The Trump Era Begins
We could conceivably write a Pyrspectives without referring to THE election and President-elect Trump and, to be frank, it is tempting to do so as there are so many unknowns that it is difficult to be cogent and value-additive. Nevertheless, we feel compelled to make some stumbling attempt at comment. We never fall into the trap of forecasting the outcome of elections, but if we are being totally honest we did believe it unlikely that we would end up discussing a Trump Presidency.
The first observation to make is that the stock market clearly likes the prospect of Mr. Trump at the helm. The “Trump-bounce” in the stock indices is very pronounced even on very longterm charts. The market likes the sound of a big-spending President, who has also promised a substantial reduction in the corporate tax rate. The jaw-boning about tariffs and protection seems not to disturb the traders one whit (it disturbs us!).
Janet Yellen, Chair of the Federal Reserve, has met the change of leader head-on by raising the Fed Funds rate by a quarter of one percent whilst forecasting as many as three increases in 2017. The exuberance shown by Wall Street to Trump’s election victory left her with little option but to make a move. The bond market, on the other hand, has not been appreciative of this turn of events. Yields across all maturities have risen sharply — and not just in the U.S. The U.S. 10-year benchmark treasury yield dipped to a low point of 1.36% on July 8th this year. At the time of writing it has risen to 2.5%. Ouch! (If you’re a holder). If you are a non-holder (and, in particular, a defined-benefit pension fund) you should be cheering. Finally, bond yields may begin to make some sense. We have read many times that Mr. Trump could be another President Reagan — that is, a President not afraid to turn the fiscal spigots at a rapid rate — spend the money now in the hope that growth eventually bails you out. At the risk of being accused of being out-of touch curmudgeons (again), we feel it necessary to point out some major differences between January 1981 and today. Take a look at the table below:
Mr. Reagan inherited a stagnant economy with high inflation and massive interest rates (they go hand-in-hand) but, importantly, very low levels of public and private debt. He was able to spend big and encourage others to do so, safe in the knowledge that the fiscal situation was more or less in control — at least during his two terms. Inflation and interest rates tumbled and the economy perked up (eventually). Mr. Trump, on the other hand, inherits an economy with tiny interest rates, record debt levels, an expensive stock market, modest growth, near-full employment, extremely low inflation and a central bank that has blown its balance sheet four-fold (relative to GDP) since the Reagan years. The money has poured into the system but the economic wheels have gained little traction — with the obvious exception of the stock and bond markets.
The Organization for Economic Co-operation and Development (OECD) has published some insightful work on just how poor the “recovery” from the 2008-9 recession has been, relative to the previous three recession recoveries. The data relates to all OECD member countries but the trend applies equally to the United States. The economic wheels have been skidding all over the world.
GDP Growth following recessions
The public debt situation in the U.S. gives the President-elect very little wiggle room. The OECD, in its latest forecast, suggests that nominal GDP may be able to outgrow the expansion in public expenditure mooted by Mr. Trump. Maybe, but the economic lessons from the last decade and a half give us justified cause for skepticism.