Monday, January 23, 2017

Trump Uncertainties

When it comes to the stock market, fiscal policy is vastly overrated.  Monetary policy is the AK-47.  Fiscal policy is the butter knife.  Sure, Trump will try to maximize fiscal policy by blowing out the deficit to astronomical proportions, with his large tax cuts, but that comes at a price of higher interest rates, which feeds back to lower P/E multiples and tighter financial conditions.  Only if Trump can succeed in getting someone who will be dovish regardless of high inflation will he be able to boost the stock market to even loftier levels.  What he needs is a Fed chairman that likes him and is willing to play along in creating a high pressure economy.  Even then, he faces the headwind of unfavorable global developed market demographics, overcapacity, and lack of productivity growth.

Trump's press conferences, America first spiel, and "alternative facts" are just a sideshow.  What matters is economic policy.  Right now, it looks like Trump has decided that he will use up a lot of his political capital on abolishing Obamacare and revising trade deals.  Once he gets to the tax cuts, he may not be facing such a willing audience in Congress.  Especially if his popularity gets any lower.  And it is already pretty low for an incoming President.

At current valuations, the S&P 500 will not be satisfied with just token tax cuts.  Its expects taxes to be slashed and burned over the next 100 days.  With the direction that Trump is going, he may not be able to bully his way to getting all the tax cuts he wants.
Even if he does get all of his tax cuts through, they are a short term solution.  The effect of the tax cuts are temporary because the market soon discovers that deficit financed tax cuts effectively rob Peter to pay Paul.  You are robbing bond holders to pay stockholders, high income earners, and corporations.  Ironically, the elderly, those that were most likely to vote for Trump, will be the ones hurt the most by his economic policies.  Only when there is monetizing of the debt is there a nominally "free" lunch.  Of course in real terms, there is no free lunch.  You don't increase a nation's wealth by cutting taxes or monetizing the debt.

If corporations never had to issue debt, they would be riding a gravy train of fiscal expansion.  But a lot of them have to issue debt to function.  And if they have to pay higher interest rates to do it, that is a price that is not insignificant.  With the QEs, it was heaven for corporations as they could buy back stock through debt issuance at low interest rates.  Not so heavenly anymore, especially if interest rates keep going higher.

This is not a market to try to make big gains.  Frankly, it has been boring for S&P traders for the past few weeks.  There will be times like this when the market is near all time highs and investors are comfortable.  When investors are uncomfortable and under pressure, that is when the opportunities arise.  Right now, investors don't feel any pain and are sitting there happy to do nothing, close to all time highs.  Not forcing the issue here.  Waiting for movement.  And if it doesn't come, I will do nothing.


shzhning said...

are you trading full time? if yes, you must have been bored to death these past few weeks

Market Owl said...

Full time trader. And yes, it's been boring. Can't always be fun and games.