The Purge After the Feast?

Would you get a load of the market’s reaction to Trump?

Wooooooweeeeeeee!

I was never on board with the idea that Clinton would be decisively better for the markets. Nor was I convinced that a Trump election would bring such an unusual degree of uncertainty that it would dog the markets.

Interestingly, the market’s enthusiastic reaction to Donald Trump’s election hinges upon expectations for America’s economy. Had Clinton been elected … and had the market indeed rallied … it would have hinged upon the status quo not being un-quo’d.

So here the "quo" stands. And it’s staring down a Trump presidency that’s chock-full of potential to significantly alter the global economic landscape.

And the quo appears to like it.

Is that because the quo is ready for a little inflation to liven things up a bit?

I’m not sure the quo realizes what it wants. Or what it’s about to get.

First, let me just say that inflation gauges have been targeting rising inflation for a few months now.

Here’s the St. Louis Fed’s five-year, five-year-forward expectations for inflation.

So inflation expectations are not exclusively a Trump election phenomenon.

But the future for inflation very much could become a Trump phenomenon … made possible simply by how investors digest his fiscal stimulus promises.

Let me remind you: Trump dropped a $1 trillion infrastructure spending plan on Americans before the election. It was perhaps just the seduction the Rust Belt needed.

This spending plan seems to be at the core of the market’s behavior the last two weeks.

How exactly the spending will look — the proportion of private- vs. public-sector project development — is still to be determined. But fiscal spending is generally expected to be inflationary.

Especially when its counterpart — monetary policy — is not in sync.

If Trump dumps dollars into the economy … and the Federal Reserve is not prepared to respond to inflation pressures by hiking interest rates accordingly … then things could get frothy in a hurry.

Frothy because financing infrastructure spending is going to require some amount of debt issuance.

Buyers of that debt may end up being European and Japanese investors, rife with QE dollars and looking to capitalize on "making America great again."

The thing is, there’s already been so much debt issued to make America, Europe, Japan and most every other economy great again. Yet "greatness" remains elusive.

There is just too much debt already, and the money multiplier just ain’t multiplying. (The money multiplier is believed to be negative when debt exceeds 70% of GDP.)

It means growth potential from infrastructure spending seems lively. But with the existing debt load in America — more than 100% now and projected to hit 150% in less than 10 years — growth potential may be dead on arrival.

Without growth, can inflation be sustained?

No.

At least not in the long run.

For the time-being, kneejerk money flowing through the economy might feel oh-so-right. But there could be quite a hangover to follow … when prices adjust to reflect growth potential that remains much lower than inflation suggests markets choose to believe.

***

Since my prognosticating may have lulled you to sleep faster than the carbohydrates in your Thanksgiving leftovers, let’s look at it this way:

The markets may be on the verge of an upset stomach.

We have a lot of reasons to be optimistic right now in the markets. The Dow, S&P 500 and Nasdaq were trading at record highs, going into Turkey Day weekend.

But the money that’s rushed hastily into U.S. dollars, basic materials and bank stocks might reverse with a vengeance over the long run.

Think of it this way …

You are hungry.

You sit down in front of a plate overflowing with Thanksgiving dinner. You finish every bite. It is good.

You go back for seconds.

You eat more turkey (dark meat) over mashed potatoes mixed with sweet peas and creamed onions, despite your appetite having been satisfied already.

You remain at the table, enjoying conversation and more of Grandma’s homemade, cooked-in-the-bird stuffing. After all, it’s just too good to pass up with those hidden bits of bacon and chunks of caramelized apple.

Before you leave the table, though, you force down one slice of sweet potato pie, two slices of peanut butter pie and some delightfully chewy sugar cookies.

The thing is, every return to the smorgasbord results in less and less satisfaction. Your brain is telling you to eat more so that you can reproduce the satisfaction. But you eventually reach a point where eating more has the opposite effect.

When the belly multiplier goes negative, the satisfaction level plunges until a purge is unavoidable.

Well, you get the picture …

In the meantime, U.S. stocks have a lot of international capital coming their way. It’s coming in from places where QE remains significant, and where dollar funding pressures might create additional capital flight to … or back to … the U.S.

There’s plenty of room at the buffet for everyone. Just be sure to arrive before it gets too crowded, and know when to "say when" and cash out before the latecomers straggle in.

Do right,
JR Crooks

Your thoughts on “The Purge After the Feast?”

  1. I was in New York the day before the election.
    An expert on CNBC stated that the stock market would halve if Trump was elected.
    CNBC interviewer didn’t query this statement.

    So therefore they both agreed with that statement.

    Interesting how much the MSM were against Trump.

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also …