2025: Trump’s Year of Chaos
Delusion Meets Reality
Being only January 2, dubbing this the “Year of Chaos” is more of a prediction than a definitive statement. But given the start we’ve had, and the prospect of Donald Trump returning the to the White House, I’m not really going out on a limb. On New Year’s Day, a car drove into a crowd in New Orleans killing 15 people. Later in the day, a man parked a Tesla Cybertruck in front of a Trump Hotel and detonated it with himself inside. Authorities are saying there’s no connection between the two attacks, but the fact they were both done on the first day of the year shouldn’t give anyone the warm and fuzzies about the coming year. In addition, the fact that incoming president Donald Trump blamed border policies despite the attackers being U.S. citizens, certainly doesn’t help. Nor does certain news sources obliging such nonsense by reporting unverified reports. Even after winning the 2024 election, the MAGA propaganda machine doesn’t seem to have an off button.
In previous pieces, we have outlined a multitude of concerns that should be top of mind for investors. The post-mortems for the 2024 election continue, but a general consensus has emerged. As we have covered repeatedly, the primary problem is economic in nature. MAGA voters believe they have gotten a raw deal in the last few decades due to offshoring of jobs and proliferation of automation, which have dampened wage growth. Throw in the double economic trauma of the Great Financial Crisis and Covid in a little more than a decade, and you have the makings of a tumultuous political backdrop.
Chaotic political and economic dynamics is par for the course in recent years. When such conditions have been prevalent for a while, most market analysts will say that bad news is already priced into the market. It is often true but given that the SPX has posted back-to-back +20% performances in the last two years, it’s difficult to buy into that prognosis. There is no “bad news” priced in.
Chaos vs. Bubblenomics
I hesitate to call the current environment a “bubble” only because it’s often a somewhat subjective statement. One man’s bubble is another man’s boom. There are no established criteria that signify a market has become a bubble, but the hallmark is a belief that the link between market price and fundamentals is completely severed.
Chart 1 shows a favorite long-term valuation metric for the SPX called the Shiller P/E Ratio. Where normal P/E ratios only consider trailing or forward 12-month period for earnings, the Shiller Ratio uses a 10-year trailing average of earnings that are inflation adjusted. These differences allow for better interpretations of valuation through the business cycle, particularly around recessions.
Chart 1: Shiller P/E Ratio
The current Shiller Ratio of 37 is close the level we hit in 2022, right before the market took a -30% or so nosedive. That level is second only to 2000 during the tech bubble, where it hit 45. Valuation is not a timing tool, but one thing it does is give you an indication of how far the market may fall when fundamentals roll over.
It should be noted that many believe that outside of the MAG 7 stocks the SPX seems to be reasonably valued on standard metrics. This implies that if there is a stock market bubble, it would be focused entirely on the MAG 7 stocks. I would contend that there is a bubble, but it’s broader in nature. This isn’t a particularly controversial statement. It’s an idea that’s been around for a few years now: The Everything Bubble.
Burgeoning AI investment is a large portion of the hype and extreme sentiment that has driven the stock market in the last couple of years. Along with that, the mania surrounding Bitcoin, which promoters seem to believe will take over the financial world in the coming years, indicates a high level of overall financial market sentiment as the price passed the $100,000 mark this year. To me, there is no better indication that general sentiment has gotten extreme. Bitcoin sentiment has mushroomed since the election, as Trump has endorsed many of the actions on buyers’ wish list. In all likelihood, Trump has switched from calling crypto a scam to promoting it now that he has his own venture. Such is the state of U.S. politics these days, where conflicts of interest among certain constituencies seem to be a badge of honor, and grifting is done in plain sight.
Money for Nothing
Bitcoin bulls believe Bitcoin is the future of finance due to its decentralized nature, which removes the need for intermediaries like banks and governments, potentially reducing transaction costs and increasing financial inclusion, particularly in regions with unstable banking systems. They argue that Bitcoin's limited supply creates a hedge against inflation, making it a digital equivalent to gold in preserving wealth. However, Bitcoin's extreme price volatility, which undermines its utility as a stable store of value and medium of exchange, is a major hurdle to it gaining widespread support.
These issues haven’t stopped Donald Trump from floating ridiculous ideas like setting up a “Bitcoin Reserve”, where the government would purchase Bitcoin in the same way we purchase oil reserves. Ostensibly, it would be held as an international reserve currency in the same way we might hold Euros or gold. However, what such a reserve would really do is turn the U.S. government into a speculator. That’s wonderful news for the speculators that already own said asset but doesn’t do anything for the U.S. economy as a whole.
Just by announcing such a scheme, the U.S. government would be bidding up the price against itself. BTC is already trading around $100,000. What price would American taxpayers be forced to pay if this plan came to fruition?
“The theory behind a currency reserve is that it serves as a hedge against inflation. In this view of things, gains in the crypto market can help release pressure on prices in the real economy, since the government’s reserves would appreciate at rates faster than inflation. But to have the prices of an asset rally to unprecedented heights on the mere possibility that it may form part of the US Treasury’s holdings is a sign that it’s less a storehouse of durable value than a volatile plaything for speculators and scammers. Indeed, the extreme volatility of crypto is why it’s subject to persistent market manipulation of the sort made infamous by the now-jailed crypto baron Sam Bankman-Fried: When an asset creates no economic worth of its own, the volume traders who build markets around it must commandeer a vast infrastructure of smoke and mirrors to disguise the dirty secret of its complete inutility. This is also why, amid the pre-holiday fever of crypto-speculation, news broke that North Korean hackers had engineered a $308 million theft of holdings from crypto broker DMM Bitcoin this spring—a heist that forced the company to shut down earlier this month.”
Chris Lehmann – The Nation - Trump’s Crackpot Crypto Scheme to Reduce Inflation Would Be a Financial Catastrophe
I believe that most Americans have no interest in a BTC reserve, but I don’t think it’s the kind of thing people would get worked up over, because there is such little understanding. Regardless, this notion has caused a speculative frenzy.
Chart 2 below shows the price of Bitcoin in USD for the last ten years. It’s been a wild ride! One thing that stands out to me is the persistent boom/bust pattern that seems to be recurring. Personally, I’m not a aware of any asset that has shown such extreme volatility that hasn’t eventually proven to be massively overvalued, if not worthless. On multiple occasions, BTC has dropped 90% or more. In my experience, assets that drop that much don’t usually set new records anytime soon. Yet, each time there’s been a massive drop it has been driven to new highs. This pattern is now the expectation of the speculators. Explanations of why this is happening are hard to come by, but there have been studies done which point to massive manipulation in the Bitcoin market.
Chart 2: Price of Bitcoin vs. U.S. Dollar
At Cal Berkeley, there is a computer scientist by the name of Nicholas Weaver who has written and interviewed extensively about what he feels is manipulation in the cryptocurrency market, and how the entire structure is set to fail. He claims that Bitcoin miners hold on to what they’ve mined rather than sell it. The cost of the mining, which is extremely expensive in terms of computers and electricity, is financed by borrowing in regular currencies. If true, this tells us that the miners have every reason to want the price to go much higher, and that a sharp drop could make much of their debt unpayable. Such a drop could cause them to dump enormous amounts of cryptocurrency on the market, crashing the price. In his own words:
“It will implode spectacularly. The only question is when. I thought it would have actually imploded a year ago. But basically, what we saw with Terra and Luna, where it collapsed suddenly due to these downward positive feedback loops—situations where basically the system is designed to collapse utterly and quickly—those will happen to the larger cryptocurrency space. Because, for example, the mining process is horribly expensive. We’re talking [a measurable percentage] of the world’s electricity consumption, most of that has not been paid for. So the mining companies for the most part have been taking the cryptocurrency and borrowing against the cryptocurrency that they create, rather than sell it, because the market’s actually very thin.
This means there’s a huge amount that is subject to potentially catastrophic margin calls. And that creates a feedback loop where the price drops a little, somebody’s forced to sell. That drops the price more. They’re forced to sell more. This creates a feedback loop that drives the price into the ground, catastrophically.
The previous times this has happened, we had the bubble at 100, powered by fraud at Mt. Gox. And that imploded down to 10. We had a bubble to a 1000 powered by fraud, it imploded and went back down to 100. We had a bubble at 10,000 powered by Tether, it blew up and went back down to 1,000. And now we’re at a bubble where Bitcoin blew up to 60,000, fueled by Tether and falling. But I don’t think there’ll be a fifth bubble. Because basically, they will have broken all the suckers left to break. There’s only so many more suckers that can be brought into that space. Once you burn out a sucker, they don’t come back. They’re a non-renewable resource. So they’re going to end up running out of greater fools. “
Nicholas Weaver Interview - Why This Computer Scientist Says All Cryptocurrency Should “Die in a Fire”
This interview is a couple of years old, and it shows that Weaver was quite wrong on that last part. However, he may have had a different opinion had he known Trump would acquire a stake in a cryptocurrency business, and would get reelected, creating a huge incentive for him to push a BTC reserve. Who would have guessed that the ultimate “greater fool” might be the U.S. government?
Forgive me for falling down the Bitcoin rabbit hole. No one can say it’s not an interesting subject. But the real point I want to make is that the Trump administration is promising one of the most drastic shifts in economic policy outside of major wars. I’ve made several points about how many of these policies may have detrimental effects (particularly short-term), and the anxiety this should cause.
So far, markets have shown very little of the fear which is usually evident at such times. The U.S. economy has been quite resilient despite the Federal Reserve hiking rates at one of the quickest paces on record, so some may say there’s no reason to worry. With that in mind, I would add that when markets are showing bubble like activity, that positive sentiment may help more than just financial market prices. The late 1990s tech bubble and the blistering economy of the time were not coincidences. A bubble mentality is both a consequence and a driver of a strong economy. Rampant optimism usually leads to more leverage being applied in these periods, which is what can make them so dangerous.
Never in history have we seen such a broadscale elevation in asset prices. Market bubbles usually infect no more than a few types of assets at a time. In the late 1990s, it was mostly stocks, with the tech space being the focus. in the mid-2000s, it was commodities and housing, with the latter being leveraged through reckless issuance of mortgages, and economically unsound financial derivatives. Bubbles create wealth effects that can add extra growth to an economy, as participants feel much more comfortable spending, and don’t feel the need to save. This is often exacerbated by borrowing against rising asset prices. The problem arises when those asset prices reverse, and collateral is no longer sufficient to support the debt.
All that said, it’s possible that economic and market momentum will power us to new highs in 2025. However, I believe that is a low probability. While the erratic nature of Donald Trump makes it extremely difficult to know what policies we will actually see, the likelihood is that with mass deportations, tariffs, and widely expensive markets, the smart bet is that chaos will reign. It’s only a question of how long before the fireworks start.
Disclaimer:
The information provided in this newsletter is for educational and informational purposes only and should not be considered as investment advice, a recommendation, or an offer to buy or sell any securities. The views expressed are based on personal opinions and analysis of market conditions, which are subject to change at any time without notice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Readers are advised to conduct their own research or consult with a qualified financial advisor before making any investment decisions. The publisher is not responsible for any investment decisions made based on the information provided in this newsletter.