Trump Will Not Really Cut Taxes

By Steve Saville

As the financial world waits with bated breath for details of Donald Trump’s “phenomenal” tax plan, it’s important to understand that regardless of what Trump announces on the tax front there will be no genuine tax cut. The reason is that for a tax cut to be genuine it must be funded by reduced government spending.

Tax cuts are unequivocally beneficial to the economy if they are genuine, but if a tax cut isn’t funded by reduced government spending, that is, by the government consuming less resources, then one way or another it will have to be funded by the private sector. It will just be another Keynesian stimulus program, and like all Keynesian stimulus programs it will potentially boost economic activity in the short-term at the cost of slower long-term progress.

It should be obvious that the private sector cannot benefit from a tax cut that it will have to pay for, but apparently it isn’t obvious because most people seem to believe that the government can consume more resources and at the same time the private sector can end up with more resources. This is an example of believing the impossible. Unfortunately, it’s not the only such example in the world of economics, in that many aspects of Keynesian theory involve belief in the impossible.

The cost of government is determined by what the government spends, not how much it collects in taxes. And we can be sure that during the next four years there is going to be a large rise in the cost of the US federal government, meaning that with or without a so-called tax cut the private sector (as a whole) is destined to end up with reduced resources under the Trump regime. We can also be sure that it would have ended up with reduced resources under a Clinton regime.

The reason, as explained in the article posted at http://crfb.org/papers/lame-duck-president-2017, is that spending increases in excess of revenue increases were ‘baked into the cake’ prior to the November-2016 Presidential election thanks to budgets dictated by previous presidents and Congresses. Getting a little more specific, the linked article points out that 150 percent of new revenue a decade from now is pre-committed to spending growth scheduled under laws that were in place prior to the 2016 election. Moreover, this should be viewed as an unrealistically-optimistic forecast because it assumes steady inflation-adjusted revenue growth. A more realistic forecast would account for the sizable decline in inflation-adjusted revenue that will be caused by a recession within the next few years.

The bottom line is that any cuts in the rates of US individual and corporate income taxes announced/implemented over the coming 12 months will be ‘smoke and mirrors’, because government spending is going to increase. It will essentially be a money-shuffling exercise to temporarily create the illusion that the burden of government is shrinking at the same time as it is growing.

The Song and Dance Man

By IKN

I wasn’t really sure how well it came out, not my best rant at all, but when separate subscribers write in with feedback about the screed saying that it should make the open blog, I don’t see any reason to argue. Here’s one of the two opening pieces to IKN404, out last night:

The song and dance man

It’s oh so quiet, Shh shh
It’s oh so still, Shh shh
It’s Oh So Quiet, Betty Hutton, 1951*

Preamble: I’ve tried to tighten up this semi-disjointed rant up a bit, but part of its message seems to be its very disjointed nature so in the end I edited it down but kept its disparate nature. I’m not in the running for a Pulitzer anyway. The TL:DR is “Trump isn’t really much of a factor to our investments and the world isn’t about to end just because he’s in the Oval Office”.

We need to talk about President Donald Trump. Soon we’ll need not to talk about Trump, the subject will get too repeated and too boring and as already noted on the blog (1) I’m going to curtail references to The Donald over there as much as possible (my tiny contribution to online well-being), but as The US government and its declarations are in the centre of all things newsy at the moment, there’s no avoiding at least some comment.

And the main comment is that, so far at least, there’s very little that really matters to me about President Trump’s administration. For sure there has been constant noise, sometimes close to deafening, about the executive orders and decisions handed down, along with the pushback from politicians and legal beagles alike. For what it’s worth, my fave to date is his picking a fight with the US judiciary. Really not a very good idea, Donald, it’s your four/eight year tenancy vs jurisprudence of two plus centuries, you’re taking a knife to a gunfight.

But it’s all rather inconsequential so far because it’s nearly all domestic policy. For sure building a big beautiful wall, re-doing NAF(F)TA and not letting people in from dangerous countries will affect people from countries other than The USA, but all of those are domestic and not foreign policy decisions and if you piss off an Australian politico or two along the way, big deal. The only thing we mining investors should care about are either domestic fiscal policy decisions that have a knock-on effect through Wall St, or true foreign policy decisions by The Donald, so far at least we’ve had none. Yes, we’ve had mutterings about a “phenomenal” (bless him) tax plan (2) which people are guessing will be “stimulative” (translation: rich get richer) and just the rumour saw bank stocks pop higher last week. When that one gets rolled out we can see how much optimism is already baked in, but you don’t need to take my word for the lack of real fiscal or economic news out there as yet, take it from somebody much smarter than I am about the subject (3):

U.S. Federal Reserve Vice Chair Stanley Fischer said there was significant uncertainty about U.S. fiscal policy under the Trump administration, but the Fed would be strict in meeting targets of creating full employment and getting inflation to 2 percent.

Speaking at the Warwick Economics Summit on Saturday, Fischer also said he thought Dodd-Frank financial regulation would not be repealed as a whole, and he hoped capital requirements for banks would not be significantly reduced.

“There is quite significant uncertainty about what’s actually going to happen, I don’t think anyone quite knows. It’s a process which involves both the administration and the Congress in deciding fiscal policy,” Fischer said, in response to a question.

Translation: “We don’t know what he’s going to do to the US economy yet. And we’re the freakin’ Fed, we’ve got computers and stuff, you guys out there don’t have a chance!”

Meanwhile, when it comes to foreign policy and foreign relations The Donald has found out quickly that “The Art of the Diplomatic Deal” is a missing chapter from his best-seller, a good thing for all of us. Remember all that “recognizing Taiwan” thing? Remember the “China nasty people playing nasty currency games”? Remember the trade war Trump threatened if China didn’t start giving America a good/fair/better deal? I’m sure President Xi Jiping of China remembered all of them when he told The USA that he wouldn’t even pick up the phone if The Donald wasn’t ready to accept the One China policy. Trump agreed, he now recognizes China as a single entity offshore islands and all, the two had a long conversation (4) and once it was done, the two were telling us of their assurances to work together for the greater good of both countries. Donald, that’s what having your wings clipped feels like. So here’s my bet; domestically Trump will continue to make waves, cause controversy and shake up “the system” (or the bit of the system he has identified as the nasty bit), but when it comes to the fate of the world he’s not going to make much of a difference, the smarter world leaders (China, Russia, some parts of EU and that does not include the UK) have got his measure already. The most insightful thing I read about Trump this week came from an unusual source, but a whipsmart brain. Here’s Mel Brooks (5) on his new President and entourage (and before you send in any stuffy mails, “anti-Muslim travel ban” are the words of The Guardian, not Brooks’ or mine):

Brooks, who views Trump’s anti-Muslim travel ban as poorly planned and poorly executed – his parents came to the US as kids – does not revile the new president in the kneejerk way most movie people do. “Trump doesn’t scare me,” he says. “He’s a song-and-dance man. Pence [the vice-president] and Bannon [Trump’s scheming henchman, a kind of Dick Cheney without the radiant, cherubic charm], those guys make me nervous.” He adds: “We are not talking about Athenian democracy here.”

I agree. However much his style and persona might agree/disagree with you or I, this whole drain the swamp” and “break the rules” schtick is only going to travel so far. Will “The Resistance” in The USA change my life, or even my financial situation? About as much as the Tea Party did (i.e not at all). Will a Trump tax law that allows the rich to get richer have a knock-on effect on my portfolio? Maybe, but only in the same way the rich got richer through Reagan/Bush1/SlickWilly/Dubya/Barry did. As long as Trump defines himself as a financial force for change, be it ultimately positive or negative, I’ll be able to handle his character and mouthiness. The way he’s already being put in his place on the world stage augurs well, he’s turning into a net neutral for my life and that’s a welcome turn of events.

*Though you may remember the 1995 Björk cover version

Regime Uncertainty

By Steve Saville

Right now it looks like Donald Trump is going to make uncertainty great again

In a blog post last Friday I provided evidence that the extent to which a US president is “pro-business” has very little to do with the stock market’s performance during that president’s term in office. Regardless of whether the associated policies are good or bad for the economy, the key to the stock market’s performance over the course of a presidency is the market’s position in its long-term valuation cycle. On this basis there’s a high probability that the stock market’s return over the course of Trump’s first — and likely only — 4-year term will be dismal, no matter what Trump does. However, the policies of a president can have a big effect on the performance of the economy.

It’s obviously early days for the Trump Administration, but the initial signs are not positive. The main reason is that “regime uncertainty” is on the rise.

“Regime uncertainty” is the name given to the tendency of private investors to pull back from making long-term financial commitments due to uncertainty about what the government will do next. According to an essay by Robert Higgs, it was one of the factors that prolonged the Great Depression of the 1930s. Government intervention is generally bad for the economy, but it tends to be even worse when it happens in an ad hoc way.

As discussed in a Bloomberg article last month, the economically-depressing effect of government by ad-hoc command was also addressed by Friedrich Hayek in “The Road to Serfdom”. The problem, in a nutshell, is that if the government’s actions are predictable then people are able to plan, but if officials are regularly issuing commands it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

The signs were not good when Trump started singling-out individual companies for special treatment even before he took the oath of office and got worse when Trump started talking about imposing a 20% tax on Mexican imports as a way of forcing Mexico to pay for a wall between the two countries. Does he really believe that forcing US consumers to pay 20% more for products made in Mexico amounts to making Mexico pay for the wall?

And the signs recently became more worrisome due to the sudden imposition of immigration and refugee bans. The effects of these bans on the US economy will not be significant, but the concern is what they imply about the decision-maker’s level of understanding and willingness to ‘shoot from the hip’.

The immigration ban imposed on seven Muslim-majority countries is a particular concern because of its blatant irrationality. Making America safe from terrorism is the official justification for the action, but over at least the past 40 years there has not been a single fatal terrorist attack perpetrated on US soil by anyone from any of the banned countries. On the other hand, Saudi Arabia is not covered by the ban despite having supplied 15 of the 19 terrorists directly involved in the 9/11 attacks and being well known as a state sponsor of terrorist organisations. I am not suggesting that the ban should be expanded to include other countries, I am questioning the knowledge and logicalness of a political leader who would decide to do what has just been done.

To top it all off, late last week Trump began threatening Iran for no good reason via his preferred medium for conducting international diplomacy: Twitter. What will he do next?

Taking a wider angle view, the protectionist agenda that the Trump Administration seems determined to implement will have numerous adverse consequences, most of which aren’t quantifiable at this time because it isn’t known exactly what measures will be taken and how other governments will react. All we know for sure is that Trump wrongly believes that international trade is a win-lose scenario and that trade deficits are problems for governments to actively reckon with.

Perhaps the initial warning signs are not indicative of what’s to come and Team Trump will settle into a more logical, impartial and cool-headed approach, but right now it looks like Donald Trump is going to make uncertainty great again. If so, private investment will decline.

Trump’s America & Abe’s Japan – Concrete Proposals

By Jesper Koll of Wisdom Tree

Abe is preparing to offer a comprehensive “Japan–U.S. economic cooperation plan”

Japanese prime minister Shinzo Abe is poised to be the first global leader to present President Trump with a concrete policy proposal designed to shape and promote Trump’s “America first” agenda and, at the same time, to advance the U.S.–Japan alliance. After meeting the then-president-elect for the first time on November 17 of last year, Abe will meet Trump for the second time on February 10–11; and the prime minister appears very determined to impress the president by offering a concrete “deal” so that both countries can move from talk to action. If, as we suspect, the meeting goes well, the implications are bound to be positive for U.S.–Japan economic and financial relations.

In our view, Trump’s America and Abe’s Japan are a match made in heaven, not just because both leaders share a basic strongman leadership and “my country first” philosophy but because their economic and financial agendas are very much aligned: Team Abe is determined to make Trump look good by offering “funded by Japan but built by America” infrastructure projects. At the same time, Abe is expected to propose that the U.S.–Japan bilateral trade and investment relationship become a blueprint for a new global trade and investment agenda. Make no mistake: this could be a bold and forward-looking agenda that should help markets understand how a Trump-led global economic and financial agenda will unfold.

Here Is the Deal 

Specifically, according to Japan’s largest-circulation newspaper, Yomiuri Shimbun February 2, Abe is preparing to offer a comprehensive “Japan–U.S. economic cooperation plan.” Bottom line: This deal is designed to create a US$450 billion market in the U.S. through railway and infrastructure investments and create up to 700,000 U.S. jobs over 10 years1. Japan would offer to seed-fund these projects with low-interest loans, mobilizing resources from Japan’s public pension fund and other public lenders. In addition, the plan proposes that the U.S. and Japan work together to create new cross-border trade rules covering all aspects from e-commerce, intellectual property, government procurement, labor and finance, etc. In other words, after President Trump killed the Trans-Pacific Partnership (TPP), Abe proposes that the bilateral U.S.–Japan framework assert itself as the new forward-looking model for President Trump to lead global economic developments.

Continue reading at TalkMarkets →

The Wrath

By Doug Noland

Credit Bubble Bulletin: The Wrath

It’s not the first time that a non-farm payrolls rally wiped away inklings of market anxiety. Coming early in the month – and on Fridays – the jobs report typically makes for interesting trading dynamics. By the end of another interesting week, the timely reemergence of “goldilocks” along with Trump The Deregulator were propelling stocks higher. Long forgotten were Monday’s “Stocks Fall Most in Month…” and “Trump Rally Hits Speed Bump on Immigration Concern.” Indeed, markets were grateful to let a number of developments slip from memory.

It’s still worth mentioning a few indicators that were beginning to lean away from “Risk On”. Prior to Friday’s jump, the powerful bank stock rally had stalled. The BKX was down almost 2% from Thursday to Thursday (Italian and Japanese banks down 3.4% and 2.9%). Small cap stocks have underperformed, with the Russell 2000 down slightly y-t-d as of Thursday’s close. Many “Trump Rally” stocks and trades have recently underperform. Equity fund flows were negative for three straight weeks. In high-yield debt, the rally had similarly lost momentum. Also noteworthy, Treasuries rallied only tepidly on Monday’s equity market selloff. European bonds continue to trade poorly (Greek yields up 33 bps; French spreads to bunds widened another 10bps). This week saw bullion jump $29. The dollar Index is now down 2.5% y-t-d.

The dollar/yen has for a while now been a key market indicator. After trading as low as 101.2 on election night market drama, Trump-induced king dollar euphoria had the dollar/yen surging to almost 119 by early January. The dollar/yen traded down to almost 112 on Thursday, to a two-month low. And similar to Treasuries, the dollar/yen these days struggles to participate during “Risk On” days. Trading slightly higher Friday, the yen jumped 2.2% against the dollar this week.

Continue reading The Wrath

He’ll bring them [inflation], and they will love him for it

By Notes From the Rabbit Hole

[biiwii comment: going back to posting select items of my own content here, because… why not?]

I used to make fun of the FOMC rate hike “decision” language in the mainstream media because under the Obama administration and its economic policies overseen by the Fed’s monetary policy, there really was no decision, was there? It was ZIRP-eternity, interrupted by a lone and token rate hike in December 2015 (the Dec. 2016 hike does not count because the transition to a new administration and policy regime was already known; in effect, the Fed has already made its first hike under Trump).

According to the traders who make up the Fed Funds futures, there is no decision tomorrow, either. From CME Group, we have virtually no one predicting two successive rate hikes.

cme fed funds futures

That may or may not be the case. I think everything changed with the election, and the Fed you had before is not the Fed you have today. That Fed was a promoter of inflation and a hands-on supporter of the economy and especially, asset markets. The Fed had kept its implied ‘inflate or die’ mantra and associated monetary policy in place for 8 long years. But now with the country flipped over like an egg onto its sunny side, a new administration has proven it means what it says (beginning with its blunt, heavy handed and in my opinion, misguided delineation of race and religion on immigration policy).

egg

Focusing on the financial realm, what the Trump administration says is it is going to implement is fiscal (as opposed to monetary) policy in the form of tax breaks to corporations large and small, to tax payers, including and especially the wealthy, infrastructure building, including ‘the WALL’ (more symbolic than realistic in my opinion) and environmental and business deregulation far and wide. It is a much more business-friendly environment and keeping pure politics out of it, that is a good thing, economically.

In short, what is described above is a scenario where the administration has grabbed the policy burden from the Fed and thus, the Fed is free to do as it pleases now, no longer playing politics. The Fed knows, just as you and I know, that the indirect, and maybe even unintended aim of the Trump administration is to promote inflation. That is because they intend to promote economic growth through policy, just has the Fed has been trying to do for the last 8 years under Obama. By one method or the other, it is in the ‘promotion’ that inflation lives.

Continue reading He’ll bring them [inflation], and they will love him for it

A Dubious Monetary Backdrop

By Doug Noland

Credit Bubble Bulletin: A Dubious Monetary Backdrop

Now that was one eventful week. President Trump wasted not a minute in making good on a series of campaign promises. A bevy of executive orders moved to rein in Obamacare, withdraw from Trans-Pacific Partnership (TPP) trade negotiations, tighten immigration, cut regulation and advance the Keystone Pipeline. No earth-shattering surprises there. Perhaps more startling, Team Trump had yet to even unpack before broaching radical notions such as abandoning America’s strong dollar policy, imposing a 20% border tax on imports from Mexico and opening direct confrontation with the media. Friday evening from the WSJ: “Trump’s First Week: Governing Without a Script.”

At least for this week, I’ll leave it to others to pontificate on the economic merits of Trump policymaking. Dow 20,000 is testament to the market’s ongoing fixation with tax reduction and reform, de-regulation and imminent fiscal stimulus. There were enough disquieting developments this week to dent confidence, though break-out bullish exuberance proved resilient. Unwavering faith in the course of central banking surely underpins the markets, confidence that I expect to be challenged in 2017.

My focus – one that the world now largely neglects – is on unsound global finance. It’s such an extraordinary backdrop – in all things monetary, in politics, geopolitics and the markets. Yet it is anything but a new experience for speculative markets to disregard latent financial fragilities. And we’ve witnessed in past episodes the capricious nature of market psychology. There’s something to glean from each one.

I think back to the summer of 1998. Markets were surging to record highs, led by monster advances in bank and financial stocks. The mantra was “the West will never allow Russia to collapse” – certainly not after the devastating Asian Tiger debacle. The simultaneous autumn implosions of Russia and LTCM not only punctured the financial Bubble, they almost brought down the global financial system.

Bolstered by “The Committee to Save the World” and all the Fed’s Y2K histrionics, powerful Bubble reflation saw Nasdaq almost double in 1999. Fear somehow just vanished as greed took full control. The U.S. was the indisputable leader of the free-world; there was an unassailable New Paradigm of technology-induced prosperity; America was the vanguard of technological revolution; and the dollar was unconditional king. With the clairvoyant Maestro leading U.S. and global central bankers, the New Millennium was destined to be the golden age of prosperity. Naysayers were tarred and feathered, yet that didn’t change the harsh reality that finance was fundamentally unsound.

Continue reading A Dubious Monetary Backdrop

Blinding Flash of the Obvious

By Danielle DiMartino Booth

Dear President Trump,

It’s conceivable you are not a regular reader of these newsletters. In deference to how busy you’ve been since last Friday, I’ll resist directing you to the full archive for the moment. Suffice it to say these missives usually begin with a catchy or sometimes kitschy cultural hook to draw readers in to such spicy subjects as bond market valuation, the prospects for monetary policymaking and one that’s near and dear for you — the state of the commercial real estate market.

But this week, in an open letter to you written in all humility, on behalf of myself and every patriotic American, I’d like to share with you the wisdom of one of our nation’s best and brightest military minds in the hopes you might adapt it to the economic issues you will be tackling during your time in office.

Lieutenant General John W. ‘Jack’ Woodmansee, Jr. served 33 years in the United States Army before retiring with the highest honors. Today, Lt. Gen. Woodmansee is the CEO of Tactical and Rescue Gear, Ltd., an 18-year old company that manufactures and sells goods to the Department of Defense, Department of Homeland Security and law enforcement markets. He’s a huge patriot if there ever was one and I’m sure you will agree we can all stand to benefit from his experience.

It is not uncommon to have mantras by which we live on our desks. When I was on Wall Street, I read and re-read mine every day, “Pigs get fat, Hogs get slaughtered.” That’s a good one, but perhaps better suited to your former day job. In your new role, which includes that of Commander in Chief of the Armed Forces, you would be better served to adopt the quotation Lt. Gen. Woodmansee uses as his guidepost to resolve “complex future requirements,” to borrow his words. (Get with me privately if you’d like to see Lt. Gen. Woodmansee’s Top Four Foreign Policy Priorities for National Security.) Without further ado, you may recognize these words as those of George Orwell:

“Sometimes the first duty of intelligent men is the restatement of the obvious.”

Let’s simplify that, military-style, in case you’re inclined to tweet this in the night. Call them Blinding Flashes of the Obvious that guide you — Bravo-Foxtrot-Oscar — to help sear the words into your memory bank. With that, what exactly are the obvious issues facing our economy? The Lt. Gen. narrowed his list to four, so I shall follow suit.

  1. The biggest challenge is what got you elected, that is the sense among millions of Americans that they’ve been on the outside looking in on the so-called economic recovery which technically started in 2009.
  1. Time is the second obvious element that is not on your side. Next Thursday marks the beginning of the third longest expansion in the post-World War II era. Recession will be a reality on your watch, and perhaps sooner than later.
  1. As you’ve recognized yourself, the financial markets are wrapped in bubble. You name it, they’re overvalued, some more than others.
  1. And finally, your central bank is, as my former boss Richard Fisher said, “a giant weapon that has no ammunition left.”

If only the solutions to what ails the economy were as glaringly obvious as what ails it. Patience and fortitude will see you through but you must prepare yourself for what’s to come. And though your initial actions do make it appear as if you believe economic prosperity can be signed into being with the whisk of an executive order, take it on faith that the country needs a lot longer than 100 days to get this economic party started.

 

That isn’t to say your energy industry actions aren’t to be lauded. Here’s for hoping exports are next. That natural foray accomplishes a national security aim as well. Foreign policy will be greatly strengthened if a certain egomaniac who lives east of Western Europe can no longer hold our allies hostage with the threat of their natural gas supplies being cut off in the depth of winter. Energy exporting and building those pipelines will also take us one step closer to energy independence, which is a foreign-policy and economic positive.

Then there’s the red tape that’s increasingly strangled our proud history of entrepreneurship. Please proceed to dump them at the nearest exit as you’ve promised to do. Let’s start-up and grow small businesses.

Afraid that sums up the low hanging economic fruit you can pick right away. Bringing big job growth back requires long term investment in educating our children in science, technology, engineering and math. Do you want to build the factories of tomorrow on American soil? Fine. Rip up the game plan and rebuild our education system, one community at a time.

If you won’t take my word for how critical this is, have a quick look at our literacy stats vis-à-vis other developed nations. As for the desire and wherewithal, Google that photo of single African-American mothers marching across the Brooklyn Bridge to retain charter school funding. Easier yet, pull up footage of this past Tuesday’s protest on the south steps of the Texas state capitol building – thousands of parents demanding tax dollars to help fund optionality in where they educate their kids. It IS broken and you’re not beholden to any special interests. Let’s fix education!

Fair warning: the recession inevitability thing won’t be easy on you. So why not bet on the come? Starting points do matter and, hate to break it to you Dorothy, but we are not back in Kansas circa 1980 anymore. Resisting radical central bank intervention will be a difficult test of your mettle. Helicopter money, negative interest rates, more bond purchases to grow the Fed’s balance sheet further, the abolition of cash. Just say no, which you can do via proxy, which we’ll get to shortly.

When it comes to recessions, we all know that discretionary spending is hit the hardest. That’s where those tax cuts and infrastructure spending you’ve committed to come in. They’re not perfect, but why not anticipate a crisis and simplify the tax code now – like tear it up and start from scratch? That’s called an uphill battle as your own party might not cotton to radical change. But you say you’re an artful master in the deal-making department. Go make one while the sun is still shining and what little time you have left remains on your side.

You’ll note that a purist’s approach to tax reform slaughters many sacred cows in the process. In the event this is intimidating, recall that thing about owing no one anything. Ask yourself a few questions. Will hedge funds, private equity firms and venture capitalists be destitute if you close the carried interest loophole? Do occupants of mansions really need the extra tax break afforded mortgage interest deductibility? And would it be better to bring a big chunk of those overseas profits back home? If you answered yes to that last question, ask around — there are ways to ensure those firms don’t simply plunk what’s repatriated back into share buybacks. We’ve seen how that stagnates economic growth, so why go there?

Tax reform will, by the way, go a long way toward dispensing with the searing criticism you face as you approach the desperate, and bonus, obvious, need to upgrade the country’s crumbling infrastructure. While you might like to have this be a purely privately funded scheme, it’s reasonable to assume that some public funding will come into play – think they call it ‘hybrid’ funding (call up your Australian counterpart for the specifics). The good news is that unlike tax cuts, which can be saved or diverted here or there, investment in bridges, tunnels, roads, schools, hospitals and the like is here to stay and keeps paying economic dividends in the form of the other business spending it induces around it. So, direct and indirect lasting economic benefits.

As for those bubblicious markets, they’re sure to be upset once they get the first whiff of that recession we just discussed. We can agree that letting the air out of the markets will be disruptive, and not in a good Uber way. There are no easy answers on this count. You might be faced with so few options that you’re forced to focus on the really heavy, preemptive, legislative lifting discussed above to mitigate the collateral damage. The best news that can be offered is that reasonably valued assets forge a natural pathway to future economic growth.

Finally, there’s the thorniest issue of all, the Fed. You may note the long road ahead is fraught with legislative barriers. To the extent financing is required, it’s always beneficial to contain borrowing costs. It would be nice to think you could rush into the Treasury market and issue a boatload of 50-year and 100-year bonds. But there are more than even odds that opportunity has been squandered by an epidemic of short-sightedness on the part of your predecessors. Let’s be magnanimous and say they didn’t appreciate the immense fiscal defenses that could have been built up against the backdrop of the lowest interest rates in 5,000 years. Deficit smoke-and-mirrors surely never came into play.

For the here and now, Fed officials seem intent on doubly tightening financial conditions by shrinking the $4.5 trillion balance sheet while raising interest rates. Knowing recessions are an inevitability should give you the resolve to offer the politically-driven doves-turned-hawks two words: “Try me.”

This done, back legislation to reduce the Fed’s mandate to minimize inflation. This will prevent future bouts of mission creep. Next, beef up bank supervision (note, never used word “regulation”) to stay one step ahead of nefariousness. And finally, fill those two open vacancies on the Board, and fast, with individuals who don’t think “no” is a four-letter word. Bring dissent back to the Fed by installing the best and brightest, who also happen to have uncompromising constitutions. Let the new kids on the block carry out your leadership of the Fed by proxy.

Tall orders, one and all? Without a doubt. But at least you’ve got hope, ebullience and inspiration on your side. Surveys of businesses and households suggest you’ve even got the fillip of an economic acceleration in the cards. So seize the moment and embrace the fact that you don’t require a lot of sleep to effectively lead. The hardest deals of your lifetime lie ahead. Don’t back down for all our sakes. And keep Orwell’s words in mind if wily politicians try to bog you down in the weeds. Bravo-Foxtrot-Oscar. An added bonus: it makes a great Tweet.

Sincerely,

We the People

Tweetonomics: Implications of @realDonaldTrump

By Axel Merk

Faced with a Tweeter-in-chief, how are investors to navigate what’s ahead? Is there a strategy behind President Trump’s outbursts; and if so, how shall investors position themselves to protect their portfolios or profit from it?

With all the outrage about Trump’s style, we have all seen equity markets rally in the aftermath of the election. Is the rally due to investors loving the policies proposed in Trumps’ tweets? We argue no, if only because one can hardly call most of his tweet storms policy proposals.

Before I expand further, I need to point out that discussing portfolio allocation in the context of politics is bizarre, as, in my experience, today’s breed of investors – and this may well include you – are looking for an “investment experience.” In an era where stocks have gone up and up for years, where buying the dips has been a profitable strategy, does it really matter what you invest in? So, it appears to me, many invest in what appears warm and fuzzy to them. The days are gone where investors bought shares of tobacco companies because they were good value; instead, they buy solar energy companies if they want to save the planet. Similarly, my own anecdotal research suggests investment portfolios of Clinton supporters look distinctly different from those of Trump supporters. It’s incredibly difficult for investors to put emotions aside. That said, I have no problem with an environmentally conscious investor specifically avoiding coal companies because they don’t want to support it even if it might churn out more profits in a Trump administration – as long as he or she does it with open eyes. Such investing, in my humble opinion, means gathering the facts, then making a conscious decision. To gather facts in a politically charged investment environment, here are some of the steps you might want to consider when you hear stories that might affect your investment decision:

Continue reading Tweetonomics: Implications of @realDonaldTrump

Dawn of Trump, A Plea for Sanity

By Jeffrey Snider of Alhambra

Jose Manuel Barroso was the former Prime Minister of Portugal who became the 11th President of the European Commission. Never one to be shy about sharing his opinions, in June 2012 at the G20 summit in Mexico he declared, “this crisis was originated in North America and many of our financial sector was contaminated by, how can I put it, unorthodox practices.” The political shot at the United States was in response to a reporter’s question about the prospects of foreign resources to be used to bail out Europe. Whatever one might think of his crisis analysis, it further underscored the nature of the event that frustratingly by 2012 still wouldn’t fade away.

To that end, it was Barroso who gives us perhaps a standard by which to judge where we are in all this. By “we” I mean, of course, the entire global economy. What is wrong is not European, just as it was it ever purely North American. In September 2012, at the EU’s so-called “State of the Union” he pushed for even stronger ties among Europe’s member states. The euro itself demanded further primary unification, in his view, including a common bank supervisor as well as that of sovereign budgets themselves.

It’s quite obvious that to sustain a common currency, we need more common power.

In 2017, the populists have made such chances small, and getting smaller all the time. Had Europe’s economy performed anywhere near to what it was supposed to, Britain would never have voted to leave, nor would the technocrat Italian government fallen so sharply at referendum. The Continent is moving steadily away from Barroso’s mandate.

In April 2013, newly confirmed US Treasury Secretary Jack Lew traveled to Europe with these concerns on his mind. He went primarily to urge Europe’s governments toward a “pro-growth” direction, which at that time was Krugman code for “enough with the austerity.”

Our economy’s strength remains sensitive to events beyond our shores and we have an immense stake in Europe’s health and stability. The United States has no bigger, no more important economic relationship than it does with Europe.

His message was not enthusiastically received, with many in Europe wondering what gave him the mandate to lecture anyone outside the US on such matters. The US economy, despite Bernanke’s self-defined “courage”, was no paragon of strength in a world sorely needing more than words and economic homilies. And so was born the idea of the “cleanest dirty shirt”, one that survived several years before the “global turmoil” of 2015-16 put to rest any gradation of and relating to economic laundry; after ten years and a great deal of broken promises, and more importantly a great deal of effort behind those promises, there was no reason why dirt should be the defining and unifying feature across the whole world.

When Europe fell back into official recession in 2012, the imposition of Obamacare upon primarily American small business played no role in it. Similarly, the sudden Chinese slowdown in that same year will never be traced to new and seemingly plentiful regulations imposed under the Obama administration. In fact, the regulatory creep of the US government did not begin in 2009 even though the Great “Recession” was then at its worst.

The Heritage Foundation estimates that from 2009 through 2015, the total number of new federal rules imposed was a mind boggling 20,642. As bad as that was, it was only a continuation of a trend that extended much further back in US economic history. From 2001 forward, encompassing all of George W. Bush’s two terms as well as most of Barack Obama’s, the overall total, which includes the number cited above, was 47,661.

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