by David Haggith, The Great Recession Blog:

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.

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