It's too early to say whether Donald Trump's honeymoon with investors has ended, but it's certainly hitting a dry spell. Maybe it was the disruptive travel ban, maybe it was an offhand mention of a 20 percent border tax with Mexico, or maybe it was just a sense of duty following Dow 20k, but stocks again opened down Wednesday and look set to hit five days straight in the red – the longest streak since before the election.
You can read whatever you want into that, but it's abundantly clear that the reflationary Trump promises that had Wall Street so jazzed over the past three months clearly aren't the same ones Steve Bannon scrawls on the Oval Office whiteboard every morning. A Republican congress is sure to get a few supply-side policies out in the coming year, but the executive branch has other priorities. You want tax reform? How bout a travel ban. Softening on trade? Get a load of Navarro. Regulatory relief? Well, Trump's got something, uh, kind of like that.
But for inveterate optimists there is still a quiet port in this storm: infrastructure. Despite the word scarcely passing Trump's lips since he took office, banks remain hopeful that a big inflationary push for roads and bridges will be the tide that lifts growth in the years to come. On Wednesday, minutes from the week's Treasury borrowing committee showed a surge in interest by Treasury dealers, anticipating Trumps trillion-dollar infrastructure promise. From the FT:
The big banks responsible for underwriting the US government’s debt have predicted a surge in borrowing from the US Treasury in order to fund the Trump administration’s proposed infrastructure spending plans.
[...] “These primary dealer estimates reflect a substantial range of market expectations around fiscal policy, particularly with regard to the timing and size of various stimulus and tax proposals,” said the minutes.
It's not all senseless optimism. Even if non-wall infrastructure isn't on Trump's immediate radar at the moment, it's hard to imagine him passing up the opportunity to plaster his name over building projects nationwide, seeing as that was literally his life's work up to this point. And there's a glimmer of hope that enough Democrats, long in favor of infrastructure spending, will hop aboard a Republican-led stimulus package.
But hopes of bipartisan cooperation are shrinking. So, too, is the size of Trump's proposal. During the campaign it was a juicy round number, $1 trillion. After the election the number sank to $550 billion. As of last week, a draft plan scooped up by McClatchy listed $137 billion in nationwide projects, with about half of that to be financed privately. That puts us at less than a tenth of the spending Trump originally floated.
Surely, sensible investors took the big trillion number seriously, not literally. But it remains a mystery why Trump's infrastructure promise still inspires such flights of fancy, particularly when it comes to the private-public focus that Trump and his cabinet have consistently held.
Goldman Sachs macro analysts argued all the way back in December that such an arrangement, echoing the EU's Juncker investment plan, could “only finance revenue-generating projects, and might substitute for other sources of financing instead of generating new investment.” In other words, expect a bunch of toll roads that might have been built anyway.
This was roughly the point Jim Chanos made just after the election, pooh-poohing the prospect of generating American infrastructure greatness from a plan not in a “classic Keynesian” model, i.e., simply borrow and spend. It's the latter type of plan that primary dealers are banking on in their Treasury outlooks. But it's hardly what team Trump has proposed.