Skip to main content

The Trump Economy & Financial Market

After shaking off the “He’s crazy” jitters the evening of November 8th, the markets quickly focused upon the Trump stimulative policies including especially his tax and regulatory stances.  Since then stocks have been riding high and bonds have gotten crushed, telling us that the market expects earnings growth, wage growth, and inflation.  It is indeed exciting to consider a world that is freer, with less red tape.  It is even more exciting to consider an economy where the forces of supply and demand determine capital allocations rather than the highly inefficient government process.

Naysayers focus upon the burden of our massive government debt and our out of control deficits, which add to that debt annually.  They correctly point out that higher interest rates, a hallmark of greater economic vibrancy and of inflation only exacerbate the debt problem.  The argument follows that the deflationary forces, of which the massive global government indebtedness is one large factor, are too powerful for even Mr. Trump’s stimulus/inflationary policies to overcome.

The thing is, there is no other way out of our debt trap.  We will have to grow our way out of it.  With a U.S. economy of $20T GDP we cannot stand a debt level of $20T, let alone $25T or $30T. However, with a GDP of $30T, or even better $40T, all of a sudden the debt burden looks much more manageable.  While it is not certain that the Trump policies will get us where we need to be, it should be clear to all that if we didn’t at least try then a government bond default, or a long period of malaise, characterized by no growth and ultra low rates, was likely our only other option.  On November 8th the public made a choice for hope and optimism, rather than one involving a class war over a shrinking pile of crumbs.   If things go well, those still clinging to the rhetoric of class warfare and division will over time begrudgingly join the party.  If things go poorly, we’ll all go back to fighting for the crumbs.  In that light, wasn’t the choice a “no-brainer?”

As for the rest of the world, they really have no choice but to play the same game as us.  They will all follow our lead and pursue stimulative and inflationary policies.  What Mr. Trump understands better than his predecessors, and what he shares most in common with former President Reagan, is that, with by far the world’s largest economy, we make the rules that others must follow.  We don’t calibrate to the world, but vice versa.

In the meantime, the big question will be for how long the honeymoon period will last in the financial markets.  For the past 7 years, whenever rates ticked up even a bit asset values plummeted. Underlying this price action was the belief that incomes were not likely to increase at all, so higher rates simply meant applying a higher discount rate to static future cash flows.  In the post-election world all that has changed overnight.  A significant and sudden spike in interest rates has not brought about a collapse in asset values, thus implying that the market believes that future income streams will grow significantly enough to offset the negative effect of a higher discount rate being applied to them.  My guess, however, is that incomes will not spike so quickly - not for companies, properties, or taxpayers.  Will the market lose patience or faith?  Probably.  Will that create volatility? Definitely. In the end, I’d say that Dow 30,000 is a much better bet than Dow 10,000, but it may be a bumpy road.

Popular posts from this blog

Greed & Laziness

In this most contentious and fascinating of election cycles, when nearly each conversation leads to politics, and when polarization runs so high, I ask myself - what is the essence of the debate between left and right?  What does it really mean to be a Conservative or a Liberal?

Why Rates Must Remain Low

There is an old bond trader joke that I first heard in the 1980’s when I traded mortgage-backed securities at Drexel Burnham Lambert.  It went like this:  “Upon dying, Albert Einstein finds himself in what he is told is heaven.  He encounters another individual there and asks him what his IQ is.  When he is told that it is 175 he is overjoyed, knowing that he’s found an intellectual peer with whom he can share much.  Upon meeting another, he discovers that person’s IQ is 140 and is pleased to have met another highly intelligent person with whom he can enjoy chess and other pursuits.  He is feeling pretty good about heaven, when he comes across a person who tells him that his IQ is a mere 90, and he is flummoxed.  What, he wonders, is this guy doing in my heaven and what can I even say to this person?  Then it comes to him.  ‘Where,’ he asks, ‘do you think interest rates are heading?’”

CMBS In Flux

The CMBS market has been in a period of upheaval, with dramatic spread widening on bonds and a resulting much more expensive cost of capital for real estate borrowers who depend upon this channel for their debt financing.Market participants today wonder whether we’ve entered a period like the summer of 2011, when spreads on bonds last widened this dramatically and then snapped back within a year to provide tremendous returns for those who were courageous enough to purchase bonds at the time when there was panic selling.Or, people wonder, is this recent downturn a prelude to a structural or systemic problem, like what was experienced in 2007, when spreads widened and sucked investors in, only to punish those early responders with a much more dramatic price collapse in the next 24 months.