First Brexit. Now Trump.
The people have spoken, and they’re giving the establishment — the ‘elite’ — the big middle finger.
And why not? Eight years after Lehman Brothers went out of business, we continue to stagnate in a low-growth economic swamp.
Some have done very, very well out of this. But many people have been left behind in the post-crisis world.
That in itself is not unusual. ‘New eras’ always create winners and losers. But there is a sense that the playing field is no longer level. The winners make the rules for themselves, and couldn’t give a hoot about the rest.
In the eyes of many US voters, Hillary Clinton comes from this school of ‘winners’ — the elites that have been managing the global economy for their own benefit for years.
Her loss is a repudiation of this type of economic management and what she stands for. It’s also a repudiation of Obama’s eight-year presidency. He came to the White House amid much fanfare. One of his key slogans was ‘Hope’.
But really, what did he deliver? Not a great deal as far as I can tell. I recently wrote that the boss of the Federal Reserve has more power than the US president. That was certainly the case during Obama’s two terms.
Will it continue to be the case, though?
Trump is hostile to the Fed. This is a good thing.
Whatever you think of the man, it would be wrong to dismiss him as a chauvinistic, megalomaniacal celebrity president.
He got the job done, and he’s getting ready to move into the White House. So let’s see what he’s going to bring.
Firstly, check out his economic advisory team. A key member is Judy Shelton, a co-director of the Sound Money Project at Atlas Network, a Washington DC-based think tank.
She writes regularly in publications such as the Wall Street Journal, advocating for stable currencies and a role for gold. More recently, she has criticised the efforts of central banks in trying to stimulate growth, calling for a new way of thinking.
For example, here’s an excerpt from an op-ed on 11 October:
‘Both Mr. Trump and Mrs. May say that the economy should work for everyone — not merely the privileged few. A nation’s government should act in the interests of everyday, working-class people. If fundamental reforms are needed to ensure that central-bank policies do not stratify citizens into winners and losers, so be it. Money should function as a reliable measuring tool and dependable store of value — not as an instrument of government policy.
‘It’s not as if the IMF has any new prescriptions. In a Sept. 28 speech at Northwestern University, IMF Managing Director Christine Lagarde dismissed as “pessimists” those who think central banks are not stimulating economic growth. “In my view, there is more policy space — more room to act — than is commonly believed,” she declared. “Monetary policy in advanced economies needs to remain expansive at this stage.”
‘Pesky voters, it seems, have had quite enough.’
Indeed they have.
And markets have quickly realised that Trump won’t manage the economy like an ageing Biff Tannen (from Back to the Future II). No — he will focus on growth from the ground up, not via monetary policy.
‘The election of Donald Trump as US president will unleash a policy shift away from monetary policy towards fiscal measures in the coming months, some of his key advisers told the Financial Times.
‘In particular, some members of his economic advisory team are convinced that central banks such as the US Federal Reserve have exhausted their use of super loose monetary policy. Instead, in the coming months they hope to announce a wave of new measures such as infrastructure spending, tax reform and deregulation to boost growth — and combat years of economic stagnation.’
While this means larger budget deficits in the short term, it should be positive for stocks.
That’s why you saw a massive reversal in the markets overnight, as fear gave way to hope. At one point, the Dow Jones futures were down 700 points. S&P 500 futures pointed to a 5% crash.
But markets soon realised Trump was stock-friendly. The Dow and S&P 500 both finished up more than 1% overnight. Gold gave back all its gains and finished the session at around US$1,270 an ounce, pretty much where it began 24 hours earlier.
Once the volatility dies down, I think you’ll see strong support for gold emerge. If Trump promises to spend up on infrastructure and cut taxes to revive growth, the budget deficit will blow out and put pressure on the dollar. Gold will benefit.
Treasury bonds won’t, though. Overnight, the yield on US 10-year Treasuries dropped a massive 21 basis points, to 2.07%.
Have a look at the chart of the 10-year yield below. It looks like the lows are in. The 35-year bond bull market could well be over.
Click to enlarge
That doesn’t mean yields are heading back to double-digits anytime soon. It doesn’t even mean that they’re heading back to 5%-plus. But it does mean that the days of strong capital gains from a structural decline in interest rates are over.
That could be bullish for stocks, too. As capital leaves the bond market, it will head into the stock market.
Rising yields won’t be positive for yield-based stocks — companies like utilities and real estate investment trusts that trade as if they were bonds. But most other stocks should do well. From a big picture perspective, stocks are still cheap, relative to bonds. Yields would have to rise considerably from here to change that.
At our recent ‘Great Repression’ conference, I pointed out this relative valuation argument to explain that stocks weren’t as overvalued as the bears would have you believe.
For example, at a yield of 2%, the price-to-earnings (P/E) multiple on US 10-year bonds is 50. That compares to a P/E multiple of around 17 times for the S&P 500 (using forward earnings estimates for the 2017 financial year).
Those estimates could well increase now if Trump goes ahead and reduces the corporate tax rate.
So, relative to bonds, stocks are cheap. And Trump’s stock-friendly policies will only make them look cheaper.
Who would’ve thunk it? Trump is good for stocks!
Let’s just hope he’s good for other, far more important things, too. On that front, the burden of proof lies firmly with him.
Editor, Crisis & Opportunity
Editor’s note: The above article was originally published in Markets and Money.
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