A few thoughts with the new year…
The market has priced in lots of hope. Hope of tax cuts and fiscal spending… but I’m wondering if UST yields and the USD isn't telling you this hope is somewhat priced in. Looking at various ISM-like measures it still seems we’re getting the bad kind of inflation, all price driven rather than pushed up by wages and new orders… Wouldn't that be better? And let’s not talk about medical + real estate components of CPI, we’re not getting the “good” kind of inflation… see below:
- Trade wars/protectionism = no good for world economy. In case you need a refresher: Sending #2 economy (GYNA) into recession won’t do the rest of the world any favors. Also you may have a trade deficit with Mexico, but you also still have approx $200B in US exports (that’s approx 13-15% of total US exports) bound for Mexico, and don’t forget the integrated supply chains that cross border multiple times… The time it will take for manufacturers to adjust to new regulations/NAFTA rules you could cause a serious economic crisis with hastily implemented policy… I’d like to think that the administration will proceed with more caution, but hey, ask Twitter… (Peter Navarro has some very very dangerous ideas… look at the Real Effective Exchange Rate below for the CNY, looks overvalued to you? the PBOC just burned through a little under $1 Trillion to fight outflows, they’re trying to prop UP their currency… lol)
Fiscal plans + tax cuts = at present no good for longer term debt, you really have to be a supply sider to think this won’t blow up debt + future interest expense etc etc etc… taxes may be raised again soon to pay for all this
Fiscal plans + tax cuts = crowding out effect?
Fiscal plans + tax cuts + shrinking of trade deficit = stronger USD gonna choke off exports (and encourage imports) and hurt our glorious protectionist manufacturing resurgence?
Slowing Immigration = no good for longer term demographic structural problems + productivity slump + labor skills gap (ie; too many low skilled rust belters + coal miners etc all pining for the days of $35/hour union pay, funny how it’s the GOP who got their back now… not gonna happen… a Canadian style immigration system that favors foreign educated/wealthy would be great for productivity etc)
- It's also very late in the cycle for these kind of policies... won't add much to growth, just to inflation, debt and higher interest rates for borrowers (aka job creators).
This all smells like a deflationary competitive devaluation/race to the bottom… and I’m not even going to mention political divisions + internal GOP tension… We’re not exactly launching the US economic reboot on a positive and uplifting note… So far consumer + business confidence is optimistic, that needs to hold.
Until then methinks USD and yields are at a high… (creeping inflation + modest growth in EU and Asia will help these trades) what’s missing from this picture is commodities are still bid and equities still look OK. But market does seem to be sending a message on the USD and rates…
Let’s see what MACRÖGÖD Jeff Gündlach has to say today @ 1:15PM PST!