Why a Trump Victory and an Old Italian Bank May Cause a Market Crash

by JDH on October 29, 2016

Let’s start with Trump; I’ll get to the Italian bank later.

trumpTrump will win on November 8.  In a landslide.  On November 9, the world will wake up to President Trump.

I know you think I’m crazy.   The main stream media has already declared Hillary the winner; they give Trump no chance.  I think they are wrong, and I have thought so for a long time, as evidenced by my post back in February, How President Donald Trump Will Impact Your Investments.

Before I tell you why Trump will win, let me disclose my conflicts of interests and biases:

I have none.

I am a Canadian, living in Canada.  I do not get a vote in the U.S. election.  If I had a vote, I wouldn’t vote, because death by hanging or death by firing squad is still death, so what’s the point?  They are both unworthy.  It is a sad commentary on America that, out of 350 million people, the best they could find to run for their highest office are two 70 year olds. That’s sad.

Here’s why Trump will win in a landslide:

1 The polls are wrong.  It’s happened before. In a poll released on Oct. 26, 1980, Ronald Reagan trailed President Jimmy Carter 47 percent to 39.  Reagan won in a landslide.  Why were the polls wrong in 1980?  Perhaps many people didn’t want to admit they were voting for Ronald Reagan.

Ronald Reagan was thought of as an amiable dunce.  An actor.  A lightweight.  Jimmy Carter was well liked, the peanut farmer who made good.  Voting against Carter was like voting against your father.  It just wasn’t done, so when a pollster called, you said you were voting for Carter.  But you weren’t.

In 1980 the economy was in a mess.  Unemployment was high.  Americans were being held hostage in Iran, and Carter couldn’t get them out.  It was time for a change.

Sound familiar?  Trump is a showman.  Big on flash, short on substance.  A reality TV star.  A lightweight.  Hillary Clinton is beloved, wife of a well-liked president, set to become the first female president.  Voting against Hillary is like voting against your mother.  It’s not done, so when a pollster calls you say you are with Hillary.  But you aren’t.

Labor Force Participation Rate

The economy is in a mess.  Unemployment is reported to be low, but the “man on the street” knows that’s a lie.  The Labor Force Participation Rate is under 63%, close to the lowest level ever.  People want jobs.

Immigration is a perceived to be an issue.  Real or imagined, voters are worried.

The average guy believes it’s time for a change.

2 In 2008, 93% of African-Americans voted for President Obama.  Not surprisingly, Trump started October with 9% of the black vote, about as expected.  By the third week of October, after Wikileaks started publishing damaging Clinton stories, Trump was up to 16%.  That’s stunning, and if that trend continues, Trump wins Florida, Virginia, Ohio and North Carolina, and he wins the presidency.

3 People show up at Trump rallies, but not Clinton rallies.  Since the conventions, Clinton was present at 34 rallies, and only a dozen of those events had crowds of more than 1,000 people.  Trump has held 80 events with crowds of more than 1,000, including 16 events with attendance of 10,000 or greater.

Does rally attendance prove anything?  No.  We all gawk at car crashes, but we wouldn’t vote for them.  Perhaps Mr. Trump is a spectacle, a carnival that you want to attend when it hits your home town.  Perhaps Hillary Clinton’s 30 years in the public eye have removed the mystery, so there is no need to show up.

Perhaps.  Or, perhaps, if you aren’t motivated enough to show up for a free speech, you won’t be motivated enough to show up on election day.  Advantage Trump.

4 In 1960 the average American got their news from a newscast on one of the three television networks, or from a printed newspaper.  The Main Stream Media (MSM) controlled the news.  We now know that President Kennedy had multiple extra-marital escapades, and was in poor health, but he died a hero because the MSM withheld those facts from the public.

Today only a small fraction of the population watches the evening news, and newsprint is a thing of the past.  Want proof?  You are reading this, on an electronic device.  Why would I read a newspaper with yesterday’s news, when I can scan Twitter and get instant news, unfiltered?

The overwhelmingly Democrat-leaning MSM is largely ignoring the Wikileaks revelations, so it may appear they are having no impact.  In truth, Twitter, YouTube, and Facebook, and alternate social media sites like gab.ai are now the source of information for an increasing percentage of the population.  It’s raw and unfiltered.  The MSM no longer controls the narrative, so they can’t induce a Hillary victory.

5 Trump is a master persuader.  I could write a book on this topic, but to hear it from the expert, read the work of Scott Adams, the creator of Dilbert.  The short version is this: everything Trump says is designed to persuade you on a sub-conscious level.  If you aren’t paying attention, you think he is just hurling insults, like calling Jeb! “low energy”, but “low energy” was a master-stroke of persuasion.  You understood the words, but had never heard them applied to a politician, so it stuck in your mind.  Then, every time you saw Jeb!, you remembered “low energy” and if he talked slowly, as he does, your pre-planted opinion of him as low energy was reinforced.  Jeb! had tons of money and the backing of the establishment, but Trump killed him early.

Trump “a-b” tests all phrases.  He will tweet out “Sick Hillary” and then “Crooked Hillary” to see which works best.  He uses both lines in speeches, and then uses the one that gets the best reaction.

He speaks at a fourth grade level, so the intelligentsia thinks that he’s stupid.  He’s not, because everyone can understand simple words.  That’s master persuasion.

6 Hillary is in big trouble.  On October 28 the FBI announced that they will be taking new ‘investigative steps’ on Clinton emails.  That’s not good on the eve of the election.  The Main Stream Media may be ignoring Wikileaks, but the public isn’t.  The new FBI investigation cannot be ignored by the MSM, and that is very bad news for Clinton.

If the other team scores four runs in the first inning, you have time to recover.  It’s the top of the ninth; there is very little time for Clinton to put a positive spin on this and change the narrative.  This is a huge problem for Clinton.

7 People are mad. The rich get richer.  Good, high-paying manufacturing jobs continue to leave the country.  It’s obvious to everyone in the “rust belt” that our kids will be worse off than our parents.  It’s unlikely that Trump can actually mitigate the impact of globalization, but people believe he can.

For the best summary of this phenomenon, listen to Michael Moore (who is not a Trump supporter, and I assume these comments are heavily edited and taken out of context):

Donald Trump came to the Detroit Economic Club and stood there in front of the Ford Motor executives and said: if you close these factories, as you are planning to do in Detroit, and rebuild them in Mexico, I am going to put a 35% tariff on those cars when you send them back and nobody’s going to buy them.

It was an amazing thing to see.

No politician — Republican or Democrat — had ever said anything like that to these executives. It was music to the ears of people in Michigan and Ohio and Pennsylvania and Wisconsin. The Brexit states. You live here in Ohio. You know what I am talking about.

The average guy is mad, and wants to demolish the status quo.  Trump is the “bull in the china shop” who will have no fear going to Washington and destroying the establishment.  You may disagree with that strategy, but that’s not the point.  The people want it, and they will vote for change.

That’s why I am predicting a Trump landslide victory.

A Trump victory will have a significant impact on the markets, primarily due to the shock value; it’s not expected, yet, so it will move markets.

But, the Trump victory will only be one of two big stories in the next six weeks.

The Referendum in Italy

It appears that a majority of Italians are of the view that their current weak economy is caused in large part by their membership in the European Union, and specifically their adherence to the Euro currency.  Italians want a return to the lira.  If they get it, the eurozone would collapse (Italy is Europe’s fourth largest economy), and a stock market crash would be virtually guaranteed.

On December 4, 2016 the Italian Prime Minister, Matteo Renzi, goes to the polls in a constitutional referendum.  Mr. Renzi is pro-EU, so he wants a “Yes” vote.  If he doesn’t win, he has promised to resign, and a new government would be formed (which is no big deal in Italy; I count 63 of them since the end of WWII).

The new government would likely be formed by The Five Star Movement, known as M5S.  It is a new party that is:

  • populist;
  • anti-globalist;
  • anti-euro and
  • anti-establishment.

Remind you of anyone?


So once the referendum fails and Renzi resigns, new elections are held, M5S comes to power, holds a vote to bring back the lira, and boom, down goes the EU.


Which brings us to the sad tale of the Banca Monte dei Paschi di Siena, one of Italy’s largest banks BMPS. It was founded in 1472, making it the oldest bank in the world.

Ten years ago it traded for around 100 euros.  Now it is less than 1.

Why?  Because according to the World Bank, about 18% of all bank loans in Italy are non-performing (where non-performing is defined as “no payments in over 90 days, and therefore not much chance we will see any money).

By way of comparison, France’s banks have 5% of their portfolios in non-performing loans, and the US is around 2%.

Canada is at 0.5%.

Yeah Canada! (Until the real estate market crashes, but that’s another story for another day).

BMPS is only alive thanks to two bailouts, and is currently attempting to raise enough money to stay alive.  Unfortunately they need to raise an amount equivalent to about 10 times their current market cap, so, not surprisingly, no investors want to through money down a hole.

To stay alive, a “bail in” may be required, like Cyprus did in 2013, where the bank closes on Friday, and on Saturday says to depositors “sorry, you can only have half of your money back, we need to keep the rest”.

If a bail in happens in the next few weeks, and if the EU gets blamed for the problems, how do you think Italians will vote at the referendum on December 4?

It will be a resounding No.  If BMPS fails, the referendum fails, the government collapses, and the EU is done.

November may literally be the month that changes the world.  Trump is elected on November 8, and perhaps shortly thereafter BMPS fails, bringing down the EU.


Investment Implications

Run for the hills.

Allow me to elaborate:

Run for the freakin’ hills!

A “surprise” Trump win crashes the stock market.

A “surprise” EU failure shoots gold through the roof.  Remember Brexit?  As a gold investor, that was my best single day win ever.

Here’s my advice

  1. Sell all non-gold stocks this week.  Raise cash.
  2. Buy gold.
  3. For extra find, buy the VIX, since volatility is likely to increase.  The ticker symbol is VXX, and it’s very low now, so could be a significant bounce if Trump wins, and/or if the polls decisively shift this week.


Gold stocks are an interesting conundrum.  In a stock market crash, everything goes down.  Investors sell their good stocks to cover their margin calls on their bad stocks, so it’s likely everything will suffer.  However, a gold drop will be short-lived.  The price of gold will go up, and will take gold stocks with it.

So, having cash heading into November is critical.  There will be blood in the streets.  Prepare to take advantage of the carnage.

I plan to play it through junior gold exploration companies, senior gold producers, and  NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS ( a high risk, high reward, 3x leveraged ETF).

I will probably also put some “play money” into a pure gamble: options on both NUGT and VXX.  The upside is huge, but a total bust is also likely, so don’t play with real money.


vxx-june2016As for the VIX, traded through the VXX – iPath S&P 500 VIX Short-Term Futures ETN: Here’s what happened before and after the Brexit surprise (see chart on right): The VIX bottomed at $54 on June 23, and traded over $65 on June 24, and then topped out just over $71 on June 28 and June 29 before adjusting back to under $58 by the end of the month.

So a 20% gain is easily possible, perhaps as high as 30% if you time the top and bottom perfectly.

VXX closed Friday at $33.43, so a 20% bump would put it around $40.  You could buy the VXX calls, strike price $33.50, November 11 expiration, for around $2.10 now.  If VXX goes to $40, those calls are worth $6.50, assuming all time premium is gone, so you triple your money.   It’s a risky play, so I would not put a significant bet on it.

By way of comparison, NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS bounced from under $19 to over $25 after the Brexit vote, or 31%, so the upside is similar.  (I remember it well; it was my best profit day ever).  NUGT is under $13 now, so a 30% pop puts it at just under $17, so you could buy the $13 calls, November 11 expiration, for $1.50, and hope to sell them for $4, or over a 150% profit.  Not bad, but not as much upside as the VIX.

We live in interesting times.

Be forewarned, and be prepared.

Feel free to comment below, or on the Buy High Sell Higher Forum.

Thanks for reading all 2100 words, my longest post in forever.  I’ll try to be more succinct next week.


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