The Trump Bubble, or What Happens When 2 + 2 = 5

A friend said to me that I should give everyone a little update on where I think markets and the economy are at, and about my model portfolio. That’s probably a good idea.

First of all, relax. Take a breath. If I thought that you guys were in danger, I’d alert you. I always do, don’t I? Right now, things are in a holding pattern. A holding pattern of a kind of a tense, paranoid euphoria. Let me explain what I mean by that, and we’re going to go deep. I’m going to teach you about stock markets and economies, how bubbles form, and what happens as they burst.

Two things are happening right now, but they can’t both be true. One: the tariffs are taking effect, and raising billions, from Americans—that’s according to Trump’s guys themselves—which is to say, beginning to operate as a regressive authoritarian tax. Two: the stock market thinks “Trump Always Chickens Out,” meaning the tariffs don’t exist at all, not to mention the larger trade war and ruinous set of economic policies.

Let me say it again. Both of these things can’t be true. Either the tariffs are real, hence they’re already costing billions, and so they’re having a very real effect on the real economy, as in, corporate profits, earnings, which translate to layoffs, less economic activity, less spending and investment, and so on, or the tariffs aren’t real, and everything’s fine in the world of breakneck capitalism.

So. Which is it?

That depends on who you ask. And that’s never good. A thing shouldn’t be true depending on who you ask, should it? That alone tells us we’re in trouble.

If you ask the stock market, it’s the latter: none of this is real. Everything is fine, never better, in fact, since the S&P is at “record” levels (it always is.)

But if you ask, well, the world’s best economists, little old me, or the world’s wisest investors, they’re sounding the alarm bells. They’ll tell you that the stock market is seriously overvalued. I won’t bore you with the technical indicators, but most of them show a stock market exceeding dot com bubble levels. So if you ask the smart money, it’s saying: all of this is very real.

Here we have the makings of something very, very strange, very dangerous, and probably lethal.

I’ll call it the MAGA bubble, or the Trump bubble, for short. What it means is this. Trump appears to have conned or seduced or bamboozled, take your pick, the stock market, into believing that all his trade war levies and tariffs and taxes and so forth don’t really exist. But in fact they do, because at the same time, Trump’s boasting that billions are flowing into his coffers.

Like I said, both of those things can’t coexist at once, but the point is this: stock markets are ignoring that because there’s what was once called a Reality Distortion Field at work here. They said that about Steve Jobs, in a sort of benign way. This isn’t benign. This is going to end very, very badly.

Because if we understand that in fact there is a reality here, there are then a further two things we have to distinguish between. Either the stock market is overvalued at levels we haven’t seen since the dot com bubble, or stocks are now just to be valued at entirely new levels, permanently, forever, going forward, and the old rules of valuation just don’t apply.

As in, it’s a whole new math now, in which 2+2 = 5. Because Trump says so, and that’s how things work now. Reality doesn’t matter anymore.

In that scenario, we all accept that valuations have reached some kind of new plateau, just because we all agree that, well, there’s no other game in town, which is known as TINA in the financial parlance, for There Is No Alternative.

But can 2+2 really equal five, just because Trump says so? Or does 2+2 still equal four?

Stock markets are saying 2+2=5 now. Do you buy it? Do your financial advisors buy it? Most of them do, and that’s troubling to me.

So which of those do you believe? 2+2 still equals four, or 2+2 equals five now?

I think it’s pretty dangerous to believe that the rules of economics have changed forever, just because Trump says so. And I think it’s doubly dangerous to believe that just because everyone else believes that. And I think it’s triply dangerous for your finance guys to be saying any of this is OK or normal or reasonable to you.

Because all of this is in fact the classic, textbook making of a bubble. Think back to the dot com days. What was the idea then? Precisely the above: the rules of valuation had changed permanently. Because this was to be a whole new economy. In which oldfangled notions of profitability and sound management just didn’t matter anymore. That euphoria, that mania, took hold so completely that it became a whole social current and fad. Entire books were written about it, that filled whole sections of bookstores.

And none of it turned out to be remotely true.

Bubbles always tell us that the rules have changed, and now 2+2 magically equals five. That 2+2 doesn’t equal four anymore, because technology, magic, rarity, tulips, whatever, in this case, Trump’s authoritarianism, and now, the rules of math, reality, and logic have changed permanently. This is why bubbles have this strange feeling of euphoria: they’re about unconsciously breaking free from the strictures of cause-and-effect reality itself, into a dizzying lightness.

But the rules of math, reality, and logic underlying economics have never changed, to my knowledge, and never do.

So I would think twice about the idea that the rules have changed, and this is a whole new economy, one in which 2+2=5, and we can have trade wars, authoritarianism, collapsing institutions, and booming stock markets. Maybe I’m wrong. Maybe America’s so delusional that it can sustain such a fantasy. At least for a time, anyways. Maybe, I don’t know, your boomer uncle just doesn’t give a damn about reality anymore, pardon my French, and so maybe collective psychosis can even make 2+2=5 for a year, two, or even three, as it strains and grunts. Maybe you and I can levitate if we just think hard enough. Wait, can we? You see my point, maybe.

If 2+2 can’t equal five forever, and you follow me so far, then let’s ask: if there’s to be a crash, when will it happen?

History gives us some pretty clear clues. When did Black Monday happen in 1929? October. When did it happen again in 1987? October. And in 2008? The end of September.

Why does that pattern occur? Well, it’s because Wall Street takes the end of the summer off. And before it does, it juices the markets as much as it can, so clients don’t bother brokers too much. Then, as and when it gets back, earnings season begins, the most crucial ones of the year, the second half, and the fireworks tend to begin. The pent up stress in the system rips outwards.

I think that patterns’s a very useful guide to now. I’d imagine that if this is a bubble, then it’ll burst along those lines. The other possibility, like I said, is that this isn’t a bubble, and we’re just going to agree to value stocks at levels that at any point since the dot comb bubble would’ve been considered irrational, extreme, and verging on absurd.

Maybe we’re all making that bargain. That’s hard to say. Societies do strange things. Maybe, collectively, Americans—at least those with enough money—have decided that stocks are to be bid up to infinity, because there’s just No Alternative. And so risk doesn’t matter anymore, because, well, nothing much does, since democracy’s going bye-bye anyways.

But even if that’s the case, let me add a caveat. That doesn’t mean there’s a free money machine. In that case, the dollar will have to fall in a compensatory fashion, most likely. Because while Americans might but into the notion that stocks are to be valued irrationally, the world probably won’t. It does have alternatives. And America’s debt will also grow exponentially, while bonds fall in price, because of course, if nothing matters except a rising stock market, not, say, having a functioning society, well, would you invest in a such a country?

So there’s no free lunch here. And that’s the point.

Right now, markets are acting like there is such a thing as a free lunch. But there isn’t, and I don’t even like that metaphor, because I think kids should indeed have free lunches. Sadly, though, in economics and finance, the idea of a free lunch is the oldest trick in the book. And markets are believing it because Trump is telling them that two things can exist at once that in reality must annihilate each other: either tariffs can flow from Americans’ pockets into Trump’s coffers, or the tariffs can be imaginary, but not both. The free lunch here is that nobody pays the price in the fantasy world of this delusion. Hence, the MAGA bubble. We can have our trade war, and eat our cake, too! Really? I wonder what history has to say about that.

If you ask me, it says: the price must always be paid for folly. That price is usually self-destruction. And it lands upon those who buy into the fantasy the most deeply.

I suggest discussing all this with your finance guys. And pressing them on it. Do they think both these things can be true at once? That “Trump Always Chickens Out,” yet there the tariffs are, raising billions? Do they think stocks are at not just record “levels,” but steep overvaluations? If at fundamental levels, we’re valuing stocks now even over and above dot com bubble levels, do they believe that this is just some kind of Brave New World all over again? What’s the plan here to protect you from the suspicion that you probably share by now, that this feels a whole lot like a mega bubble?

Right now, I’d say the holding pattern will go on through the summer. I could be wrong, of course. Nobody can predict the markets, as much as I can predict global events, and definitely not markets as irrational and euphoric and fragile as this one. But that’s my guess for now (watch everything implode tomorrow, LOL.)

So that’s a little update. The model portfolio will be there for you guys in a bit. The above should give you a window into why I decided to take a little summer break when I did, and not, say next month.

As always, if you need help or advice, just reach out.

Lots of love,

Umair (and Snowy!)