Thursday, April 11, 2019

The "Trump Economy" Is A Mirage Based On Spending

The Trump Economy May Be Flawed
Questioning the whole "Trump Economy" may seem in poor taste to those who have benefited so much but it is something we should do. The fact is Trump is not a rocket scientist something he most readily would deny, matter of fact he may not fully understand the economy. I base this on my observations of his reaction to many events that have occurred over the years. My conclusion is that Trump is not an economist but simply a businessman who loves the economy when it is in sync with his investments.

Trump engages the world on several levels, as both a communicator and as a politician he has displayed a style uniquely his own. With this in mind, it is important to remember Trump is a creature of the late 1900s and much of his success is rooted in inflation driving up real estate values and retaining that wealth by playing tax games. Throw in a few well-positioned bankruptcies that left his unfortunate investors and vendors under the bus and we are left with the real Donald. He could be described as a self-promoting charlatan that has in his own words "negotiated deals" that have allowed him to move forward.

The unexpected occurred when Trump was elected, the stock market soared and he quickly stepped up and declared the credit for the move was because of his vision. Oddly, Trump never was a stock guy but he now points to the market as proof of his success. Wall Street may have been on a roll since he took office but the economy on Main Street remains troubled. To those looking a little deeper into the American economy, it is clear many problems still exist such as growing inequality and more dependence on government spending. This spending and artificially low-interest rates, however, do not always lead to nirvana. This can be seen in the government bond sector where investors seeking safety have driven yields into the basement.

It does appear, however, that Trump does understand that bloated government spending drives the GDP ever higher. Whether it be military or infrastructure spending. This should give America great concern for today way too much of our focus is about Trump "in the moment" rather than "America going forward." It is difficult to ignore that immediately after taking office Trump loaded his cabinet with  Goldman Sachs executives, the same loathsome creatures that have created so many problems across the world. It seems Trump is more interested in the perception all is well than substance or the long-term health of the economy. This means we should not be surprised to find the economy is left flapping in the wind when all is said and done.

Trump Has Pushed The Fed Towards Easing
Of course, the media always comes up with an explanation for market moves and many times they seem a bit far fetched. In the end, anything can be explained away, bad news is good news and such. Still, the current conventional wisdom remains that any weakness in the economy ensures another wave of stimulus will flow from the Fed.  Without question, and as demonstrated by the Fed’s recent decision to hold rates steady nothing has changed and the will to really stress the system is again on hold.

Without a doubt, because of Trump's braggadocios nature he now owns not just the stock market but the overall economy as well and when both turn south the blame will fall directly upon his shoulders. In all truth it should, as an economic doctor Trump is a "quack" that has prescribed a treatment full of inconsistencies. His goal has become to produce numbers with little regard as to what lies behind them. This is evidenced by Trump's recent actions which include monkey hammering the Fed and called for QE4. He has also called for and badgered oil producers to produce more in an effort to lower prices. Trump even has Larry Kudlow, Director of the United States National Economic Council, running around calling for a 50bp rate cut.

What is being ignored is the structural issues that haunt America's competitiveness and far outweigh the benefits of lower taxes. The ugly truth is American companies have little reason to bring jobs home. The logic that lowering corporate income tax will create a massive flow of jobs to our shore is flawed. The tax bill Trump served up did little to level the playing field between low wage countries and predators such as China. It merely encouraged companies to spend money doing stock buybacks driving their share value ever higher. Issues such as healthcare cost and over-regulation continue to act as barriers to doing business in America.

Trump's Ugly Legacy - Debt!
 Sadly, it is only massive and unsustainable deficit spending that continues driving our economy forward. This over the top spending coupled with a series of one-offs is why investors would be wise not to accept America's recent GDP as verification that the economy is hitting on all cylinders. The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road.

Government spending is a poor substitute for the free market in allocating capital to where it is most effective and it is not economic growth but simply a method of borrowing from the future. After criticizing Obama and the Democrats for taking us down this road we find Trumponomics is little different. With the government driving demand we continue to see the economic imbalance grow and should prepare for inequality to worsen. This will become obvious over time as sharp-elbowed preferences feed money into larger and sanctioned businesses and away from small local business.

Any notion that as a no-nonsense businessman Trump would halt wasteful government spending and go about setting our house in order is gone. The problem disenchanted Trump supporters have with the current state of the union is that they have no real alternative to him. We live in a political world devoid of a "one size fits all" hero of the people. This means, no real choice or options exist.  Whether it was Trump's promise to "Make America Great Again" or simply that he was not Obama, Hillary Clinton, or one of the other miserable choices we were given it seems it was just enough to get him the big prize.

Unfortunately, Trump's history of flip-flopping on issues and constantly capitulating or redefining his stand has left many of his supporters appalled and questioning whether he really has a spine. Still more important to investors contemplating the direction of the Trump economy is the "hope" that central banks will extend and expand the pretend state of QE and once the US and China sign a trade deal global growth will re-accelerate in 2020. This is what has ushered in a stock market that soars higher even as cracks continue to appear in the false economy. Trumponomics is built on perception rather than substance which like a mirage can vanish before your eyes.

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  1. The end of the road is a good point but the Japanese haven't hit yet and they are light years ahead of us in the ridiculous experiment. Robotics/automation may bring back factory production to the US. Lowering corporate tax rates will help attract and or keep business, here it worked in Ireland. Deficit spending in the US is about $3000 per citizen/year, imagine what that would do to the economy if stopped. Hard to see what and when the day or reckoning happens as the rest of the OECD is doing the exact same economic voodoo we are engaging in. Trump has just succumbed to the swamp.

  2. In the penultimate paragraph the "L" was knocked out of HILLARY.
    Why do people love doom porn? If it isn't the government or student debt, it is derivatives. We manage to muddle through somehow. I know, this time is different.

  3. Helpful analysis - keep up the detail and specificity - thank you for your interest.