Counting The Trump Chickens

Yesterday we spoke to the surging sharemarkets in the wake of the Trump victory.

So why did we call it irrational exuberance?  Well it looks like the market is counting its chickens before they hatch.

For a start the market is pricing in fiscal stimulus that hasn’t even been approved yet.  It also appears to be comparing this to ‘Reaganomics’ without comparing the two eras.  When Reagan came into power US government debt was just 25% of GDP, interest rates were sky high, the 10 year Treasury bond yielded 12.7%, inflation was 13.6%, and they were enjoying a bull market.  Trump inherits government debt over 76% of GDP and an eye watering $19.6 trillion, interest rates are at record lows near zero, 10 year US Treasuries were just 1.7% (and now already 2.3%), inflation struggling to make the Fed’s target of 2%, and the market showing signs of wobbles (though now surging…).  Just months after Reagan took office the US entered a recession and shares fell 22% after a Trump like 7% surge on his election to the end of November.  The talking heads discount that happening next year but many more objectively think it’s a real possibility, especially if the Fed hike in December.

People forget that some of what Reagan wanted to do was blocked by Congress and seem to forget the GOP are hardly in love with Trump.  Beliefs that somehow a Republican Congress (in both houses) will rubber stamp a Trump fiscal package that proposes adding $5 trillion to a $20 trillion debt pile they have already pushed Obama back on, seems a little presumptuous at best.

This week US Fed vice chair Fischer issued a clear warning to the new administration that there is “not a lot of room to increase the US deficit without adverse consequences down the road”.  i.e. at a time when the US Fed actually really probably might raise rates in December, that 0.25% will cost the government an extra $50 billion in annual interest and add to debt stress already evident throughout the market.  This aint 1980…

A lot of this markets action is on the belief these policies will bring inflation (you will read about ‘Trumpflation’ more and more), something that until only recently monetary stimulus has been unable to achieve.  Inflation is the only tool left to try and whittle away that debt pile.  However, high inflation without strong growth leads to that bogey man, stagflation (if you think gold likes inflation, it simply LOVES stagflation). Whilst the fiscal stimulus proposed will bolster segments of the US economy, the accompanying higher USD together with immigration controls could see significant adverse pressures in many others.  This at a time when the growth starting position is just 1.7% GDP.

In short there is much water to flow under the yet to be constructed Trump bridge and this market reaction has all the hallmarks of a ‘buy the rumour, sell the fact’ set up.  Stay tuned, don’t count your chickens, and stay balanced. 

Speaking of balance, last night we had ‘The Future Proof Portfolio’ seminar at the State Library Queensland.  The feedback from attendees was fantastic thanks.   Simon Gabbie gave us great insight into how to more effectively invest in shares, Matthew Gross provided an unbiased and insightful lesson in property investment and yours truly presented on gold and silver bullion.  If you couldn’t make it and want to learn more please don’t hesitate to contact us.