Wednesday, December 21, 2016


It's likely that close to half the population of the U.S. is still fearful of what Donald Trump will do once he becomes the most powerful man on earth. But to judge from the reaction of the stock and bond markets, the other half is ecstatic. Since November 4th, when expert opinion held that Hillary Clinton was almost sure to win, 1) the value of the U.S. stock market has increased by just over $2 trillion, according to Bloomberg, 2) the expected real growth rate of the U.S. economy has increased by roughly 0.5% per year according to the bond market, which translates into an additional $1 trillion per year in national income, and 3) the global purchasing power of U.S. residents has increased by about 6% according to the foreign exchange markets. You might call those gains Trump-Trillions.

The chart above shows the value of the U.S. stock market (in trillions of dollars).

The chart above shows the real yield on 5-yr TIPS, which is a good proxy for the market's economic growth expectations. About two-thirds of the 80 bps increase in 5-yr Treasury yields since the election has been due to an increase in real yields.

The chart above shows the trade-weighted value of the dollar vis a vis other major currencies, which is up about 6% since the election.

In a sign that the world's general level of discomfort has eased measurably, gold is down over 13% since the election.

The question now becomes whether the market has gotten ahead of itself. According to Mohamed El-Erian, the market has "priced in no policy mistakes ... no market accidents ... [and] ignored all sorts of political issues." I'm not sure I'd put it the same way, but it's undoubtedly the case that the market has priced in good things that have not yet happened, and that leaves the market vulnerable to disappointments. Further gains over the six months or so will probably require concrete achievements, not to mention a pickup in corporate profits and an actual reduction in tax and regulatory burdens.

Over the long haul, I think there's still lots of upside potential. To support that assertion, I offer the following chart, which suggests that the real yield on 5-yr TIPS would have to increase significantly if the market were to price in a booming economy with 4-5% real growth rates.


bt1138 said...

Personally, I am looking forward to the GOP suddenly deciding that debt and deficits are perfectly OK, as they start there usual routine of spending more and taxing less.

In fact, as long as a Republican is President, deficits are totally acceptable. They provide the best possible evidence that government is awful.

Scott Grannis said...

If the GOP goes hog-wild with deficit-financed spending I would be very surprised and conservatives everywhere would be enraged. The infrastructure spending Trump is talking about would most likely be privately financed. The tax cuts for businesses and individuals would be paired with caps on deductions for the most part, thus aiming to be deficit neutral. It's absolutely possible to cut business tax rates significantly without increasing the deficit, since they would elicit a lot more investment and thus facilitate an expansion of the economy and the tax base. It's entirely possible that cutting tax rates and limiting deductions could result in smaller deficits if they expand the tax base.

Consider: businesses reportedly have $2-3 trillion in offshore profits that have not been repatriated. As long as that money stays overseas the IRS collects 35% of nothing. If instead businesses were offered a 10% tax rate for repatriating overseas profits, this could generate $200-300 billion of revenues, and that could potentially result in a big reduction in the deficit (total corporate income taxes last year were about $300 billion).

steve said...

This piece goes right to the heart of what I have been preaching for years: A) you CANNOT time the market and B) pundits know nothing more about where markets are going than anyone else. In fact, I would argue they know LESS because they're not smart enough to realize they DON"T KNOW!

John said...

I'm not optimistic about private capital fixing infrastructure. Why haven't we seen private capital upgrade LaGuardia or JFK airports? If it can't happen in NY, where can it?

Ryan talks about public private partnerships. I'm concerned that means private profits subsidized by public funding with the taxpayers bearing all of the risk.

John A said...

" . . . a booming economy with 4-5% real growth rates . . ."

There is no way on God's green earth we are going to get steady 4-5% real growth - not again for decades, and perhaps even centuries. Maybe a stray quarter here or there. I don't care who is president, or what policies are enacted, it just isn't going to happen. The population isn't growing remotely fast enough anymore, and neither is the labor force. Plus a bevy of other reasons. Anyone waiting for that to happen is going to be sorely disappointed.

Benjamin Cole said...

Great post.

Call me an heretic, but I wonder what is the meaning of a "government deficit" anymore, when a central bank can simply buy back debt, pay it off, without inflationary consequence.

See Japan. By 2020 the government will owe all the debt to itself.

And Europe and the United States, when they are conducting central bank quantitative easing?

I do not mind government deficits so much, if they are offset by quantitative easing or are simply financed by so-called helicopter drops or what is called "money financed fiscal programs."

Yes I have my splatter shield up.

Unfortunately, the biggest structural impediment in the United States today is property zoning, and I do not see a pathway for Trump to lessen that obstacle to growth and business development.

Scott Grannis said...

Benjamin: excess reserves are now only about $2 trillion, less than 15% of federal debt. It is highly unlikely that the Fed will buy more Treasuries. But is highly likely that the federal debt will continue to grow.

Benjamin Cole said...


Probably, although in another recession, we might see QE or possibly even helicopter drops (under various guises).

Aside: In the past, you have noted that at least some segments of global financial markets actually want outstanding US government bond volume to grow. It is considered a risk-free asset that serves as collateral, and there is shortage of risk-free assets, or risk-free dollar-denominated assets.

I ponder if the private sector cannot contrive and generate risk-free assets, but if not, then it may be the US government should run deficits.

Benjamin Cole said...

You know, this guy Trump is beginning to grow on me. I sure hopes this is not just showtime.

"President-elect Donald Trump elevated his criticism of Lockheed Martin's F-35 fighter today, saying he's asked Boeing to explore pricing for an alternative to the costly fighter jet.

"Based on the tremendous cost and cost overruns of the Lockheed Martin F-35, I have asked Boeing to price-out a comparable F-18 Super Hornet!" Trump tweeted Thursday.

Trump's tweet sent Lockheed's share prices into a nosedive in after-hours trading and Boeing's on a rise. It came after he held meetings with the CEOs of both companies on Wednesday, as well as with a slew of military officials, including the F-35 program manager, Air Force Lt. Gen. Christopher Bogdan.

After the meeting with the military brass, Trump said the focus was "primarily the F-35, trying to get the costs down."

Since being elected, Trump has slammed the F-35 as an "out of control" program, and he's also gone after Boeing's new Air Force One contract."


Maybe Trump is showboating. But egads, when was the last time we had a President that blurted out the truth, or was in the taxpayer's corner? Why was Obama so pleased with $4 billion for a couple Air Force One's? And the F-35 has the look of trillion-dollar lemon written all over it.

Johnny Bee Dawg said...

Im amazed people are surprised that the stock market has surged on a Trump election.
Markets loved Trump before the election. There were lots of tells.

Why in the world would markets have liked 4 more years of Hillary lawlessness & risk aversion that would have been an extension of the Obama lawlessness and risk aversion we already had??

Markets like when We The People push back.
Make America Great Again!
Drain the Swamp!

Wall of worry is delicious.

randy said...

Brett Stephens article did a nice job providing perspective on the competing arguments for stagnation (demographics or regulations?). Maybe more useful was perspective on why coastal liberals don't appreciate tangible business issues. Segue - a good argument that the electoral college has a good purpose.

These regulations go largely unnoticed by coastal elites because we’re mostly in the business of producing and manipulating words—as politicians, lawyers, bureaucrats, academics, consultants, pundits and so on. But regulations (and those who profit from them) are the bane of anyone who produces or delivers things: jet engines, burgers, pool supplies, you name it.

Scott Grannis said...

Re: federal deficit and the Fed. I note that currently the Fed holds about 18% of outstanding Treasury debt, which is, amazingly, the same amount it held at the end of 2004. It less than it held in 2002 (then 20%).

I see no problem at all with federal debt continuing to grow, as long as the deficit is 2-3% or so of GDP. It is a good thing to have a viable, deep, and liquid Treasury market, since Treasuries form the risk-free backbone of the entire global financial system. It is in some sense a "public good" that in turn at least partially justifies its continued existence.