When financial Armageddon arrives, it can hit in a flash like a dangerous rogue wave — the kind that rises up when two big waves from different storms intersect and merge into a single wave big enough to capsize a ship. The global Wannacry warware attack and endless waves of Trump turbulence came together with just such damaging synergy last week, knocking the top off the Trump rally.

 

Black swans unite and strike stocks

 

On Wednesday of last week, the stock market fell 370 points because of all the turmoil Trump has been brewing — its worst day in eight months. Globally, equities lost almost a trillion dollars in a single day. Part of this was the political crisis in Brazil, and part was the Wannacry virus, but the biggest part nearly everyone agreed was the political crisis in the US that constantly embroils President Trump.

US equity funds saw $8.9 billion in outflows for the week up to Wednesdays’ close while European equity funds added one billion. US financial stocks took the brunt of the hit. Then the market recovered somewhat on Thursday and Friday, but more Trump turbulence took back a sizable piece of Friday’s attempted recovery.

Friday’s drop from its high point of the day hit immediately upon a double-whammy in the Washington Post and the New York Times, wherein the Post announced that a White House official is now a significant person of interest in the Russiagate scandal, and the NYT alleged via two anonymous (their new standard) government sources that Trump told the Russians at his meeting with the Russians and Kissinger that he had “just fired the head of the FBI; he was crazy, a real nut job,” also telling them that doing so had taken off a lot of pressure that was on him because of Russia and that he was “not under investigation,” as if not being under investigation resulted from the firing … in his opinion at the time.

Naturally, these big ups and downs in the market mean volatility, which had remained uncannily placid for weeks (typical of the final-euphoric run-up of a stock market before it crashes) is back, shooting up the most it has since Brexit. (It’s odd to me that many investment advisors say the end of the bull market can not be here because markets are usually very low in volatility, and volatility just spiked. What a peculiar thing to say. Volatility is low just before the end (and it’s rarely been lower than lately), but there is nothing low about volatility when the end hits.)

 

“The market will revert to much higher volatility and this could be the start of it,” said Richard Haworth, chief investment officer of 36 South Capital Advisors, a London-based hedge fund which bets on rising price swings. “The sharp move this week reflects how short volatility the market was – how complacent.”  (Zero Hedge)

 

The VIX, which is a measure of volatility, made its second largest daily move ever seen. Complacency got jarred but is already returning to its normal lull. That complacency is so hard to break completely only means that when it does, the panic will be all the greater. US Bonds, the traditional instrument of safety saw interest rates plunge as investors clearly fled to safety.

 

“What has been setting in over the course of the day [Wednesday] is that political uncertainty is something that’s likely going to be with us for a significant amount of time,” said Dennis Debusschere, Evercore ISI’s head of portfolio strategy and quant. “We may be looking at a higher volatility backdrop with a trending lower market for the next couple of months.” Wall Street finally took notice of political wrangling in Washington as investors began to question the Trump administration’s ability to focus on policy as it careens from one crisis to another. Many of the trades sparked by the president’s shock election have reversed in recent days…. “If he’s preoccupied defending himself and if it goes a lot further, then any hope of his legislative agenda coming to the fore is going to be reduced,” John Stopford, the London-based head of fixed-income at Investec Asset Management Ltd. (Newsmax)

 

Since last winter, I have been saying this  is exactly what the Trump Rally is poised to do by early summer as reality sinks in that the rally was all built on irrational exuberance — hopes about things that were never likely to actually happen. The market is now being jolted back into seeing reality, instead of viewing everything through rose-colored glasses where ideally everything Trump promised works as he promised.

 

The biggest stock market drop in eight months marks the end of the so-called Trump rally rather than the type of plunge that would accompany the president’s ouster, according to Guggenheim Partners Chief Investment Officer Scott Minerd.

 

“We have no indication now that this is Watergate,” Minerd, who oversees more than $260 billion, said Wednesday at a forum on fixed-income investing in Beverly Hills, California. “But at this stage in Watergate, we had no idea it was Watergate.”

 

U.S. stocks lost roughly 40 percent during the Watergate corruption scandal between early 1973 and the market’s low point after the resignation of President Richard Nixon the following year….

 

“The Comey memo is the first time that we have any sort of potential direct implication of bad acts by the president or the administration…. Markets may come to realize that the Trump rally is long on promise and short on delivery….” (Newsmax)

 

The trigger for the initial sell-off was an anonymously leaked report that James Comey had sent out memos to key staff, noting that Trump had pled with him to terminate the investigation into former National Security Advisor Michael Flynn and after the first Republican (Rep. Justin Amash (R-Mich.)) joined in talk of impeachment if the reports of Trump pressuring Comey are true.

 

That plea, if relayed accurately, could veer dangerously close to criminal activity, according to national security attorney Brad Moss. “Even if there is some legal nuance that the President could rely upon to save himself here from an obstruction charge, the allegation (if true) is politically devastating…. The President didn’t just walk up to the line, he stepped over it without a moment’s hesitation….” (The Daily Beast)

 

Then, assuring that the Russiagate story will dominate the news for months to come, Deputy Attorney General Rod Rosenstein finally appointed a special prosecutor to head the investigation — former FBI Director Robert S. Mueller III. Rosenstein took this action without consulting Atty. Gen Jeff Sessions or the White House because Sessions had recused himself from the matter. Mueller is a former federal prosecutor who served as U.S. attorney in San Francisco under President Clinton and was named FBI director by President George W. Bush. He is widely respected as being impartial by both Republicans and Democrats. Mueller worked closely with Comey who succeeded him as head of the FBI. He was praised on Wednesday by Democratic Senator Chuck Schumer, California Democrat Dianne Feinstein and former President Bush’s AG, John Ashcroft.

 

Sen. Dianne Feinstein … who knows Mueller well from his years in the Bay Area, her base, said there was “no better person who could be asked to perform this function. He is respected, he is talented and he has the knowledge and ability to do the right thing….”

 

“It’s impossible to think about Washington without politics blowing people off course,” Ashcroft said. “But if anyone can stay on course and not be deterred by the whims of politics, it’s Bob Mueller.” (The LA Times)

 

This is only the second time in history that special counsel rules allowing the Department of Justice to hire and fund special counsel from outside the department have been invoked. Pat Buchanon who worked for Nixon in the Watergate days explains what this means in real political terms:

 

Rod has reinvigorated a tired 10-month investigation that failed to find any collusion between Trump and Russian hacking of the DNC. Not a single indictment had come out of the FBI investigation….

 

Democrats are hailing both his decision to name a special counsel and the man he chose. Yet it is difficult to exaggerate the damage he has done.

 

As did almost all of its predecessors, including those which led to the resignation of President Nixon and impeachment of Bill Clinton, Mueller’s investigation seems certain to drag on for years.

 

All that time, there will be a cloud over Trump’s presidency that will drain his political authority. Trump’s enemies will become less fearful and more vocal. Republican Congressmen and Senators in swing states and marginal districts, looking to 2018, will have less incentive to follow Trump’s lead, rather than their own instincts and interests. Party unity will fade away.

 

And without a united and energized Republican Party on the Hill, how do you get repeal and replacement of Obamacare, tax reform or a border wall? Trump’s agenda suddenly seems comatose….

Markets had soared with Trump’s election on the expectation that his pro-business agenda would be enacted. If those expectations suddenly seem illusory, will the boom born of hope become a bust? (Buchanan.org)

 

While there has not been any party unity to fade away since Trump was elected, the point of my recent articles about Trump has been that all of this stuff about Trump and Russia is going to grow, not fade, and that is going to impact the stock market. I have been certain of that because Trump’s actions (whether he is guilty or innocent. See “BOMBSHELL: CNN News Flash Inadvertently Confirms Trump’s Innocence in Russiagate Story.”) constantly stir controversy and tend to make him look guilty (whether he is or not). Firing Comey particularly stirred things up (whether Comey deserved it or not) because it resulted in the appointment of special prosecutor.

 

Russia has become the administration’s unintended but self-imposed mood music and narrative arc — sucking bandwith, draining esprit, looming as a potential calamity.

 

The price and opportunity cost have already been high — in time, in credibility, in possibility.

 

And it may just be starting. Legal scholar Jonathan Turley pointed out on Fox News that the Mueller miniseries may run for years.

 

The mood among some top Republicans is turning to anger: So much has been squandered.

 

“The damage to the agenda is permanent,” said a Republican working to pass Trump’s plans. (Axios)

 

My interest in all of this has never been to prove or disprove the guilt of Trump, but to say this is exactly the reason Trump’s promises, which the rally was built on, are anything but certain to happen. The constant turmoil from all of this means Trump will (whether innocent or guilty) continually lose more and more of the already limited support he has in his own party as they try to distance themselves from him. He has also handed tons of ammo to his Democratic opponents. Foreseeing all of that as being extremely likely, given Trump’s character and the way he ran his campaign, is a major part of why I have been predicting for months that the stock market will crash in early summer. That is about how long I figured it would take before all of this turmoil starts to wash over Trump.

 

“Earnings have provided a good fundamental base for the market, but I’m beginning to wonder if this news item is the straw that breaks the camel’s back,” said David Schiegoleit, managing director of investments at U.S Bank Private Client Reserve…. “If special prosecutors are hired or there is more talk about obstruction of justice being an impeachable offense, one can kiss the tax plan, health care plan, and fiscal stimulus plan goodbye for 2017,” Andy Brenner, head of international fixed income securities at National Alliance Securities, said in a note Monday. (The Hill)

 

Done. Special prosecutor hired, and market falls … like clockwork. (This isn’t the crash, but the shocks are clearly now taking a major toll on the market each time they hit, and my point is that this proves how vulnerable the market is to this political crisis.)

A special prosecutor assures that the Trump turmoil isn’t going away. Thus, Trump’s economic plan is likely to unwind … well … about now. It is now beginning to dawn across the the entire stock market that the Trump rally was built on baseless euphoria — rosy hopes of the 100% success when nothing in politics and particularly in Trump politics is ever certain. The only thing that is predictable with Trump is turmoil (whether his fault or everyone else’s around him).

 

“We’ve seen the Trump agenda derailed and try to get back on track several times. It’s registering with more investors that its going to be hard to get back on track with the latest allegations,” Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. “Prior to the election investors expected Trump to represent uncertainty,” he said. “The market is now recognizing that some of the fears they had back in October are coming to fruition.” (Newsmax)

 

How bad can this get economically? One of Trump’s CEO colleagues, who was no fan of the Obama administration, criticized his management sharply last week and forecasted how his management style could lead to a market sell-off:

 

Jack Welch, the former CEO of General Electric who has President Donald Trump’s ear, told CNBC on Wednesday that an impeachment would crush the stock market. “An impeachment proceeding would blow the market away,”Welch said on “Squawk Box.” Welch also said Trump’s firing of James Comey as FBI director was a “rookie mistake.” He added, “You don’t make any friends doing it the way [Trump] did it. I think without question we have a guy that’s on the right agenda with crappy management practices,” Welch said, giving the president a “D minus” on his management skills.

 

Yet, management skills were supposed to be Trump’s greatest asset. So, if is greatest asset is proving in the eyes of CEO’s who are in good with Trump and who didn’t like Obama to be a detriment, what is the rest of Trump going to bring?

 

Trump turmoil is the shape of things to come

 

The fact that the sell-off was particularly great among financial stocks, indicates fear that the Trump turmoil will overshadow everything now and prevent passage of Trump’s much ballyhooed tax plan.

 

Major investors are “somewhat cautious” as they wait to see whether President Donald Trump and Republican leaders on Capitol Hill can deliver on promises of lower taxes and massive business deregulation, Starwood Capital Group founder Barry Sternlicht told CNBC on Monday. “If we don’t succeed, the backlash could be significant. It all really needs to succeed. I just hope [Trump] stays on the main script, which is the business script.” (CNBC)

 

“The obvious point we’ve made before repeatedly is that Trump now has much less political capital to spend in the Capitol, and that makes Trumpflation far less likely. Yet things seem to be rapidly moving beyond that point, opening up other scenarios,” [Rabobank strategist Michael Every] said. He was referring to the threat of impeachment. (Zero Hedge)

 

What happens in the weeks ahead if the Russian backstory continues to sideline the main script of tax reform and we get a few more simultaneous events like Wannacry now that the market has begun to tremble and fall? The wall will weaken with each blow of the ram. Trump’s controversies are black-swan events, in that no one can even guess what he’s going to do next or when. And, yet, they are predictable in the sense that he loves to create controversy and almost certainly will create a lot more, and they’re predicable in the sense that the press loves to jump all over him.

Clearly not even his own staff has a clue as to when the next controversy will come and what it will be. They have stumbled all over themselves trying to keep up. While a black-swan event, by definition, means an unpredictable negative event, what is predictable is the odds the many of these unpredictable negative hits are bound to keep piling on. While I cannot tell what the next one will be or when, I can be reasonably sure it will not be far off. Months back I could see the high probability of things falling apart badly under Trump and could see that it wouldn’t take long for that to start to break up the Trump rally.

None of this is about whether or not he’s guilty, but about how is erratic nature has always been part of my basis for saying the economy and stock market will hit the rocks by early summer. Besides Trump’s own penchant for controversy, it’s easy to see that draining the swamp would certainly create huge turmoil if done properly and destruction of the presidency if done wrongly, as Trump was assured to have few friends and many enemies in very powerful places if he tries to start removing swamp creatures. From a market standpoint, I looked at this this: Just as the Fed is trying to keep raising interest rates, all kinds of uncertainty is going to bombard the market every week.

 

The election of President Trump is eclipsed only by the 9/11 terrorist attack and the battle over the fiscal cliff in 2011 in terms of generating doubt about future economic policy, according to the Economic Policy Uncertainty Index. Increases “in policy uncertainty foreshadow declines in investment, output, and employment in the United States,” the three professors who created the index wrote…. While the EPU index has come off its high from the November election, it remains elevated, coming in month after month of the Trump presidency well above its long-run average…. The daily index spiked twice in the past week with allegations the president had divulged secrets to the Russians and allegations that he may have interfered with an FBI investigation. (CNBC)

 

It’s an investing aphorism that the market hates uncertainty, and uncertainty levels have only been this high following the 2008 financial crisis and 1987’s Black Monday.

Wannacry was also the kind of black swan event people have seen coming, but no one knows exactly how or when it will happen — just that the world is increasingly loaded with such prospects so that sooner or later some are going to happen. The likelihood of cyberwar began brewing in the final Obama days as Obama declared cyberwar on Russia. (Did he really think they wouldn’t fight back secretly with their own barrage of cyber attacks?)

So, while these cyber events are also completely unpredictable, what is predictable is that the odds of very damaging ones went up with the advent of Obama’s cyberwar against Russia (which Obama declared as a countermeasure) and with the release by Wikileaks of the NSAs very powerful viral software and knowledge of how it can be used to hack into networks. Wannacry proves how unprepared and vulnerable the entire modern world remains after years of opportunity to prepare and knowledge that we needed to prepare.

Now we sit at D-day in that both kinds of events are happening together. The Wannacry virus is already mutating, and the US government’s most powerful spyware has been sent to everyone in the world to use. At the same time, even a Republican or two is now talking of impeachment. Add to that the kind of violent protests I expected to see for this year, and one almost defies the Federal Reserve to risk raising rates in June now that the kind of chaos I predicted for this year is intensifying so rapidly.

The Epocalypse will take months to fully develop, but the initial breakup of the ice sheets of market complacency will become evident this summer. In fact, they are already starting to crack as euphoric hopes begin to melt. You’ve probably noticed that the post-election Trumphoria is entirely gone. Even Trump’s supporters are waiting with bated breath, many major supporters now openly wondering if Trump will turn on all of his promises, and many hopeful investors are getting nervous that their bets were misplaced.