If anyone is still reading . . .

Given how much I’ve gotten wrong about Trump over the past year, I doubt if anyone is still reading this blog.  But just in case, here are a few reactions to recent market moves:

1.  It seems like a “growth reaction” to me, at least after the initial decline. Investors now expect faster economic growth.  Why more growth?  It might be tax reform.  It might be infrastructure (although monetary offset applies there.)  But one thing I heard a lot today (on CNBC) was deregulation.  Private prison stocks soared.  Coal stocks rose.  Bank stocks rose.   Biotech soared.  Many of these are clearly related to regulation.  We often forget how many regs the Obama administration had imposed, and Hillary was promising still more (her talk of drug price controls had been crushing biotech.)  Probably small business readers are thinking, “you forgot, I didn’t”.

2.  It seems to me that investors are assuming that Trump will give us the good stuff, but not the bad stuff (the reverse of last night).  That is, he’ll cut taxes on capital, he’ll deregulate, but he won’t do a trade war and he won’t expel 11 million illegals, many of which provide important labor services.  They started by treating it as a Trump win, and later began treating it as a GOP win.  Markets usually rally about 2% on a GOP presidential win.

3.  From my perspective, this is obviously not the worst-case scenario, although I’m not sure we can count on it.  Think about this.  If I’m right about the market reaction, then a man elected to help the struggling blue collar workers left behind by globalization will mostly help affluent stock investors like me.  (My wife’s in biotech, so we did very, very well today.)  But I’m not sure that Trump will leave things at that.  German industrialists also thought . . . oh, I better stop going down that road.

4.  Nonetheless, a rising stock market is better than a falling stock market, even if some of the individual cases (defense stocks, coal stocks, private prisons, etc.) leave me less than enthused.  (I’m not opposed to private prisons; I am opposed to burning more coal and building more weapons.)

I read the stock market rally as a sign that investors are assuming that Trump doesn’t know anything, and hence will have to leave the day to day policy work to the GOP supply-side “experts”.  I agree he doesn’t know anything, but I’m not so sure he’ll defer to others—we’ll see.

Here’s another way of putting it.  Somebody is going to be really disappointed–either discouraged unskilled workers looking to go back to a 1972 economy, or affluent stock investors like me.  Time will tell who it will be.

5.  I don’t have much to say about monetary policy. I think people overrate the impact of elections on Fed policy, and quite frankly I have no idea what Trump will do.  If he’s smart he’ll focus on taxes and regulations, because those will be really difficult issues to address—he needs to pick his fights.  Just imagine the complexity of replacing Obamacare—and that’s just one program.  The GOP has promised to repeal it, but they’ll be under pressure to preserve insurance for the millions who have recently become insured.  There are lots of tricky trade-offs, although that’s not to say there aren’t some good ideas being kicked around, such as interstate competition.

6.  Keep in mind that Trump may also do lots of things to hurt the economy. Infrastructure could be a black hole for money unless the process is reformed to inject more of a profit motive into the system (as in Europe).  Building the wall is 100% pure Keynesian waste–it won’t even boost AD.  But if we are going to do it, we could save a lot of money by using illegal Mexican immigrants.  BTW, I don’t think a wall would actually stop illegal immigration; it’s like the war on drugs–almost impossible.  Trump might raise the minimum wage, which would be a drag on the economy.  He might impose tariffs.  We simply don’t know.

7.  The deficit could get really, really big, especially for a period of peacetime with no recession.  Or Trump could severely disappoint some people by reneging on his promises.

PS:  Off topic:  File this under “It sucks to be Hillary”:

2008 total primary vote count:  Obama 17.87 million  (47.4%)   Hillary:  18.05 million  (47.9%)

2016 general election:  Trump:  around 47.0%      Hillary:  around 48.2%

The latter are estimates, as we are still waiting (as usual) for the lazy vote counters in California and Washington to get act together.  Late West Coast votes will boost Hillary’s margin well above the current 0.2%–it happens every election.

Think about this.  The 2008 Democratic primary was for all intents and purposes the general election, given the collapsing economy.  Twice Hillary fell just short twice, in elections that were “rigged” to favor her opponent.  In both cases she got more votes than her opponent.  In one case the rigging was the caucus system, which Obama did relatively well in, and in the second it was the Electoral College, which Trump did relatively well in. It would be like if Nixon had lost narrowly to Humphrey, after losing narrowly to Kennedy.

Of course I’m using “rigged” in a loose sense, I don’t see anything sinister in either case, just bad luck for Hillary.

PPS.  Trump got 4.1% of the vote in DC, versus 7.3% for Romney.  In contrast, he got 8% of the black vote (nationwide).  That backs up my feeling that I don’t meet many Trumpistas when I visit DC.  The GOP really has work to do if it wants to compete for DC’s 3 electoral votes.  Trump will enter DC sort of like a German barbarian tribal chieftain entering classical Rome.  He’ll need a good praetorian guard!


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36 Responses to “If anyone is still reading . . .”

  1. Gravatar of AIG AIG
    9. November 2016 at 13:17

    That’s ok, everyone got it wrong. We don’t blame you. Now its time to move on from the fear-mongering from all sides.

  2. Gravatar of Jason Odegaard Jason Odegaard
    9. November 2016 at 13:22

    I’ll still come back for monetary policy news, and I do have some concern about the type of Governors he might appoint. IF (big if) he pays attention to the Fed as much as he did when he said he would fire Yellen, then we might expect some hard-money types to be appointed to the Fed. That could provide a higher monetary offset that will make it harder for Trump to achieve his economic growth goals. That’s bad.

    But maybe he’ll forget about Fed governor positions for quite a while like Obama did, and the Fed will continue along relatively unencombered.

    But more likely, the GOP in the House & Senate will push to audit the Fed’s monetary policy meetings and establish a inflation-only mandate. Also bad.

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    9. November 2016 at 13:24

    There is no reason to push the 1% vs 99% rhetoric. The rise in bank valuations is the best news for working class families in a decade. Maybe they will be able to buy homes again.

  4. Gravatar of Art Deco Art Deco
    9. November 2016 at 13:34

    Building the wall is 100% pure Keynesian waste–it won’t even boost AD.

    It’s a component of law enforcement, a subject libertarians are too feckless to concern themselves with (except to bitch about cops and vice crimes). Happily for the cause of good government, soi-disant libertarians are comparatively few.

  5. Gravatar of Art Deco Art Deco
    9. November 2016 at 13:39

    Trump: around 47.0% Hillary: around 48.2%

    No, the margin between them appears to be 0.17% of the electorate, not 1.2%

  6. Gravatar of A A
    9. November 2016 at 13:43

    Does this series of market reactions raise your skepticism about equity event studies? For example, the XLF didn’t respond to Trump’s improved betting odds in early September.

  7. Gravatar of ssumner ssumner
    9. November 2016 at 13:53

    Jason, I don’t expect anything radical out of Congress. They only have 52 Senate seats, and those guys (and gals) all have their own strong views.

    Kevin, Nice thought, but I’m skeptical.

    Art, Wrong again, wait until the late California votes come in, it happens every cycle–the Dems pick up 1% in the week after the election. 9 million out of 13 million Cali votes have been counted.

    A, Yes, but only slightly, because:

    a. They’ve been useful on 100s of other occasions.
    b. We don’t have anything better.

    But yes, where there is enormous uncertainty about the implications of something, then I think you need to be cautious. They are better for well understood shocks, like when the Fed was expected to cut rates by 0.25%, but cut them 0.5%

  8. Gravatar of Christian List Christian List
    9. November 2016 at 14:01

    Good read, good analysis. I prefer the new matter-of-fact tone to the apocalyptic undertone(s) we heard before.

  9. Gravatar of Adam Adam
    9. November 2016 at 14:02

    Except we know he’s not smart. Anyone trading on the belief they know what he will do is a fool. He’s unhinged and unpredictable.

    Our hope lies in the congressional GOP. Ugh.

  10. Gravatar of Randomize Randomize
    9. November 2016 at 14:22

    Dr. Sumner,

    I have to disagree on the private prisons. Profit motive is a wonderful tool but, when the profit is based on putting as many people in prison and keeping them there as long as possible, it’s the wrong tool. Given the perverse incentive, it’s hard to imagine that money isn’t making its way into lobbying for harsher prison sentence and lining the pockets of parole boards. How many dollars do you think the private prison industry has pumped into lobbying for the war on drugs?

  11. Gravatar of Jeff Jeff
    9. November 2016 at 14:33

    Did everyone just forget that this guy suggested we default to fix our budget problems?

  12. Gravatar of Lars Christensen Lars Christensen
    9. November 2016 at 14:50

    Scott,

    This is the story: https://marketmonetarist.com/2016/11/09/make-america-keynesian-again/

    And no the Sumner Critique do not apply because the Federal Reserve have “asked for” infrastructure spending. And now they might get it big time. It is an alliance of Keynesians at the Fed and in the WH. Therefore inflation is back and the markets fully well understands that.

  13. Gravatar of Alex Schibuola Alex Schibuola
    9. November 2016 at 15:00

    No worries…I guessed the wrong way as many people did on this one. The political commentary was just a bonus. I’m looking forward to the focus on monetary policy analysis again. Keep up the good work please!

  14. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. November 2016 at 15:22

    I will still read you :)

    And this post is actually an excellent example of why.

    Apparently, this will be the Democrats’ worst Electoral College performance since Dukakis. So, Hillary the girl did notably better than the short Greek guy who looked ridiculous in a tank …

    (Also, excellent post Lars.)

  15. Gravatar of B Cole B Cole
    9. November 2016 at 15:59

    Remember: where priviledge conflicts with free enterprise, um, er, let’s change the topic!

    Will much change?

    Free markets and no property zoning?

  16. Gravatar of RIcardo RIcardo
    9. November 2016 at 16:46

    I agree with Lars. Mostly its expectations for greater fiscal spending w/o monetary tightening.

    A Bloomberg story with a graph of inflation break-evens: “Inflation bets soar, More fiscal spending seen under Trump to bolster price pressures.” http://www.bloomberg.com/news/articles/2016-11-09/pimco-joins-bond-traders-seeing-fast-tracked-fed-after-trump-win

  17. Gravatar of Massimo Heitor Massimo Heitor
    9. November 2016 at 16:50

    “I don’t think a wall would actually stop illegal immigration; it’s like the war on drugs–almost impossible.”

    The people who are outraged at border walls are outraged because they work and stop migrants, not because they are completely ineffective.

    The debate is do we want country borders to be easier and more welcoming for migrants or more inpenetrable.

    When Hungary built border fences to stop unwanted refugees, they worked. People protested precisely because they worked.

    The US is building a border wall for Jordan to block excess refugees. Obviously, we are building the wall because it will work.

    “a man elected to help the struggling blue collar workers left behind by globalization”

    The president won’t make 1972 style jobs and industries come back and shouldn’t try.

    The president can use words and rhetoric to raise/lower the status of different demographic groups.

    President Obama purposefully lowered status of small town residents, blue collar laborers, whites, christians, native residents, and raised status of non-whites, particularly non-asian non-whites, immigrants, muslims, academics, civil rights types, and gays. Some of the “struggling blue collar workers” probably want this status game reversed even if the president can’t fix all their career problems. That is quite possible.

    Also, Obama’s use of public housing programs to put dysfunctional underclass residents in working/middle class neighborhoods is clearly a detriment to the latter. A president can reverse that too.

  18. Gravatar of bill bill
    9. November 2016 at 17:35

    I wonder if he’ll nominate Larry Kudlow for the Fed?

    I’m guessing that a higher minimum wage will lead to more off the books work. i.e., more illegal aliens.

  19. Gravatar of Major.Freedom Major.Freedom
    9. November 2016 at 18:03

    Nonetheless, a rising stock market is better than a falling stock market.

    Not true. It depends on market forces. If market forces are putting downward pressure on prices, but the Fed is goosing the capital markets with credit expansion and inflation, then a rising stock market is a bad thing.

  20. Gravatar of dtoh dtoh
    9. November 2016 at 20:23

    Scott,

    Some thoughts/comments.

    1. You have repeatedly said, there is no way of knowing what Trump will do (am I paraphrasing correctly?). The markets seems to have a different opinion on this. So who’s right? You?…. or EMH?

    2. Interesting question on the effect of deregulation versus lower taxes on the markets. I have repeatedly argued that tax rates on capital have a dramatic impact on growth especially when there are asymmetric returns on capital. You have I think downplayed the impact. With Republicans in control of both the Presidency and the Congress, hopefully we will have more empirical data to test this theory.

    3. IMHO regulation over the long run acts as huge barrier to entry and generally boosts corporate profits (at least for companies who make up the S&P and DJI indices.) I think you could make an argument that deregulation should be negative for the markets and therefore the growth inducing effect of expected tax cuts is even larger than what is reflected in changes in the price of those indices.

    4. What’s your view on how a Trump Presidency will impact Fed policy. Trump maybe has a better understanding (than any previous President) of how the credit markets impact economic activity so maybe that translates into better Fed appointments. Not really sure though.

    5. You have argued that the instantaneous change in the market prices is what counts not follow up changes. What about this time? Should we take the change in overnight futures markets to be definitive or is the market reaction (opposite to overnight futures) during the course of today definitive. Also was the change overnight just a widening of the bid/offer spread or was there actually a price change?

  21. Gravatar of ChrisA ChrisA
    9. November 2016 at 22:13

    I will be still reading you, don’t worry! Personally I am still really processing how I feel about the election, not being a US resident or citizen I didn’t invest too much emotion in it, but basically I preferred HRC to Trump as Trump just didn’t appear a serious person. To me heads of state should be at least externally dignified and polite, as a representative of their country. But while Clinton clearly wins in that regard, I did highly dislike all the soft corruption around her and the dynastic entitlement. And the business as usual stuff is actually quite dangerous longer term, it makes for very brittle responses to threats, which make it hard to back off from eg Russia. And of course I am enjoying the schadenfreude on the leftist SJW elements. So mixed feelings. In any event, the well known Chinese curse is definitely operative right now.

  22. Gravatar of B Cole B Cole
    10. November 2016 at 01:21

    After being down 5% on the Trump news, the Nikkei 225 rose 7% the next day….

    maybe markets do not tell us exactly everything all the time….

  23. Gravatar of Michael Michael
    10. November 2016 at 03:41

    “Somebody is going to be really disappointed–either discouraged unskilled workers looking to go back to a 1972 economy, or affluent stock investors like me.”

    Great summary! But: When you put it like this, do you really question the answer?

  24. Gravatar of Scott Sumner Scott Sumner
    10. November 2016 at 08:33

    Lars, Monetary offset is not going away–the Fed is pretty committed to 2% inflation. The stimulus will simply mean we get there with slightly (and I emphasize slightly) higher interest rates.

    Massimo, You said

    “The people who are outraged at border walls are outraged because they work and stop migrants, not because they are completely ineffective.”

    Not me, I’m outraged because it’s a typical liberal big government program, a giant waste of money on “infrastructure.”

    Bill, You said:

    “I’m guessing that a higher minimum wage will lead to more off the books work. i.e., more illegal aliens.”

    One thing is clear. It will either lead to more unemployment or more illegals.

    dtoh, You said:

    “You have repeatedly said, there is no way of knowing what Trump will do (am I paraphrasing correctly?). The markets seems to have a different opinion on this.”

    That’s really strange thing to say after wild market gyrations, which can only be explained on the assumption that the market has a really hard time figuring out what Trump will do. I agree that the market now leans toward the supply-side Trump, not the populist Trump of the campaign. But it could easily be one of the those 60-40 things, there’s obviously huge uncertainty in the markets.

    You said:

    “You have I think downplayed the impact. With Republicans in control of both the Presidency and the Congress, hopefully we will have more empirical data to test this theory.”

    Either your point about the markets are wrong, or your point about the supply side effect of taxes are wrong. The markets current expect really slow growth going forward. So which is it? Trump won’t do supply side reforms, or they won’t work?

    BTW, the small increase in long term real rates is consistent with my supply side view that reforms can boost growth, but by much less than the true believers expect.

    You said:

    “Trump maybe has a better understanding (than any previous President) of how the credit markets impact economic activity”

    God I hope you are joking. Trump is a complete moron with no understanding of anything. All he knows is that he likes low rates, because he borrows lots of money.

    As for the event study I answered that above. This time it failed, because of the extreme uncertainty about the implications of Trump. My best guess is that the initial reaction was that we’d get a populist, and now the markets expect a supply-sider, more likely than not. The vast majority of event studies face much less uncertainty regarding policy implications. If Rubio had beat Hillary, markets would have soared initially.

    Ben, And maybe no one ever claimed they did. And maybe I already knew that markets move around continually, and that the sun sets in the West.

    Michael, No, I’m honestly not sure what he’ll do.

  25. Gravatar of Lars Christensen Lars Christensen
    10. November 2016 at 09:00

    Scott,

    If there was full monetary offset then inflation expectations would have been unchanged. Instead we have seen a very sharp rise inflation expectations since Tuesday and long-bond yields are up very significantly all over the world. The market clearly is seeing this as fiscal stimulus, which is having a monetary impact.

    The point here is that the Fed is not as committed to 2% as you seems to assume. If they where they would not have hiked rates in December and not signaled a new hike in December this year. Rather the Fed has clear preferences on the “instrument”. The primary target in fact seems to be the short-term interest rate level. If the Fed targets interest rates the Sumner Critique does not automatically apply.

  26. Gravatar of ssumner ssumner
    10. November 2016 at 10:15

    ChrisA, Good points, but keep in mind that Trump is also personally corrupt, even more so than Hillary.

    Lars, Sorry, but I just don’t see it. I checked the 5 year spread and it’s still well below 2%. (Actually 1.75%, which implies 1.45% inflation) Maybe up a tiny bit, but an extra few basis points are within the normal fluctuation. I’m not saying zero effect, but the effect on AD will be utterly trivial.

  27. Gravatar of Lars Christensen Lars Christensen
    10. November 2016 at 11:31

    Scott, it is not a tiny bit. Take a look at the 5-year/5-year (that is average inflation from 2021 to 2026) inflation swap.

    This is from yesterday: https://marketmonetarist.files.wordpress.com/2016/11/image001-1.png

    Today it is up an additional 5bp.

    Also look at the 10-year and 30-year bonds – up very significantly since Tuesday – more or less in line with the rise in inflation expectations.

    If there had been full monetary offset inflation expectations would have been unchanged, while SHORT-TERM yields would have been up. They are not. The curve has steepened significantly.

  28. Gravatar of ssumner ssumner
    10. November 2016 at 11:49

    Lars, I see a jump of about 13 basis points after the election, but a much bigger jump in the months before the election, when people did not expect Trump to win.

    And why look at 5 years out? Trump probably won’t even be President 5 years from now. I’m sticking with the assumption that the Fed is targeting inflation at 2% unless I see strong evidence otherwise.

    I’m actually more open to the claim that Trump might be boosting real interest rates.

  29. Gravatar of Lars Christensen Lars Christensen
    10. November 2016 at 13:36

    Scott,

    Real interest rates have not increased. The jump yield and in inflation expectations have been completely parallel. This is inflation expectations that are increasing and we know that that can only be interpreted as a monetary shock. However what monetary shock happened on Tuesday?

    The monetary shock was a fiscal shock in a world where the Fed is quasi targeting interest rates rather than inflation or NGDP.

  30. Gravatar of Lars Christensen Lars Christensen
    10. November 2016 at 14:17

    Scott,

    Here is my follow-up post with a discussion about how we can think about these matters in an expanded IS/LM model with different monetary policy rules: https://marketmonetarist.com/2016/11/11/make-america-keynesian-again-part-2/

  31. Gravatar of Joeleee Joeleee
    10. November 2016 at 18:26

    Lars, not strong enough in monetary policy to touch most of the argument, but the monetary shock on Tuesday could reflect the small chance of Trump debasing the dollar to pay off debts. It’s something he has spoken about I believe, and a small chance of that could price in a small expected value of increased inflation?

  32. Gravatar of ssumner ssumner
    11. November 2016 at 06:21

    Lars, Do you have a link to a graph of real interest rates?

  33. Gravatar of Shaun Shaun
    11. November 2016 at 11:28

    This caught my eye when you mentioned Obama care:

    “The GOP has promised to repeal it, but they’ll be under pressure to preserve insurance for the millions who have recently become insured.”

    Pressure from whom exactly? I think that’s incredibly naive. There’s nothing really stopping them from doing anything. Trump has a lot of leverage here. Besides, this is one of the only areas they actually all are united on. You think any of them give two shits about the tens of millions of Americans now vulnerable?

    Even a friend of mine who voted for Trump trashed one of his best friends whose daughter was helped by the ACA and said he didn’t care what happened, because Obamacare is a disaster and it’s better in the long run. The others I’ve talked to all say “well I’m sure he’ll do something for them. Of course he wouldn’t just let that happen.” What in his past or history makes them think this at all? Oh that’s right they really don’t even know anything about him, because they either A.) Shut it out, or B.) The media sources they follow led them astray. Hell one lady I work with called him a chauvinist bully and egotistical with a short temper, but voted for him anyways. She didn’t even know he (mostly) has control over every federal regulator, the military, and the nuclear arsenal. And she’s married to a Hispanic man and admitted that his family members have been harassed and knows it’s because of Trump. The Hispanic husband also voted for him.

    These people have collectively lost their goddamn minds and there is absolutely nothing we can do to stop any of it. Nothing.

    We need a new model of the world and the American voter, because whatever logical order we thought things made no longer applies. That was all proven wrong in the last 48-72 hours. Nobody knows anything and if they say they do they are wrong.

  34. Gravatar of ssumner ssumner
    11. November 2016 at 14:17

    Shaun, I predict they will not abolish Obamacare, they’ll tweak it.

  35. Gravatar of Shaun Shaun
    12. November 2016 at 21:34

    Tweak it? His stated commitment and they’re stated commitment for years now has been to eliminate it. How many times have they voted to repeal it now? Maybe they’ll keep the pre-existing condition clause, but then eliminate the subsidies and the requirement. The result would be an insurance market worse than before ObamaCare.

    You’re a smart guy and I mean absolutely no disrespect, but you’re line of thinking is eerily similar to what I’m hearing from lots of Trump voters telling me about how he really doesn’t plan to do X,Y,Z, such as throw illegals and their families out of the country, ban Muslims, tear down Nato, build a wall, dismantle Dodd Frank, etc. The list goes on. No this was all just political theatre to rile people up and get votes. But the alt right believes him and plans to make him honor his word. The white supremacists believe him and plan to honor his word. Why can’t we not take him at his word? Why must we delude ourselves? When are we going to start taking this guy seriously? If not now, when?

  36. Gravatar of ssumner ssumner
    13. November 2016 at 07:22

    Shaun, Trump is the most vile person in all of American political history. This is the first time I’ve ever been called a Trump defender. :)

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