bonds

Last week’s US wage numbers are a wake-up call to bond investors.
Inflation is back, and now it is back in a sustainable way.
At 3.10 % US long bond yields are way too low considering wages are growing at 2.9 % and are bound to accelerate in the tightest labor market in recent history.

Technically, the next move in yields is up and a break of the 3.20 level will send long bond yields sharply higher towards 3.5 % and then 3.80 % with significant consequences on equity markets.

SHORT BONDS

USA — 10 Year Government Bonds

The picture is the same save for the fact that we are getting much closer the the 3 % threshold. The Break out is imminent. SHORT BONDS

CURRENCIES

DXY — US dollar Index

The US dollar rebounded strongly on Friday as the wage numbers are out, confirming that the FED would raise rates continuously to keep inflation in check. The re-test to the downside of the crucial 95 level is bullish US Dollars and opens the way to 98. A re-test of 96 should happen quite fast.

EUR — Euro to US dollar

Last Friday’s close indicated the high level of US Dollar shorts and the need for hedge funds to clever positions. The weakness of the European economy, Swedish elections and Italy’s budgetary uncertainties are also weighing on the single currency.

Although a BUY signal is tentatively developing in the weekly chart, additional short term weakness should take place before te end of the uptrend in the US dollar can be called.

CNY — Chinese Yuan

The line is clearly drawn in the sand ! BUY !

JPY — Japanese Yen

Probably the most interesting currency pair of all. The Yen has been trying to break out of its long term triangle and a confirmed break would send the Japanese Currency falling towards 115 as a first objective and then 119.

GBP — British Pound

Weaker Pound and stronger US dollar at least until 1.20. SELL

CAD — Canadian Dollar

There again, last week’s price action negated the CAD attempt at breaking the trend in place since November of last year. The moving averages are now pointing up indicating a weaker CAD ahead.

TRY — Turkish Lira

BUY ! Nothing else to say !

BRL — Brazilian Real

BUY ! Nothing else to say !

RUB — Russian Ruble

SELL ! More weakness to come in the short term.

COMMODITIES

CL1 — OIL

Oil isn trading at crucial levels and the upward momentum is clearly abating ! The failure to hold above 70 and last week sharp fall delivered a SELL signal on the weekly charts with a target at 65 and then 56.

A break below 56 will confirm that the counter trend rally in place since 2016 is over and a sharp fall in oil prices ahead.

XAU — GOLD

A clear bottom at 1160 is in place and the precious metal is highly oversold.
ACCUMULATE

XAG — SILVER

The silver picture is relatively unique. From a short term perspective, the Precious metal is in a bear market and there is no end to it for the time being.

From a weekly perspective, we are now trading on a major support that constituted the low in 2016 and the low point of the entire 2011–2016 bear market. It should therefore provide the base for a strong rebound towards 16 and 16.5

From a Long term perspective, either the downside break of the triangle is confirmed and the picture is terribly bearish, pointing to a low at US$ 10, or the tentative break down is negated, Silver trades back above 16.5 and then new major up leg will take Silver flying.