We have to
admit to being as surprised as everyone else at the stock market’s reaction to
the Donald Trump victory. And it is not
because we think the policies of the incoming administration will be less
growth oriented than the Obama or the not to be Clinton administration. Quite the contrary. President-Elect Trump’s policies will be
friendlier to business and to the taxpaying public than the alternative. The problem is that those policies could also
explode the debt, which we believe is the most significant financial threat to
the country’s growth and economic well being.
positive side, there are a number of pro growth initiatives in the Trump
plan. A partial list would include, infrastructure
related spending and jobs resulting from the fiscal response, rebuilding a
depleted military including new investment in weapons systems, scaling back or
eliminating Obamacare, tax cuts for individuals and corporations, reducing the
maze of Federal regulations that are choking certain business activity including
energy production, building the Keystone and other pipelines, possible corporate investment in
neglected real plant and equipment due to a shift to optimism from pessimism,
and importantly, repatriation of corporate profits that are being held
offshore, mainly in Europe.
opposing side, there are at least several negatives. Among those are building a wall financed by
Mexico that causes friction and reverse immigration of low skilled workers
(ultimately very inflationary), minimum wage laws, which are not only inflationary
but actually can destroy jobs, renegotiation of trade agreements that slows
business activity, trade tariffs that are ultimately borne by the U.S.
consumer, and possible political interference in the activity of the Fed (our
readers know that we have vehemently criticized this Fed in particular, but we
have never espoused political interference).
Below are a
few statistics, sourced from www. usdebtclock.org. We compare to the same series eight years
ago, at the end of 2008, and encourage our readers to view for themselves.
The National Debt went from $10.9tn
to $19.9tn, an increase of 82.5%.
GDP went from $14.1tn to $18.7tn, an
increase of 32.6%. (This increase in debt relative to increase in GDP is
Though the National Debt stands at
$19.9tn, which given GDP is an increasing and ominous number, the Unfunded Liabilities,
which include Social Security and Medicare, stand at an almost unfathomable
Total Public and Private Debt is now $66.8tn,
up from $50.8tn. Given the above, Total
Credit Market Debt now stands at 357% of GDP.
We could go
on and on with many more statistics but we think that you, the reader, get the
point. Our thesis is, and has been, that
the excessive debt that exists has slowed growth. This is evident in the anemic GDP growth
statistics since the end of “The Great Recession”. We believe the better than expected 3.2%
increase in GDP increase reported by the government last week will prove to be
another false start, especially in light of the rapidly increasing dollar
relative to the currencies of our trading partners.
At the same
time that debt was going through the roof, the Fed was increasing its balance
sheet from $800bn to $4.5tn. Said
another way, the increase in debt, at least on the public side, was financed in
large part through the printing of money.
That has, in our view, led to the inflating of financial assets to levels
not seen before on the fixed income side, and to near the most expensive
valuations in history on the equity side.
In its most recent reporting summary S&P 500 Trailing Twelve Month GAAP earnings are $89.29 (24.2X P/E on 9/30/16 Close). We have written about what we view as
dangerously high equity valuations many times, most recently in the piece
entitled “Malaise” on this website.
us back to President-Elect Trump and what he will face as he attempts to
implement the policies he espoused during the campaign. In March 2017, the federal debt limit, which
has been suspended since the fall of 2015, will be reinstated. It is at the time, or more likely, in the
weeks immediately preceding, that the markets will focus on the issue. We could again get a glimpse of just how
topsy-turvy the world has become, for it may be the republicans that become the
debt lovers and the democrats that, in the spirit of obstruction by both
parties that has existed for some time, try to put the brakes on. While it may not be possible to predict the
outcome, we feel it is safe to say that this is one of several catalysts that
have the potential to ignite the bear market we have been anticipating for some
President-Elect Trump would be wise to heed the advice espoused by Randall
Forsythe in the last two issues of Barron’s magazine. Essentially, it boiled down to taking
advantage of artificially low interest rates and issuing 50 or 100 year bonds while cutting corporate
tax rates to a theoretically revenue neutral 22%. At $20tn in debt, each 25 bps is $200bn of
interest. In the longer term, this will
have the effect of crowding out other spending.
In our view massive
infrastructure spending may boost the economy temporarily. But more spending means more debt and potentially
more inflation and interest rate exposure.
Whether President-Elect Trump and his advisors heed the advice remains
to be seen. But from our perspective, we
see more money printing, more currency debasement, and more risk to the
financial assets that have been so grossly inflated by the Fed’s irresponsible