Thursday, March 9, 2017

The "Trump Rally"

The Trump Rally

The above image currently making the rounds on Right-wing web sites is a lie because the market has been going up consistently since 2009. Trump hasn't caused a rebound, so the arrow shouldn't be going down before it goes up. However it is true that there has been a Trump bounce. 

Any new president can cause a stock market rally by announcing sharp increases in military and infrastructure spending, tax cuts, cuts to entitlements, reducing regulation of business and cutting health and safety regulations. That's like eating a candy bar for breakfast and thinking you'll be fine till lunchtime.

Republicans like to point to former President Reagan's economic policies to prove that "supply-side" economics, aka "trickle down" economics works. Reagan cut taxes and increased government spending by 2.5% a year. These actions caused the Federal debt to almost triple. It grew from $997 billion in 1981 to $2.85 trillion in 1989. And most of the new spending went to defense, so it amounted to a jobs program for highly-paid defense contractors and manufacturers

Trickle-down economics

Trickle-down supply-side economics has always favored corporations and wealthy individuals, while doing almost nothing to create jobs or raise blue-collar workers’ incomes. Trump's economic plans are no different. According to the non-partisan Tax Policy Center, almost half of the benefits from Trump’s proposed tax cuts would go to the top 1% of income earners. 

A Stock Market Rally on Life Support

Stock valuations have climbed to high levels because the Trump rally has been fueled by expectations of tax cuts and other stimulus, not fundamental improvements in corporate profits. The market’s price-to-earnings ratio hasn’t been this high since the dot-com-bubble. The S&P 500 has gone more than 100 consecutive days without a 1% decline, the longest streak since 1995, according to Goldman Sachs. The S&P is also 9 percent higher than its 200-day average, often a signal that a correction is ahead.

To keep his rally going, Trump will have to deliver on his promises. But paying for the promised tax cuts, plus increases in defense and infrastructure spending would have to be approved by Tea Party Republicans and they are in no mood to negotiate with free-spending Republicans.

The U.S. is expected to exceed the debt limit on March 16. If the ceiling isn’t raised, it could trigger a default and a global crisis. Government funding also expires on April 28, which means Republicans will have to agree on some kind of measure to avoid a shutdown. Such an agreement would also have to be blessed by more conservative Republicans who are adamantly against further increases in the national debt for any reason.

“Wall Street is totally misreading Washington,” David Stockman, former O.M.B. director under Ronald Reagan, has said. “It's pricing in a fantasy about a Trump stimulus that simply isn't going to happen. There will be no tax cut, there will be no 15 or 20 dollar a share reduction in the corporate rate.” 

According to the National Bureau of Economic Research, the average post-World War II expansion cycle lasts less than five years. It's been 7 years without an official recession and we are overdue for the next downturn, the first signs of which should be a rally killer, and the longer we have to wait for it the worse it'll be.

Life cycle of a stock market rally
The life-cycle of a stock market bubble

Restrictions on trade by the Trump administration could trigger other countries to retaliate and lead to lower profits for U.S. companies that depend on customers and suppliers around the world. Trump's protectionist policies could even result in China replacing the U.S. as the main trading partner for other nations.

Perhaps the most glaring risk that markets have discounted is Trump’s own unpredictability. He is a walking embodiment of unacceptable risk, and not just in economics. His inability to control his Twitter rants and his frequent policy shifts are unnerving investors. There’s nothing Wall Street hates worse than uncertainty — and Trump is nothing if not unpredictable. 

The current irrational exuberance in the stock market has been fueled by the mistaken belief that Trump will implement only the “good” part of his campaign promises (tax cuts, deregulation, infrastructure building), while refraining from pursuing the “bad” promises (trade wars, import tariffs, unraveling multilateral agreements). This wishful thinking will soon collide with reality and the markets will take a deep dive. As always, those who can least afford it will be the ones who suffer the most; and ironically many of those same folks voted for Trump.

Trump supporters cartoon

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