In “The New World”, the band X sings:
“Honest to goodness
The bars weren’t open this morning
They must have been voting for the president of something…
It was better before
Before they voted for what’s-his-name
This was supposed to be the new world”.
“Don’t stop thinking about tomorrow
Don’t stop, it’ll soon be here
It’ll be, better than before
Yesterday’s gone, yesterday’s gone”. Fleetwood Mac, “Don’t Stop”
OVERVIEW AND CONCLUSION
What marketplace consequences will ensue from Donald Trump’s surprising “populist” victory? Much obviously depends on how successfully the new President implements his campaign agenda. Some aspects of his plans in principle and practice require clarification. And he might elect to change his current political views and aims. However, at present one should assume this leader generally will seek to accomplish the broad outlines of his recent messages, particularly in the economic arena.
In trade and several other matters, the President retains substantial freedom relative to Congress. However, even though the Republicans control the Senate and House of Representatives, passage of the new President’s proposed legislation is not guaranteed. The Republican Party has significant divisions. Senate Democrats, as they control well over 40 seats, likely can block many executive branch proposals.
Moreover, in a globalized and multipolar world, America’s political and economic fields, even after dramatic change such as that represented by Trump’s triumph, of course do not move independently of other realms. In addition, numerous assorted and entangled variables and trends, not just those closely linked to the 2016 election and American political (economic) scene, influence financial marketplaces in the United States and elsewhere. Besides, benchmark interest rate, currency, stock, and commodity benchmarks themselves intertwine. The economic game, like the political one, moves as it plays.
With such complexities and caveats in mind, let’s concentrate on three key parts of the American and global financial marketplace pictures, the United States Treasury 10 year note, the broad real trade-weighted US dollar (“TWD”), and the S+P 500. The long run yield trend for the UST probably is up. In the near term, the dollar will challenge and perhaps break modestly above its January 2016 high. However, as time passes and the new President and his friends fight to implement his policies, the trade-weighted dollar probably will embark upon a notable bear trend. Though it is a very difficult call, the S+P 500 probably will not surpass 8/15/16’s record high at 2194 by more than five percent.
To some extent, and although not exclusively, the patterns of rising interest rates and the (eventually) weaker dollar probably will derive from a growing lack of domestic and international confidence in American political and economic leadership and policies. America’s ongoing severe political and other cultural divisions likely will interrelate with this eroding trust. The passing and outcome of America’s Election Day 11/8/16 did not bury the nation’s substantial conflicts. Widespread support for Trump and Sanders showed that American “populist” ideologies, whether within so-called right wing/conservative congregations or left wing/liberal fraternities, likely will not soon surrender their attractiveness or fervor. But the “establishment” (elites) have not fled the battleground or abandoned their doctrines.
UPCOMING MARKETPLACE ADVENTURES
“Fasten your seatbelts, it’s going to be a bumpy night!” advises Margo Channing in the movie “All About Eve” (Joseph Mankiewicz, director)
The aftermath of Trump’s victory saw the UST 10 year note yield jump sharply, breaking above 3/16/16’s 2.00 percent. Yet recall that UST yields had been climbing higher several months prior to his win; recall 7/6/16’s 1.32 percent bottom. US inflation expectations also have ascended since early summer. The St. Louis Fed’s measure of expected inflation (on average) for the five year period that begins five years from today has risen from 1.41 percent (7/5/16) to over two pc recently (11/10/16’s 2.06pc).
Why should US Treasury 10 year note yields keep rising from current levels around 2.25 percent?
First, America’s debt was rather lofty and likely to trend higher over the next decade (and probably thereafter) even before Trump’s win. See the Congressional Budget Office’s “An Update to the Budget and Economic Outlook: 2016 to 2026” (8/23/16; this study did not include Trump’s plans). Second, and very importantly, most experts believe Trump’s (Republican) tax and spending (think of infrastructure projects to help make America great again) proposals, if enacted, will result in even more massive budgets deficits. Gaping budget holes, especially those lasting for several years, represent a demand for cash to fill them. Who will do so, and at what price? For many months (a long time before the November 2016 election), foreign official institutions have been notable and consistent net sellers of UST notes and bonds (next Treasury International System/TIC release is 11/16/16). See the essay “Running for Cover: Foreign Official Holdings of US Treasury Securities” (10/13/16).
Moreover, the Federal Reserve Board, which has for several years repressed the Federal Funds rate (and thus the government yield curve) at artificially low levels, again has hinted it will gradually normalize rates. The next Fed meeting is 12/13-14/16. Admittedly, inflation benchmarks such as the consumer price index and personal consumption expenditures have not marched above the Fed’s beloved two percent target. The Fed nevertheless nowadays likely will be more inclined to push rates higher. Not only is the election past, but also the likelihood of monumental US fiscal stimulus (huge budget deficits) encourages rate hikes. In addition, headline unemployment is around the Fed’s goal. Asset prices such as stocks (S+P 500) and real estate have soared from their international economic disaster depths.
In his political apprenticeship on the campaign trails, Trump criticized Fed rate suppression. Perhaps he should have been more careful regarding the higher policy rates for which he implicitly asked. Since Trump and others criticized the Fed for keeping rates on the ground floor, they hardly can complain (at least for a while) about upward Federal Funds rate moves.
In addition, keep in mind that the Fed for several years engaged in mammoth money printing (quantitative easing). Although the Fed ceased QE, it has not reversed its money printing actions. Thus though some inflation measures (such as the CPI) are low, even before the election 2016 outcome, there arguably was potential for eventual inflation ascents as a consequence of the Fed’s ardent QE monetary stimulus. Assuming the new US political regime enacts hefty individual (and corporate) tax cuts and embarks on its infrastructure schemes, Trump’s festive tax and spending party will intertwine with this earlier Fed money printing extravaganza. Also, the European Central Bank and Bank of Japan continue to print money.
Signs of US wage inflation have appeared. There remains some pressure to boost the minimum wage. Would a big infrastructure plan, if it occurs a time of low headline unemployment, lift labor prices? Also, suppose the US deports a significant number of illegal (undocumented foreign) workers; that will tend to push wages and thus interest rates higher, though gurus can quarrel as to how much.
Suppose inflation marches higher and sustains levels around the Fed’s two percent weathervane. To (finally) give savers (creditors) a decent return relative to inflation, UST rates obviously should be above that goal. Focus on the UST 10 year. A one pc premium (100 basis points) makes the UST 10 year yield 3.00pc, well above current levels. The 6/11/15 top was 2.50pc. Above that stands 1/2/14’s 3.05pc peak. A two pc premium makes the UST 4.00pc. Obviously, no guarantee exists that the inflation level, if it advances, will halt at two percent (or that the Fed immediately will fight vigorously to contain inflation once it touches two pc).
Suppose US government (and many other related) interest rates rise from low levels. Will current debt holders start to run for the exits? Supply from those sellers of “old” debt may supplement the US government’s effort to sell “new” securities to finance tax cuts and spending programs.
Finally, suppose America imposes tariffs to ensure “fair” trade. Viewed alone, this perhaps will tend to increase the price of goods and services sold in the US. Of course other nations may respond. Some may cut prices to retain access to the American marketplace. Or, a genuine trade war could help weaken world (and US) GDP and keep prices and rates low.
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The New World- US Election Aftermath (11-15-16)