The Orange Swan Looms Ever Closer

 | May 17, 2017 | 9:30 AM EDT
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(This commentary originally appeared on Real Money Pro at 7:55 a.m. ET today. Click here to learn about this dynamic market information service for active traders.)

* The President's legislative and policy agenda will be diluted and delayed

* Sell stocks as risk is underpriced

* Buy gold as a protective strategy and for diversification purposes

News broke late Tuesday of Mr. Comey's contemporaneous notes that Mr. Trump asked him in February to "let this go," referring to the FBI probe of axed National Security Adviser Michael Flynn. The White House denied that account of the conversation, but that would be more credible if its previous statements were more reliable. 

Mr. Trump's strife and insults with the intelligence community were also bound to invite blowback. The Post report is sourced to "current and former U.S. officials," which raises the question of how former officials are privy to "code word" information, defined as anything that could be expected to cause "exceptionally grave damage" to national security if disclosed. In that case the public leaks about Mr. Trump's actions, if true, will do more damage than whatever he said in private.

Mr. Trump is considering a White House shakeup, including cleaning out many of his top aides, but the White House always reflects the President's governing style. If Mr. Trump can't discipline himself, then no Jim Baker ex machina will make much difference.

Mr. Trump needs to appreciate how close he is to losing the Republicans he needs to pass the agenda that will determine if he is successful. Weeks of pointless melodrama and undisciplined comments have depleted public and Capitol Hill attention from health care and tax reform, and exhaustion is setting in. America holds elections every two years, and Mr. Trump's policy allies in Congress will drift away if he looks like a liability.

Millions of Americans recognized Mr. Trump's flaws but decided he was a risk worth taking. They assumed, or at least hoped, that he'd rise to the occasion and the demands of the job. If he cannot, he'll betray their hopes as his Presidency sinks before his eyes."

- Wall Street Journal, "Loose Lips Sinks Presidencies: The Russian Intel Story Shows the Price of Trump's Lost Credibility"

It is growing increasingly clear that, at best, the Trump administration's policy initiatives -- tax and regulatory reform and various fiscal endeavors, including infrastructure spending and cash repatriation -- probably will be delayed and diluted. At worst, the decline of Trump's presidency is now coming into focus.
 
Over the last few weeks the descent in the president's fortunes has accelerated, owing in part to the following events and paths: 
* FBI Director Mike Comey was fired in the middle of a Russian investigation. This followed the canning of former U.S. Attorney  Preet Bahrara and former acting Attorney General Sally Yates, the former of whom was embarking on his own investigation of Trump's campaign team and Russian officials and the other had objected to the administration's immigration policy as well as Michael Flynn's background.
* President Trump warned former FBI Director Comey of tapes of their private conversation
* President Trump apparently revealed classified information to the Russian foreign minister and ambassador. 
* Finally, it was recently claimed that a Comey memo reveals that the president attempted ("I hope you get let this go") to shut down the FBI probe of Flynn, raising the flames of possible obstruction of justice

I expressed concern about six months ago in my 15 Surprises for 2017 that we'd see fighting, internal chaos and a president increasingly isolated, enraged, unable to be contained and out of touch with the requirements of the presidency.
 
When Presidents Nixon and Clinton (and others) ran afoul, their minions circled the wagons. By contrast and in a break with history, Donald Trump is much like the day trader who essentially operates by himself.  As such, the vulnerability, and even demise, of the administration may be closer at hand than many realize. And the associated uncertainties may not be market-friendly.
 
Jim "El Capitan" Cramer, in "Selling on Trump Presidency Troubles? Are You Kidding Me?,"    believes one shouldn't panic and sell stocks based on a presidential spiral.

I respectfully disagree as it is my view that the cumulative impact of Trump's actions finally may take hold on an overvalued market (most valuation metrics are in the 95% decile) in which risk is underpriced and where stock prices have been overly inflated by the explosion in ETF popularity and quant strategies that are agnostic to balance sheets and income statements and that worship at the altar of price momentum, and in a overall market in which leadership is narrowing and showing other technical weaknesses. 

In the near term, all of the administration's economic initiatives likely will come to a stop in a collision course of credibility.  I  started today's missive with this morning's Wall Street Journal editorial, which followed an earlier late-March editorial, "A President's Credibility":

"Falsehoods are eroding public trust, at home and abroad... If President Trump announces that North Korea launched a missile that landed within 100 miles of Hawaii, would most Americans believe him? Would the rest of the world? We're not sure, which speaks to the damage that Mr. Trump is doing to his Presidency with his seemingly endless stream of exaggerations, evidence-free accusations, implausible denials and other falsehoods... Yet the President clings to his assertion like a drunk to an empty gin bottle, rolling out his press spokesman to make more dubious claims... Two months into his Presidency, Gallup has Mr. Trump's approval rating at 39%. No doubt Mr. Trump considers that fake news, but if he doesn't show more respect for the truth, most Americans may conclude he's a fake President."

Donald Trump, as I initially feared in my  15 Surprises for 2017, appears to be continually obsessed by the media, doesn't seem capable of restraining himself and his administration is disorganized. The president, under the guise of trying to be seen as a strong leader, continues to raise more questions than answers in both the domestic and foreign arenas.

I am sticking with Surprise #4:

Surprise #4: "The Unartful Deal" -- President Trump's Popularity Quickly Fades as "The Dude (Doesn't ) Abide."

And based on what we have witnessed in the administration's first few months I will also stick with Surprise #5:

Surprise #5: Trump Grows Restless After Some Failed Initiatives and Loss of Support. He Begins to Lose Interest in His Job After He Finds Out How Hard It Is to Get Anything Done and Becomes The First Part-Time President in History.

Bottom Line

The President's legislative and policy agenda is now likely on hold.

As Tom Brokaw said recently on " Morning Joe": " There are burning fuses everywhere (in the Trump administration). They are not small ... I have talked to numerous business people in the last few days and they are appalled."

The markets have risen on the assumption that the new president would be successful in his bold agenda of regulatory and tax reform and aggressive fiscal policy programs.

With housing, retail and autos all peaking, I reject the notion put forward by some that the rate of growth in the domestic economy is reaccelerating and that this trumps the success of the administration's agenda. Meanwhile, rising gold (up $11 this morning), a contained 10-year U.S. note yield (2.29% this morning) and sinking commodities markets (the price of oil has fallen to close to October 2016 lows) seem to be negative economic and market "tells" that up to recently had been ignored.

The first few months of the Trump administration have been a test of the president's business acumen. Can his "art of the business deal" be translated into the "art of the political deal" in Washington, D.C.? Arguably, the body of evidence is that the administration has not been successful -- to some, it is failing spectacularly.

From my perch, the markets are overvalued and risk remains (perhaps dramatically) underpriced.

Given recent White House developments, the " hockey stick" projections and consensus of rapid profit growth in 2017 and 2018 seems to now be "pie in the sky."

What is dangerous is that consensus sentiment, political, profit and economic expectations are inflated at a time in which many valuation metrics are in the 95% decile. Moreover, as the Divine Ms. M writes this morning, the technical are eroding:

*Breadth is lagging as leadership narrows

*The put/call ratio for equities is under 60% for the third consecutive day

By my gauge, the market's downside risk substantially exceeds the upside reward -- perhaps by as much as 4:1.

As I said back in late 2016 ,  Donald Trump will make market volatility and economic and profit uncertainty great again.

The market seas are growing more turbulent as The Orange Swan looms ever closer.

T.I.N.A. (there is no alternative) is B.S.

C .I.T.A. (cash is the alternative) should be considered.

Be less concerned about return on capital and more concerned with return of capital.

Sell stocks, buy gold.

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