Something is brewing in the economy. Since the election of Donald Trump, interest rates have spiked, copper prices have surged, and various sectors of the stock market have swung “bigly” on speculation of what “Trumponomics” will bring.
Scores of triumphant Republican commentators are already painting a bullish picture of the Trump economy. The GOP – which will control the White House, Congress, and most state governments – has a rare opportunity to implement a pro-growth agenda.
Republicans squandered their last great window of opportunity. George W. Bush and his Congressional allies grew government spending at a faster clip than the economy and saddled the country with trillions of dollars in new debt.
It’s too early to tell whether Republicans will finally get serious about fiscal responsibility. No one knows exactly how Donald Trump will govern or how the economy will perform under his presidency. But one trend that is now being signaled by markets is a pick-up in inflation.
Bonds and Base Metals Are Signaling Future Inflation
The yield on the benchmark 10-year Treasury note spiked from 1.9% on Election Day to as high as 2.5% by Christmas. For the bond market to move that far that fast is unusual. In fact, it was the sharpest yield surge in 15 years.
What may be worrying the bond market is the potential for the government’s borrowing needs to grow under the Trump presidency. Rising debt means rising credit risk and inflation risk, which means higher bond yields.
“Trumpflation is coming,” declares Forbes columnist Kenneth Rapoza.
The president-elect proposes a combination of tax cuts and spending increases that could swell the deficit. The Committee for a Responsible Federal Budget claims that Trumponomics will add $5.3 trillion to the federal debt over 10 years.
Of course, Trump disputes that figure. He says that faster rates of economic growth will add to federal revenues and pay for the tax cuts. It’s possible. But you have to be a committed optimist to believe the deficits won’t grow at all over the next four years.
At the core of Trump’s domestic spending agenda is an ambitious infrastructure program. Stocks related to building and construction have boomed since Trump’s election win. So, have the prices of copper and palladium. These economically sensitive industrial metals moved in the opposite direction of gold and silver post-election.
Inflationary and Deflationary Forces Competing with Each Other
Are rising base metals indicating rising inflation dead ahead? Or does the recent slump in gold prices suggest disinflationary pressures to come?
Let’s take a step back and consider the larger trends. Gold and silver prices still show positive gains for 2016. The recent selloff occurred as a result of a rising U.S. Dollar Index and investor optimism on the prospects for the Trump economy. Base metals tend to benefit from optimism, while precious metals tend to thrive more on pessimism.
The early stage of a rising inflationary trend tends to be associated with positive things such as rising demand for raw materials, new job creation, and increased economic output. Only later do concerns over rising price levels and rising interest rates cause investors to react fearfully and seek the protection of precious metals.