Trump Is Status Quo

As I said in my last article, I was wrong about the market’s reaction to Trump winning. This wasn’t a Brexit market reaction. This was a reaction like we’ve seen to jobs reports in the past. The market goes up whether there is a good or bad report. In this case, the market would find a way to craft a bullish narrative no matter who would win the election. The establishment analysts in finance have lost their credibility as they used their power to try to predict a bad market reaction to a Trump victory in order to hurt his chances. They now reversed their predictions because they don’t actually want to see the market fall.

Instead of changing my mind without admitting I was wrong like them, I will say I was wrong about how the market reacted. I am still bearish on stocks in the medium term, but we must re-adjust ourselves to the new facts at hand because not only was the system turned on its head yesterday, but also the changes aren’t as expected given the information we had yesterday.

Monetary policy is very important to the way the market will move during Trump’s presidency because the market is reliant on extremely dovish policies. It’s also important because Trump’s rhetoric was potentially exactly the opposite of what current policy was. I always left the possibility in my mind that Trump was only criticizing the Fed so harshly because he was criticizing every aspect of the current administration. There was a good case to be made against the Fed to score some accurate political points. Maybe he was only critical because it fit in with his ‘drain the swamp’ narrative.

The reason I am once again making those points are because Trump’s camp was asked about what he’d do with Janet Yellen. His camp said Trump wouldn’t call for the resignation of Janet Yellen. Instead he’ll nominate someone else when Yellen’s term ends in February 2018. This is the perfect situation for Wall Street because now the uncertainty over who will be the Fed chair is gone. The most dovish chair ever gets to have another year in office.

We really have no idea what Trump will look for in the next Fed chair. I was already proved wrong in thinking he would call for Yellen’s resignation. I watched Trump’s key ad before the election where he could not have been more negative on Janet Yellen’s policies. It was reasonable for me to think he would want to get rid of her. Considering he changed his position on that while being president-elect, I can see him appointing a new Fed chair which is only slightly more hawkish than Yellen, but still nowhere close to a critic of the Fed’s QE policies. Now that Trump is in power, he wants the economy to do well. It will be easy for him to rely on the Fed helping the market.

Another possibility for Trump is that the economy weakens further next year. At this point his hand will be forced and he will have to blame something for the weakness. Given he’s already blamed the Fed for causing this bubble, he could blame the Fed again for the burst of the bubble. In this case, he will appoint someone drastically different. It could be a chairperson who is against ZIRP and QE.

Trump can easily change his positions based on the political winds. Before he ran for president he praised Bill Clinton for how good the economy was in the 1990s. Then after the economy went south, he decided to take his anger out on NAFTA. Trump was consistently against free trade policies, but he shifted his positioning. This would be the mold of his monetary policy. Trump has been a critic of the Fed for a while, but he will only act if it is in his political best interest.

At first when the market was crashing, the odds of a rate hike were declining because of market volatility. Now the odds of a rate hike are higher than they were before the election. The current chance of a rate hike is 81.1%. With Trump raising inflation expectations with his stimulus, the Fed is more likely to raise rates. In my mind, the chances of a rate hike have risen as well. This isn’t a good thing for the economy because government spending creating inflation only does more damage to the free market.

Jeffrey Gundlach is looking correct in his predictions for a Trump presidency. Firstly, the fact that he thought he may win was correct. Secondly, he said Trump would be like Ronald Reagan. He said Trump would increase government spending and lower taxes which will grow the economy and help stocks.

I disagree that this policy prescription is good because we still haven’t paid our dues for the Obama presidency’s debts. In theory, Democrats are supposed to be for higher taxes to pay for higher government spending on social programs. Republicans are supposed to be for lower taxes and lower government spending. Donald Trump ignored this and ran on the idea that he would cut taxes and not touch entitlements. Cutting entitlements is a tough thing to get done politically. Considering he didn’t run on doing this, there’s no way he will. He’s already caved on his criticism of the Federal Reserve. Higher deficits will be an ever-increasing drag on GDP growth.

Conclusion

Donald Trump winning is causing the markets to rally as he is proving to be more status quo on central banking than originally expected. I am still bearish on the market because this status quo will lead to a crowding out of private sector growth. As an American, I am hoping Trump’s hand is forced and he has to start criticizing the Fed again. Considering I am expecting the economy to get worse, this hope could become a reality. In this case, we delayed the market volatility by a few months.

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2 Comments

  • Jeff

    November 10, 2016

    Actually, it WAS a Brexit-like market reaction, except the decline was compressed and occurred in the futures market overnight.

    • Peter

      November 11, 2016

      Yes, the decline was compressed: very technically interesting. But isn't it also interesting that the defense industry is taking off in hopes of more war, and the private prisons are going gangbusters. We apparently are not satisfied with being the number one imprisoner in the world. Trump will want to put more people away. Don says his policies will be great for the "economy". Doesn't that mean the economy of the rich? Won't we pump up the asset bubble more at the expense of most of the society? Or are these things irrelevant?