Friday, February 9, 2018

Financial Market Jury Is Out On The Trump Economic Plan

Senate leaders unveiled a two-year budget deal on Wednesday, February 7th, 2018 that created a compromise in the heated budget negotiations between the Republicans and Democrats.  Less than two months after their $1 trillion tax cut, the House passed a resolution the following day that raised budget caps by $300 billion in the next two years, increased the debt ceiling and offered up more than $80 billion in disaster relief for hurricane-ravaged Texas, Florida and Puerto Rico.  President Trump signed the bill into law on Friday. 

There really is not any way to fund all the Trump budget requests without higher government fiscal spending given the Senate rules.  Once the Republicans put forward higher spending increase requests for their favored military lobbying constituencies, the democrats countered with their own increase requests.  In order to get the 60 votes required to pass the budget, the outcome was predictable.

What is so misleading about the whole situation is that the actual fiscal spending increase rate, in absolute terms over the past decade has only been 3.6%, and an even lower 2.6% over the past 4 years.  You would think with all the hype it was growing at 10 times that rate.  But, it is very telling about the economy in general when you look at the growth rate in fiscal spending over time, and its relationship to generating inflation (the debt also has a big impact, depending on where the debt is financed foreign versus domestic).

I have a table I recently created from some of my research I think you will find interesting.

You can draw your own conclusions from the data, but what I see is a country that has cut its tax base so far, that it cannot grow the government fiscal spending machine without borrowing more and more debt.  The trending result is lower domestic GDP as both real growth and inflation driven price pressures have moved lower through time. 

Slowing the Washington spending machine down in absolute growth terms, turning the FED loose with monetary stimulus (the Obama result), but without a large increase in the public debt from the end of 2013 until today (all the new debt occurred in 2009 and 2010, and much of it was consumed by the Fed and China) produced a hyper-inflated stock market, but tepid U.S. economic growth.

The Trump plan is changing the entire playing field - more fiscal spending in absolute and % terms, possibly a lower FED effective balance sheet (but definitely a lower absolute balance sheet as they allow Treasury holdings to run off their balance sheet) which means higher interest rates, and much higher growth in the US public debt.

I leave a question mark on the GDP forecast in the table because the jury is definitely out on how this new path will play out.  But I do know the realization of how this plan will actually be implemented in the financial markets is hammering longer term bonds, stocks and the US Dollar as of the first week of February 2018.  On a relative basis, the Trump plan might end up pushing the economy back toward an era similar from a mathematical perspective in relative terms to the 1970s. There is hope it will be the 1980s in the market, but I think the starting point for stock and bond valuations is too high.

Here is a look at what has happened to the stock market over the same periods covered in the table above.

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Daniel Moore is the author of the book Theory of Financial Relativity.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell. 

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