The stock market is rising to the occasion. The shackles on opportunity are coming off.
By Marc L. Flaster
NEW YORK New York (Texas Insider Report) Now that Donald Trump has become the President-Elect we will be hearing a lot of interesting speculation from both sides I suspect. For the moment the soul searching by the media for having missed the boat has dominated the news.
But putting aside the teeny-bopper coordinated demonstrations and the reports of a shortage of crying towels in New York City and Hollywood the reaction in the stock and bond markets are calling out for attention.
Let me outline a short course for you on the policy changes that will flip the switch on Government Policy
from leftist egalitarianism to practical economics.
The 20 past years saw our government shift its focus away from policies that:
- Promote the general welfare
- Ensure the safety of its citizens and
- Limit regulation that discourages the basics of free enterprise.
It had become an ombudsman paradise for the complaints of its constituency. (You all can fill in the blanks from here.) Suffice it to say that the worst example is the Dodd/Frank Act.
This election was a repudiation of all this legislative diarrhea. The pride of our nation had been subverted. And the first place to restore that is with the withdrawal of the impediments that have deflated the promise for individual effort.
Life is not like the Boston or NYC Marathons where everyone gets the same prize for crossing the finish line no matter what their placement. For these past years our leaders have successfully chipped away at incentives and rewards for taking risk. Those who excel have been held back or taxed excessively. As we have witnessed the ultimate indignity has been the trend to redistribute income.
Donald J. Trump has been given the ultimate trump card: election to the highest office in the land. In the words of Harry Truman the buck stops here. With or without the help of Congress we can expect the following:
- Lower tax rates for individuals and business
- Less burdensome environmental rules:
- Example: the X/L Pipeline will be built
Government subsidies to be withdrawn or cut back for development of questionable alternative energy resources
- Carbon energy will again be encouraged
- Auto CAFE standards withdrawn or modified
- Electric cars may have a place but not in every garage
- Climate change will return to the home thermostat
- Our military preparedness to be well financed and membership will be encouraged as a rite of passage
- Deficits have never mattered! It resides in ivy covered theories not practice
- Billions and billions are coming for infrastructure repair and construction. This has as much to do with job creation as with improving the movement of people and goods.
Eisenhower promoted an Interstate Highway System as a defense project. Today it is a necessary high capacity transportation conduit. Dor Donald Trump I expect this will mean:
- Deregulation and modification successes will abound think of the CFPB DFA ACA
- Immediate discard of O-b-Wans executive actions that furthered his leftist agenda
- Appointment of judges to the Supreme Court who are more interested in rule of the law than social engineering
- Most importantly replacement of 1000s of prosecutors and regulation enforcers where the rubber meets the road
The stock market is already rising to the occasion. The shackles on opportunities are coming off.
Yes the bond market has shifted gears. The rise in yield however reflects the coming supply from the U.S. Treasury to fund these new beginnings. Corporate borrowings will be used for new projects rather that refunding old debt. Construction targeted commodities have blossomed in price. Copper is up 20. Countries that rely on the sale of these basics will start to earn enough to balance their budgets and prosper.
The trade weighted U.S. dollar is flirting with parity again making imports cheaper. International trade is not going away. Relative efficiencies drive trade. The curse of past administrations has been that they did not extract much in return for giving access to the U.S. marketplace.
Where does this lead? Unbounded growth with little or no inflation. Interest rates and Fed policy may anticipate the building of these fires. The result will be an orchestrated rise in short term interest rates while the long end of the curve steepens sharply.
No comparisons to administrations in times past are useful
Money is in bit-coms today. Electronics makes media transmission immediate.
Congress has always been a deliberative body where compromise was the tool that shaped legislation. That maybe the way they would like it to continue but it is not the way forward. It will be either you get aboard or suffer the consequences at the next election.
To coin a phrase: there is a new Sheriff in town. This one shoots from the hip and asks no questions. Change is not in the wind. It is here!!
An important concept to note is that those Congressmen who were just elected were supported by a different voter conscience than the vote for Mr. Trump. Those in the Congress have yet to understand that there is a public referendum to follow this pied piper. In some ways we have entered into a British-like parliamentary realm. When there is a challenge or blockage to the main agenda Mr. Trump will go to the people for endorsement. Congress will have to bend over bear it or risk punishment at the polls.
When we think of inflation the numbers that come to mind are in the middle to high single digits. Hyperinflation refers to double digit pressures. There are 2 general avenues that pull the price index beyond the growth rate of GDP to absorb it. Cost Push and Demand Pull. It is my opinion that Janet I cannot hear you when Im yellen and O-b-wan were in concert to encouraged state employment laws that raised the minimum wage. The thinking was that this rise in the cost of labor would be forced into the pricing of services and products and thereby be reflected in the CPI index.
Fed policy has been stymied for over 7 years. It has not shown any success in its management of the economy. Some of the tools were experimental like Bernankes bond purchases and some of it was pure traditional like collapsing interest rates and expanding the money supply. The response of business was unexpected. Fewer workers more tech bypass the middleman outsourcing and increased use of media to name a few.
The demand-side never materialized. Nor will it.
Competition today has many avenues to bypass inefficiencies in the marketplace. Product and services are in constant turmoil. Who would have thought that Kodak would be an also-ran company? That Xerox has nothing left but its name in the encyclopedia as a definition. To be successful in creating Demand Pull inflation you need monopoly behavior in the marketplace or delivery constraint where need cannot be met with supply. The oil embargo of years past had features of both elements of inflation.
My view is that the Fed will promise inflation whether it exists or not because like in the GEICO ad That is what you do.
And as in the Man from La Mancha they will fight the impossible dream.
Feel free to share this email with anyone else you believe might have an interest. It is written from my point of view about topics that I
find interesting and I dont expect my readers to agree with me even half the time.
Marc L. Flaster has advised financial institutions across Texas in balance sheet management for over 35 years. The views expressed in this article do not necessarily reflect the opinions of any client or organization with which Marc L. Flaster might be affiliated.
