Why you should be worried about the Trump rally in World Markets.

Why you should be worried about the Trump rally in World Markets.

Shriram Garde

The last time we heard stock-market investors talk like this in 2000, it didn’t end well for the bulls.

Traders were captivated by a “new era story” of technological transformation: The Internet had re-defined world business and made traditional gauges of equity-market value obsolete. Today, the game changer everyone’s buzzing about is political: Donald Trump and his bold plans to slash regulations, cut taxes and turbocharge economic growth with a trillion-dollar infrastructure boom.

They’re both revolutionary eras. There were warnings about the dot-com mania and housing-market excesses that led to the global financial crisis. “This time a ‘Great Leader’ has appeared. The idea is, everything is different.”

The power of a new-era narrative helps answer one of the most hotly debated questions on Wall Street as stocks set one high after another this year: Why are traders so fixated on the upsides of a Trump presidency when the downside risks seem just as big? For all his pro-business promises, the former reality TV star’s confrontational foreign policy and haphazard management style have bred uncertainty — the one thing investors are supposed to hate most.

Charts illustrating the conundrum have been making the rounds on trading floors. One, called “the most worrying chart we know” by Societe Generale SA at the end of last year, shows a surging index of global economic policy uncertainty severing its historical link with credit spreads, which have declined in recent months along with other measures of investor fear. The VIX index, a popular gauge of anxiety in the U.S. stock market, has dropped more than 30 percent since Trump’s election.

I don’t generally call the entire market wrong — investors are very smart, highly motivated individuals — but I find it hard to say why stock markets are so non-volatile right now.

The simplest explanation may be that share prices have less to do with Trump than with tangible improvements in the economy and corporate earnings. With the U.S. unemployment rate well below 5 percent and S&P 500 Index profits projected to reach all-time highs this year, perhaps it shouldn’t be surprising that equities are doing so well.

But there’s more to the market’s resilience than just numbers. Like the fable of the boy who cried wolf, pessimistic forecasters have so badly over-estimated the consequences of big events — the rolling European debt crisis since 2010, the U.S. debt-ceiling standoff in 2011, Brexit in 2016 — that traders have become conditioned to ignore them. Even when bears are right, the past eight years have shown that central banks are more than willing to save the day when markets fall.

It’s been a period of repeated shocks, and I think people get toughened against that. It seems like uncertainty is the new norm, so you just learn to live with it.

This rally is just another example of investors’ remarkable penchant for tunnel vision. It’s like the great tulip-mania of 17th century Holland.

Even the most casual students of financial history are familiar with the frenzy, during which a rare tulip bulb was worth enough money to buy a mansion. What often gets overlooked, though, is that the mania happened during an outbreak of bubonic plague.

People were dying left and right. So here you have financial markets sending signals completely at odds with the social mood of the time, with the degree of fear at the time.

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About The Author: Shriram Garde

My mission is just to share the events in my life sincerely with you; as I have experienced them, not necessarily in that order. I write on various topics. Whether that means - advice, tips, tools, scriptures, or instructions on budgeting, getting out of debt, making some extra cash, investing or anything else, I intend to provide it. I was 18 years old when I started working as a labourer. I had no savings. I had no money left in my bank accounts. I know life through lot of unpleasant incidences occurring day in and day out. But what I realised is that it doesn't have to be always like that. We are not doomed to how we are currently living – we all can change! I know, because over last couple of years my family and me have paid off a huge amount of debt. I have a passion to help people come to this realisation and get started on their own journey to financial freedom. I had owned 2 Companies before moving to Finance Sector about 9 years back. Spending more than 30 years in various capacities taught me quite a lot. I have a diploma in Engineering completed in part time while I was working. I have learned a good chunk from my working background in various fields. But, like most people who are eager to learn, the bulk of what I have learned thus far is from reading magazines, books, blogs, pod cast or whatever else I can get my hands on about Personal Finance, investing, business, personal development, and time management.

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