Make America Great Again.
Certainly the market has little doubt about Trump's ability to follow through on his campaign slogan with a Dow rally for Nov of 6.7% and S&P 500 of 4.4%. Government bonds were anihilated in Nov with long US Treasuries, as measured by the BAML G802 Index of 15+ year treasury bonds, being -7.5% after being -4.1% in Oct. These are big moves all the way around but especially so in the long end (10-30yr) bond markets. What happened?
We went from Deflation on Nov 7th to Inflation on Nov 8th/9th...overnight, jsut like that. Deflation is good for long bonds, cash and otherwise slow gorwth, conservative investment vehicles. Inflation is bad for long bonds and good (at least in the short term for stocks). But wow, did it move fast and hard.
It moved so fast and hard, one has to wonder if it is overdone and what is priced into the market.
What I notice first and foremost, is the amount of monetary tightening accomplished in the US system in a matter of weeks (as I said to Scott earlier this month, "we just got a year's worth of monetary tightening in one week"). We call this "monetary conditions" and what really tightened up those conditions were two things:
Where does this leave us?
You have all probably done a bit of reading on Trumpflation, Trumpenomics, etc which have one basic goal...create inflation through fiscal stimulus. Monetary stimulus has run it's course as I wrote in early Sept here: highrockcapital.ca/pauls-blog/what-the-ecb-said-or-didnt-say-yesterday-and-peak-central-bank-liquidity and Trump was smart enough to seize on it and come with a campaign with a promise of massive fiscal stimulus. The reason why this was somewhat surpirsing to most was that the level of government debt (and government debt to GDP) is so high that governments the world over are in no position to be gambling on increasing debt levels in the hopes that their infrastructure spend, and other debt-increasing policies, will increase growth and therfore tax receipts which, ultimately, will help decrease the debt burden. Well Trump was a little bit more, "damn the debt", and "lets get at it". He does own a casino or two, doesn't he?
Trudeau campaigned with the same promise and he is 14 months into his infrasturcture spend and massive deficit-increase. Anyone feeling like it is getting through to the rank and file voter in those 14 months? Not me. Not seeing it in the economic numbers either, that is for sure.
So why doesn't this Keynesian spend seem to be working as expected, at least in Canada? Because there is too much structural debt to be repaid and serviced, that's why? Every penny earned by a newly hired infrastructure worker goes to servicing debt, paying down debt and basic needs...not an F150 or a trip to Disney World.
As for Trump's plan, I have some doubts and observations:
To conclude, we are a little cautious that the rally in US stocks and the bloodbath in bonds might have just too much built in to them. Without doubt, Trump is a man of action and I do believe he will roll out his plan as quickly as he can so he can Make America Great Again. The problem might be Congress. Any and all delays will leave the market wondering. And they can look north of their border to see the effect on our economy of a $20bln deficit-spend (I lost count, is it -$30bln now?) over a 1 year period. Damn the debt.
I think Keynes is dead, isn't he?