This month’s MarketCycle’s Musings post involves me thinkin’ out loud about the ramifications of the U.S. election. I am not taking sides. For an investment advisor it is important to consider both sides of every argument and concept with an unbiased mind. Frankly, the best investment account managers are unbiased, politically-independent moderates. Anyone positioned on either the far-right or on the far-left will always be biased in their judgement and they will always be looking for ways to confirm their stance and they will never be interested in evidence that challenges their position. That said, with Mr. Trump now as the most powerful man in the world, I’m a bit of an apocaloptimist.
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I’ve been repeatedly writing (since late 2011 when the most recent Secular Bull actually started) that something would come along that would propel us into a prolonged Secular stock bull market similar to the ones in the 1950s & early 1960s and the late 1980s & 1990s. Secular bull markets still contain multiple normal economic recessions but the bullish periods are stronger than usual (and the recessions are profitable for trend followers like MarketCycle Wealth Management that can also short the market). Of course, both Secular periods ended with massive problems, the first with prolonged stagflation and the second with depressionary conditions, but the ride in between was fun. The Secular stock bull market that started in the 1950s centered around Eisenhower’s big infrastructure spending and the one that started in the 1980s centered around Reagan’s big tax cuts and deregulation. Now we have a polarizing President-elect in the United States that is promising to implement the ideas of both. It may conclude with us reaping the end results of both… stagflation in the 2030s followed by depression in the 2040s??? Again, just thinkin’ out loud.
In my last blog I wrote that the normal market/business cycle had been “Trumped” by the unexpected election of Donald Trump and that investor’s portfolios had to be altered accordingly. My main concern was that what is normally an important asset for the late-stage of the market cycle, emerging market stocks, had to be jettisoned from portfolios because of President-elect Trump’s threats against them (IE, Mexico and China, the Middle East, Africa and South America). I was also concerned that his proposed programs would unleash inflation (where everything costs you more) and crush the (fixed-rate) bond market while raising the price of the United States Dollar. Obviously we were correct on these calls; both emerging market stocks and fixed-rate bonds tanked while the Dollar soared and there is likely more damage to come.
For any readers that believe that we are still in a state of deflation rather than inflation, MarketCycle’s indicators, using the Federal Reserve’s own data (but via trend analysis) revealed a strong and continuing uptick in United States inflation beginning on January 1, 2016. We are absolutely now in the early stages of an inflationary scenario that is about to get even more inflationary… slowly and steadily.
Mr Trump, while touting the benefits of smaller government, wants to spend $-trillions that the government currently does not have on infrastructure projects (including his “Trump Wall” and the military) all while cutting taxes on the ultra-rich (the middle-class may end up paying up to $2450 in additional taxes), imposing trade tarrifs and eliminating the 2008 banking reforms. He wants to create a new “Infrastructure Bank” to ease the process. Trump essentially wants the U.S. government to borrow huge sums of money (at currently low fixed-rates) and then to throw this money at middle-class infrastructure jobs and “see what sticks” (actual words).
Cato Institute: “It costs more than a dollar to finance a dollar in government spending. The best estimates indicate that, on average, it costs between $1.50 to $1.60 to raise a dollar in tax revenue.”
With this infrastructure program, he is not actually planning to bring back the promised manufacturing jobs; he is a real estate mogul that is planning to go deeper into national debt to create construction jobs. Buildings and bridges do not create long lasting jobs, they’re not employers… they only create temporary jobs for as long as the temporary work is going on. This is normally reserved as a depressionary economic tactic where the government attempts to just put people to work, but we are very close to full employment and we are not currently in a depression!
The Economist: “Nothing government policy can do will bring back the lost manufacturing jobs. The service sector is the future of work in the United States, but nobody wants to hear it.”
In an attempt to bring back manufacturing jobs, President Trump would impose trade-tarrifs and implement protectionist laws, but according to the OECD, each dollar of increased protection leads to a drop of 66 cents in Gross Domestic Product (GDP). This means that the entire economy is hurt by a practice that may end up creating few manufacturing jobs.
Several advisors to the new President are suggesting that the government could issue “tax certificates” for the private purchase of public debt in order to pay for the infrastructure projects, but this is not a good idea because the Federal Government will not gain the tax revenues.
President-elect Trump would also like to give $187-Billion in tax breaks to corporations in exchange for doing infrastructure projects. But there is no guarantee that these corporations will build anything that they aren’t already planning to build (they will just end up making more profit off of their projects) and there would be no way to get them to build infrastructure where it is most needed but less profitable. My guess is that more projects would be done on the “liberal-elite” east and west coasts than in the “fly-over” mid-west and “Bible-belt” southern states where many of Donald Trump’s supporters seem to be concentrated. The infrastructure projects might end up just helping the already ultra-rich. And of course there has long been talk amongst some Republicans of just turning public property over to corporations… imagine toll booths on everything, oil rigs surrounding Yosemite and the clear-cutting of old growth forests.
This new spending program will unleash inflation while it increases the government’s national deficit and, out in the future, deflates the economy.
The new administration’s theory is that the gigantic infrastructure loans could be slowly paid down via increased tax receipts from newly employed middle-class workers (but not as much from the ultra-rich or from corporations since their taxes will go down). The big downside is that the resultant increased inflation means that the new “affordable-level” car that would have cost $3000 when I was young and costs $30,000 now will cost you much more in the not too distant future. The cost of everything would inflate.
President-elect Trump will attempt to hold the deficit down by slowly whittling away at (or privatizing) Medicare, Medicaid, Social Security, welfare programs, public schools, Planned Parenthood and the Affordable Care Act and also by gutting the Environmental Protection Agency. Trump has repeatedly stated that he would like to entirely eliminate the Department of Education and the Forest Service as well