In this issue
The Risks and Hopes from Donald Trump’s Presidency; Trump’s Market Shock!
-Philippines Experience: How BOOM BOOM BOOM Policies Spurred the Rise of Anti-Establishment Politics
-Trump’s Emergence: How BOOM BOOM BOOM Policies Spurred the Rise of Anti-Establishment Politics
-Donald Trump: The Anti-Establishment Mirage
-Trump’s Statist Policy Means To Promote Establishment Interest
-The Fatal Consequences of Protectionism
-Déjà vu: Smoot-Hawley?
-What Happened to the Trump’s Big Fat Ugly Bubble??!!!
-The Deepening Global Infrastructure Charade
-The Trump Market Shock: US Stocks Soar, US Treasuries, Emerging Market Currencies and Gold Crash!
-Newton’s Law: Duterte’s Honeymoon Expunged as Peso Tumbled to 2009 Lows
The Risks and Hopes from Donald Trump’s Presidency; Trump’s Market Shock!
Let me say this curtly. Current events or formative trends don’t appear out of the vacuum. They are dynamically forged as part of a time consuming process. There is biblical maxim that analogizes this: Be not deceived; God is not mocked: for whatsoever a man soweth, that shall he also reap. (Galatians 6:7 Biblegateway.com)
And this is what fails almost everyone: the understanding that life is a process. Actions have consequences. And consequences are intertemporal: they differ over time period. Or effects can have short term impacts that are totally distinct from the long term.
Most have been programmed to believe in the superficial that “things just happens” or “people suffer from character shortcomings”. In the field of economics, experts shout statistics “demand will boost economy” among the many myopic supposedly economic assertions which are really heuristic or mental short cuts “clothed in numbers”.
In gist, most fail to comprehend the causal relationships that encompass the nature of life. They tend to embrace the logic of what is visible, tangible or what can be seen, and but on the other hand, ignore the logic of what can’t be immediately seen or counterfactuals from human action.
Present developments are proving to be awesome examples
Philippines Experience: How BOOM BOOM BOOM Policies Spurred the Rise of Anti-Establishment Politics
Last week’s culmination of the US national elections was marked by a stirring upset—a win by an OUTSIDER; a political NOVICE—billionaire and businessman Donald Trump.
This outcome has not been so distinct with current emerging trends around the globe.
The rise of nationalism, anti-migration and anti-globalization sentiments, secession movements, increased tensions in geopolitical affairs, among many other (social issues) reflect on developing symptoms or trends that characterizes increased polarization, divisiveness, assault on the centralized structures and inward looking dynamics.
The electoral victory of the Duterte regime or of Brexit can be associated with this.
Let us take the Philippine experience as example
Remember how language and the flow of information on the prospects of a Clinton victory had been virtually monopolized by the establishment pre-elections?
That’s exactly how the establishment portrayed of the BOOM-BOOM-BOOM in the Philippines.
If one recalls, there was hardly any opposition to the BOOM-BOOM-BOOM manifested in mainstream media from onset of through of the end the Aquino administration. The BOOM-BOOM-BOOM in asset prices (stocks, property, bonds, and peso) that fueled GDP had even been WORSHIPPED by the consensus. Experts virtually ignored the 10 months of 30% money supply growth that spurred a surge even in the government’s suppressed CPI measure. They even rationalized it as nonevents.
For these highly paid experts, destruction of the average man’s peso has little relevance with the real economy. BOOM-BOOM-BOOM can only go on forever. Risk has totally vanished. So it was held. Yet inequality surged
Then 2016 elections came. Instead of rewarding the previous regime for the asset BOOM-BOOM-BOOM GDP, over 16 million voted to repudiate the anointed from Aquino regime—by a landslide.
People knew something went wrong, but they simply can’t spell it out. That’s because statistics, media and mushrooming physical structures went against what they felt.
Or, what they were told and what they felt were just incompatible.
So in the din of confusion, a significant segment of the populace instead desired to imbue supposed political C-H-A-N-G-E in the form of a strongman rule. The strongman rule has been predicated on the perceived lasting efficacy from superhero effects that constituted short term solutions through violence and repression.
The strongman rule was supposed to supersede the institutional and legal framework. The end justifies the means.
Hence, the appeal for the anti-establishment strongman rule and its electoral triumph transformed the landscape of the Philippine political economy to an ochlocratic leftist dictatorship.
The Philippine society has not only veered to the left but embraced violence and repression as paramount virtue for G-R-O-W-T-H. So the Philippine model now has transmogrified into “BOOM-BOOM-BOOM with socialist characteristics” (to paraphrase China’s communism).
Trump’s Emergence: How BOOM BOOM BOOM Policies Spurred the Rise of Anti-Establishment Politics
In the US, the asset BOOM-BOOM-BOOM GDP also preceded the two previous (Bush-Obama) administrations.
The only difference, the US BOOM-BOOM-BOOM suffered a crash in 2008 that percolated to the world. Such would be known as the Great Recession (GRC). The immediate political remedy to the GRC had been a massive bailout of Wall Street through an alphabet soup of measures. That subsidy was further reinforced by QE 1.0 ,2.0, and 3.0 and by Zero Interest Rates Policy (ZIRP) via record low interest rates (until December 2015).
The Great RESCUE of Wall Street drove a significant wedge in economic performance between the politically connected and main street (or the average Americans).
Given the political response to the GRC, the distribution of credit activities provides clues of the direction of performances of key sectors of the US economy.
Because of the legacy of balance sheet troubles, the plumbing mechanism for credit, which has functioned as the cornerstone for Keynesian driven modern day political economies produced varying effects from the Wall Street Rescue by the FED and the US Treasury.
Velocity of money (M2) continues to sink as households deleveraging continues. (Yardeni.com US Flow of Funds September 17, 2016)
This comes as non-financial business debt has been revving up. Moreover, it’s government debt that has been skyrocketing (see numbers below).
The BOOM-BOOM-BOOM in non-finance credit can be seen mainly through a borrowing spree to finance financial engineering, excess speculation or just to take advantage of RECORD low rates—usually to use on the former two.
Financial engineering can be seen via RECORD buybacks “CNBC Record buybacks: Sign of bubble trouble or just cheap rates August 12, 2016”, as well as RECORD Mergers and Acquisitions “Daily Mail Companies set monthly record for mergers, acquisitions October 28 2016”.
Part of the activities above combined by the incentive to take advantage of low rates has been reportedly expressed through RECORD Corporate Bond issuance “Bloomberg U.S. Corporate-Bond Sales Pass $1 Trillion in Record Pace September 8, 2016”.
Credit financed asset BOOM-BOOM-BOOM has reappeared in stock market speculation via NEAR RECORD margin debt: “Wall Street Journal Blog Margin Debt Is on the Rise Again November 1, 2016; Doug Short, A New Look NYSE Margin Debt and the Market October 28, 2016 Advisor Perspectives”.
BOOM-BOOM-BOOM asset speculation on real estate has emerged with the revelation of RECORD Commercial Real Estate Loans to have prompted a stern warning from a credit rating agency: “National Mortgage News Fitch Issues CRE Warning as Bank Portfolios Hit Record Levels November 7, 2016”
As one would note many firms attached to Wall Street seem to be having a shindig. Except, many banks have reportedly been in a considerable lay off of employees due to recent underperformance (diminishing wholesale finance activities).
Beneficiaries from the bailout were hardly about Wall Street but likewise the politically connected industries such as Military industrial Complex (e.g. defense industry, private defense contractors and more), private firms attached to the Welfare State (e.g. private prisons, JP Morgan’s food stamp programs and more) and to the bureaucratic state (e.g. media firms, consultants and more)
Meanwhile, rocketing Federal US debt has reached US $19.382 trillion 2Q 2016 (FED FRED) or 105% of GDP as of August 26. That’s outside state debt. US Federal debt has grown to current levels from 5 years ago or from 2Q 2011’s US $14.343 trillion or by 35% (or an simple average at 7%).
On the other hand, US GDP continues to underperform: “CNSnews.com U.S Has Record 10th Straight Year Without 3% Growth in GDP February 26, 2016”
In the face of DEBT outperformance, US GDP continues to underwhelm
Like the Philippines, the economic deprivations of the average man, despite supposed wonderful job statistics which bizarrely have been deviating with industry performance—eventually translated into votes—again to the triumph of a NOVICE or an outsider.
Donald Trump: The Anti-Establishment Mirage
And similar to the Philippines, current elections projected the war between the establishment against the anti-establishment.
But the supposed war between the establishment and the anti-establishment is really a mirage.
When Mr. Duterte won the elections last May, I wrote [Changing the System is a Time Consuming Process; Duterte’s Backdoor Strategy (May 18)]
In a democracy, one is elected THROUGH the system. And because one is elected through the system, a candidate will have a support base which he/she would be indebted to. There is no such thing as a free lunch. So there will be paybacks (yes corruption my dear).
And it turned out that I have been right.
Forces ensconced behind the scenes emerged. Previous presidents led by Fidel V Ramos backed the supposed “anti-establishment” candidate of Mr. Duterte. Some of big businesses also supported Mr. Duterte.
And cabinet appointments immediately confirmed my suspicions. Together with popular appeal, Mr. Duterte cunningly used this political network to rise to the top!
Unlike Mr. Duterte whom has been exposed to local politics way back to 1986 (30 years of politicking), Mr. Trump has virtually ZERO political experience.
Mr. Trump even required less funding, he reportedly raised only $795 million as against Ms. Clinton’s US $1.3 billion and previous GOP presidential candidate Mitt Romney’s US $1.02 billion (Fox News November 10).
Mr. Trump easily bulldozed his Republican competitors to seek the party’s nomination at the primaries in an acrimonious fashion. Yet, as the Republican bet, he supposedly caused “destruction” of the GOP (see numerous articles here).
As a side note, curiously both Trump and Clinton only got 26% of the eligible voting population each for a 52% turnout. The alternative has been that 48% didn’t vote for either Trump or Clinton. Based on total population, 62% voted for neither of the candidates.
This should mean a likely watershed moment in US political history. That’s because Mr. Trump would have the LEAST political baggage, as he owes little to anyone, he would have the opportunity to implement policies with little influence from the special interest groups.
But this will unlikely happen.
Being a novice, Mr. Trump would be vulnerable to be captured by interests groups.
In short, one can hardly escape the clutches of being consumed by the vortex of political realities. Non-traditional politicians will eventually metastasize into traditional political entities.
And Mr. Trump will be no different.
Cabinet positions will reveal of his priorities.
As I wrote in May, “Understand that cabinet positions signify as heads of the implementing agencies of the government.” Hence, cabinet appointments will likely reflect on the Trump administration’s policy agenda as well as interest groups he is likely to protect or prioritize.
Team Trump’s cabinet has reportedly been filled by Republican loyalists and family appointments, as well as a “scramble” (Reuters) by Washington experts and lobbyists from K Street, think tanks and political offices for posts (CNN International).
If current trends would persist, then what used to be Democrat “establishment” will be replaced by Republican “establishment”. Hence, there was no anti-establishment bet.
Trump’s Statist Policy Means To Promote Establishment Interest
It’s easy to see why Mr. Trump’s will be consumed by politics.
The Trump administration’s manifesto will focus on the following: building immigration walls, imposing “fair trade”, dismantling Dodd Frank, will be heavy on infrastructure and transportation, will repeal Obamacare, cut taxes, institute regulatory reform, will build and modernize defense, promote energy independence, reform veteran’s administration, will fix education and promote American Constitutional rights.
Mr. Trump’s populist mostly nationalist programs have been filled with statist agenda (which promotes special interest groups) predicated on self contradictory claims.
Also Mr. Trump’s manifesto implicitly extrapolates to the closing of the US economy
Let me just cite a few of major inconsistencies.
Mr. Trump’s proposed programs to build immigration walls, infrastructure and transportation, modernize defense spending, fixing education and reforms on veterans would entail large increases in government spending.
And while the Trump laudably would aim to cut taxes, just how would such enlarged spending and deficits be financed?
Debt? The US has a legislative limit on debt increases. It’s called the US debt ceiling. Just how does Mr. Trump propose to the Democrats to accommodate massive increases in debt? By sacrificing which agenda (Obamacare or Dodd Frank or energy or what combination) in his manifesto?
In short, many in Mr. Trump’s manifesto will heavily be compromised. Or Mr. Trump will succumb to special interest groups, hence, eventually fall short of expectations.
Also Mr. Trump stated that they would like to reform the US regulatory regime through “a temporary moratorium on all new regulation, canceling overarching executive orders and a thorough review to identify and eliminate unnecessary regulations”.
This should be highly commendable. Ideally.
But reality would portray a different milieu.
Just how can this be accomplished if the Trump administration would be picking winners and losers according to his manifesto above? Politically picking of winners and losers translates to defining the parameters that promotes and dissuades activities to be controlled.
So this means that there will be MORE and NOT less regulations.
What such regulatory reform likely involves would be a string of replacements by the Trump regime of existing regulations made by the previous administration. And it would not be far-fetched that part of the political compromises with special interest groups would mean the sacrificing of this goal.
Yet who would notice?
The Fatal Consequences of Protectionism
How about fair trade?
Will Mr. Trump make good of his threat to brand the Chinese government a currency manipulator? And as currency manipulator, would Mr. Trump pursue his threats to impose 45% tariffs and other countervailing duties on imports from China?
Aside from China, Trump, in his campaign repeatedly proposed a 35% tariff on Mexican imports.
Would Mr. Trump use tax policies to force nations, with trade surpluses with the US to buy MORE from the US and compel US consumers to buy LESS?
Would Mr. Trump impose 35% levy on companies that layoffs their employees while engaging in overseas outsourcing?
Trump’s idea of producer’s first signifies a mercantilist agenda debunked centuries ago by classical economist such as David Ricardo, Adam Smith, John Stuart Mill and liberal politician Richard Cobden.
Mercantilism means HIGHER prices, LOWER quality goods and LESSER goods available for the consumers. Putting up trade barriers effectively punishes domestic or US consumers. In short, this entails the LOWERING of the standard of living of the average citizen while promoting the interests of a few. Or, mercantilism represents a forced redistribution from the consumers and the average citizens to a few politically connected producers.
It would be pretty naïve for many to believe that when America unilaterally imposes tariffs or trade war, the world will pretty much conform at its pleasure.
Or another ridiculous idea is that in the absence of external trade, one can depend on “domestic demand”. This is an example of looking at numbers without looking at factors affecting human action.
Yet HOW will nations, like Chinese government, respond to such unilateral trade aggression?
Will the Chinese simply relabel their products and transship these to non-tariff intermediaries who then exports to the US? But what if the Trump administration finds out? Will the scope of trade barriers expand? Or will the theater on the war on trade multiply?
Failing to curb deficits, what’s would be next for the Trump administration? Would capital-currency controls, people or social mobility controls and eventually price and wage controls eventually become next measures?
Will economic sanctions or economic blockade be the next thing they would impose on China?
Will Mr. Trump morph into the left?
And what if Chinese government decides to counter these by selling most if not all their holdings of US treasuries? How will the US respond?
And what if the Chinese government impose their own trade and capital walls? And what if the Chinese government flexes its muscles to control trade routes at South China Sea to ensure trade with its neighbors would be free from a blockade?
As a side note, China’s president Mr. Xi Jinping has been bestowed by the communist party as the “core” leader which puts him at par with Mao Zedong and Deng Xiao Peng (The Guardian October 27). This essentially cements Mr. Xi’s strongman rule. This makes Chinese government’s political actions more vulnerable to the whims and impulses of Mr. Xi.
“When goods don’t cross the borders”, to sum up the gist of the great French proto Austrian economist Frédéric Bastiat work, “armies will”. (Online Library of Liberty)
In short, the repercussions of a trade war won’t be limited economics but will spread to the many other aspects of social life.
Déjà vu: Smoot-Hawley?
ONE of the US government’s major responses to the Great Depression (1929 to 1939) was to implement a global trade war through the Smoot–Hawley Tariff Act.
The Smoot–Hawley Tariff Act was authored and sponsored by two Republican legislators Senator Reed Smoot and Representative Willis C. Hawley under a Republican presidency of Herbert Hoover which raised tariffs on 20,000 goods.
Déjà vu in politics; a Republican sweep or Republican controlled government (house, senate and executive) then as in today?
The trade walls via Smoot-Hawley exacerbated the Great Depression immensely
Mssrs. Theodore Phalan, Deema Yazigi and Thomas Rustici at the FEE.org explained (The Smoot-Hawley Tariff and the Great Depression February 29, 2012)
The Smoot-Hawley Tariff threw inter-allied war-debt repayment relations into limbo by shutting down world trade. An international moratorium on debtor repayments to the United States froze billions in foreign assets, thus weakening the financial solvency of the American banks. Specifically, over $2 billion worth of German loans were obstructed by Germany’s inability to acquire dollars through trade to repay its debts. This same scenario played out in many other countries as well. The tariff wars created widespread financial crises across America, Europe, and a host of nations in South America. In September 1931 England abandoned sound money; America would follow suit in 1933. The functional operation of the post-World War I gold exchange standard was sabotaged by worldwide protectionism in reaction to Smoot-Hawley.
Historians of the Great Depression have overlooked important connections between trade conditions and monetary collapse. The tariff and retaliations against it destroyed the world trade system and demolished the integrated world financial structure operating under the gold-exchange standard as well. America’s monetary and capital structure from 1921 to 1929 was primarily shaped by six factors: first, a centrally planned monetary system; second, a decade of disguised inflation; third, branch-banking restrictions; fourth, state deposit insurance programs; fifth, agricultural subsidies; and finally, a plethora of taxes and regulations.
Smoot-Hawley placed enormous pressure on the central banking system and capital structure. In addition it caused the dramatic loss of export markets and declining farm income (due to foreign retaliation), rendering much agricultural capital useless. This was responsible for widespread agricultural bank failures, which then led to contagion effects. Due to the uncertainty of trade conditions, each of the ten largest world economies had their secondary financial markets crash. It created international financial chaos leading to foreign debt repayment suspensions. As a result of thousands of bank failures, the U.S. money supply dropped 29 percent from 1929 to 1933. (The weighted average of the world money supply of the eight largest economies annually declined by double digits from 1931 to 1932). All of this, and much more—and yet only 2 percent of GNP? We think not.
So it would be quite myopic to posit that “domestic demand” will cushion a trade war. That’s because one thing leads to another. A political control can lead to multifarious sets of political controls. Or interventions beget interventions
Moreover, protectionism fuels animosity and incites social frictions.
Proof?
In a speech in 2015, incumbent Japan Prime Minister Shinzo Abe blamed the Smoot Hawley for tacitly or indirectly inciting the Japanese government to launch a war*. (bold added)
At the beginning, Japan, too, kept steps with other nations. However, with the Great Depression setting in and the Western countries launching economic blocs by involving colonial economies, Japan’s economy suffered a major blow. In such circumstances, Japan’s sense of isolation deepened and it attempted to overcome its diplomatic and economic deadlock through the use of force. Its domestic political system could not serve as a brake to stop such attempts. In this way, Japan lost sight of the overall trends in the world.
With the Manchurian Incident, followed by the withdrawal from the League of Nations, Japan gradually transformed itself into a challenger to the new international order that the international community sought to establish after tremendous sacrifices. Japan took the wrong course and advanced along the road to war.
*Breitbart.com World View: Japan’s Shinzo Abe Blames WW II on the Smoot-Hawley Tariff Act August 15, 2015
The strains brought about by trade wars eventually paved way for or indirectly influenced such catastrophic military conflict.
Bastiat’s law was affirmed.
In the pre-election period, I was concerned over Ms. Clinton’s repeated demonizing of Russia’s President Vladmir Putin and her relentless overseas agenda and interventions. These I believed enhanced the risks of inflaming another global conflict—had she won.
Mr. Putin reportedly even warned its government to prepare for war in case of a Clinton victory.
But Mr. Trump’s protectionist agenda could also lead to a global conflict.
Yet I am banking on Mr. Donald Trump, the businessman and dealmaker, to predominate his political decision making process than the Mr. Donald Trump of the nationalist persuasion and as neophyte politician.
Given that Russia’s Putin has been affable with Mr. Trump, will brewing trade conflict between the US and China be mediated by Mr. Putin?
Or has protectionism only served as rhetoric to gain election votes?
Nonetheless even a tinge of protectionism will likely compound on fragile global economic conditions.
So how would protectionism Make America Great Again?
What Happened to the Trump’s Big Fat Ugly Bubble??!!!
Absent in the Trump manifesto has been his strident views against the US Federal Reserve.
Last September, Mr. Trump accused Governor Janet Yellen’s FED of inflating "a big, fat, ugly bubble with debt increasing while the "only thing that looks good is the stock market." (Business Insider September 28) [Note S&P 500 2171.37 Sep 28]
He accused the Yellen’s FED of keeping interest rate low to sustain Mr. Obama until the latter leaves the office.
I posted here the earlier version of Mr. Trump’s “fat ugly bubble” claim as early as June 2015. This proves Mr. Trump’s long held view of the US stock market and the economy
In April of 2016, Mr. Trump warned of a “very massive recession” which the US economy has been faced with. In the same venue, he again repeated “I think we’re sitting on an economic bubble. A financial bubble" (Reuters April 3, 2016) [Note S&P 500 2066.13 April 4]
Then when asked about stocks, he also noted that “it’s a terrible time right now” to invest in the stock market”
Again last September at another interview, Mr. Trump accused the FED’s spawning of a “false economy” from low interest rates: “because they're keeping rates down because they don't want everything else to go down… "We have a very false economy," Trump told Reuters. "At some point the rates are going to have to change." (CNN Money September 8)
The point is during the pre-campaign and campaign period, Mr. Trump took on the Austrian economics stand that America’s BOOM BOOM BOOM signified nothing more than an inflated bubble.
His relentless attack on the FED made the public speculate that Ms. Yellen may be pressured to resign if Mr. Trump wins (Bloomberg October 24). Although, earlier Mr. Trump said that he won’t reappoint Ms. Yellen once her term ends and he would instead seek a replacement for her post (WSJ May 5, 2016)
In the aftermath of his electoral success, Mr. Trump seeming antipathy of Ms. Yellen appears to have subsided. Mr. Trump’s adviser said that that Ms. Yellen’s resignation wasn’t demanded (Marketwatch November 9). So maybe Mr. Trump will simply wait for the end of Ms. Yellen’s term. Or may Mr. Trump may have changed his mind.
The reason I say that he may have had an about face is because while assailing Ms. Yellen, Mr. Trump himself repeatedly stated that he was in favor of low interest rates (CNBC May 5, 2016). Although last September he also said that low interest favors him but not the economy, as a businessman “I love low interest rates,” but that they hurt many people who were living on their savings (Fortune September 12, 2016)
My point here is that given the prospective surge in government spending, based on his manifesto, Mr. Trump’s USA Inc. would require a low interest rate regime. That’s because the opportunity costs for investors to lend to the government and or to invest in Trump’s political projects would be higher than when interest rates are low. Or investors would rather position on other higher yielding fixed income instruments or other investment opportunities rather than in the government papers if the returns of the former (non government) exposure are higher.
So I would suspect that Mr. Trump may have a change in outlook or would appoint another dove.
Yet all hope shouldn’t be lost. Dr. Judy Shelton who is a hard money advocate has been Trump’s economic adviser (Fortune August 18). Whether she gets a post or not is something unclear.
During the GOP primaries debate, candidate Trump showed his leanings for the return of sound money (Ralph Benko, Forbes, June 5)
Then there was Donald Trump. “We used to have a very, very solid country because it was based on a gold standard,” he told WMUR television in New Hampshire in March last year. But he said it would be tough to bring it back because “we don’t have the gold. Other places have the gold.”
And…
Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.
Problem is again, sound money isn’t compatible with Trump’s statism.
Finally, the S&P at Friday’s 2,164.45 has been vastly higher than when candidate Trump made those comments on “big fat ugly” and “economic bubbles”.
So what are you gonna do about this bubble, President elect Trump?
The Deepening Global Infrastructure Charade
Yet it is best to understand that political spending in terms of infrastructure represents low economic value/priority, hence the reluctance of the private sector to voluntarily underwrite them
As the Austrian economist Frank Shostak rightly explained, [IS THE BUDGET DEFICIT AN IMPORTANT PROBLEM? Cobden Center November 3, 2016] (bold added)
We hold that when the government undertakes projects to boost the aggregate demand these projects are actually of a wealth consuming nature. The fact that the private sector did not undertake these projects indicates that these projects are on the low priority list of individuals.
The implementation of these projects is going to undermine the well-being of individuals, because they are funded at the expense of projects that are of a higher priority and would otherwise be undertaken in the private sector.
Of course, this would be a different thing for the Philippines where politics is mandatory for infrastructure projects.
Again, with low interest rates and large scale asset purchases having failed to goose up the real economy, the du jour obsession has been over infrastructure as the NEXT Holy Grail for the global economy. This applies to Trump, Duterte, Abe or Xi.
Here’s a guess, it is NOT going to work.
And much has not been appreciated that infrastructure (where impact is largely local) will hardly offset the wider effects from the actual rigorous practice of protectionism (where repercussion is national).
And because infrastructure spending depends on taxpayer funding and partly through private sector participation, economic dislocations from protectionism will only take away funding for such political boondoggles.
And yes, protectionism may lead to disruptions through a sudden supply shock that leads to a jump in “inflation”.
Unlike the Great Depression where the gold exchange standard amplified the effects of various government interventions on debt deflation, current unanchored central bank fiat currencies could lead to an upside spiral in inflation.
The Trump Market Shock: US Stocks Soar, US Treasuries, Emerging Market Currencies and Gold Crash!
Trump’s policies--infrastructure, defense spending and the repeal of Dodd Frank—sparked what would signify as totally wild volatility or rollercoaster ride in the US markets.
Stocks were unhinged, they practically flew.
For the week, big upside spikes were seen in the banks (+12.7%), Russell 2000 (+10.2%) and Biotechs (+17.1%).
The major benchmarks also registered upside sizeable moves: S&P 500 +3.8%, Dow Industrials 5.4% and Nasdaq 3.78%.
The five day spike prompted the Dow industrials to hit a new record!
The Dodd Frank’s likely annulment would allow banks not only to engage in prop again but likewise invest in hedge funds directly. So more speculative juices for the gambling casino.
On the other hand, Utilities crashed -4.2%.
It’s not just the numbers but how the same numbers got there that mattered.
Monday, US stocks soared when FBI James Comey’s absolved Ms. Clinton from email controversy. Wednesday, when results of the elections appeared, stocks soared on the account of very early lead by Clinton. But when Trump took over, green turned into red. As Trump’s lead solidified so did losses in US stocks. At one point, US stocks fell by over 5%.
As Europe opened, losses in US stocks had been halved. By the time US markets opened, negligible losses turned into a massive pump. Such intense pumping was largely carried over through Friday.
The Trump shock morphed into a stock market shock. History was carved on the stone. From Bloomberg: (November 10)
You need to go all the way back to the dark days of 2008 to find a stock market reversal to rival that of the last 12 hours, in which S&P 500 Index futures erased a 5 percent loss triggered by Donald Trump’s surprise presidential election win. Bigger turnarounds only happened three times before, twice in the final months of 2008 and the other in October 1987, data compiled by Bloomberg show. Stocks turned higher on Wednesday as speculation the Republican will pursue business-friendly policies offset some of the broader uncertainty surrounding his ascent.
Such are signs of a massive short covering.
Yet vertical moves similar to the Philippine Phisix in post May. We know how this could end up.
Volatility wasn’t confined to stocks.
US Treasury Bonds crashed! Or yields of bonds spiked. Losses accrued to over $1 Trillion. From Bloomberg (November 11): More than $1 trillion was wiped off the value of bonds around the world this week as U.S. President-elect Donald Trump’s policies are seen boosting spending and quickening inflation.
Quickening inflation? Not so fast. Well, such has hardly been oil and gold’s story. Gold and silver crashed 6.15% and 5.18% respectively. WTIC fell 1.5%. Gasoline plunged 5.3%.
From the industrial metals perspective, copper and nickel supported the inflation theme. Copper soared 11.92% while Nickel surged by 6.53%. Industrial metals have been creeping upwards this year.
The surge in US inflation expectations have been supported by the US 5 year 5 year forward, 10 year Tips and 10 and 5 year breakeven inflation. Inflation expectations have been rising even prior to the Trump shock.
The US dollar leapt by 2.2%.
In the meantime, emerging market currencies fell hard—to a 5 year low.
From the Financial Times: (November 12)
Emerging market currencies are heading for their their biggest weekly loss in more than five years on Friday as Donald Trump’s shock US presidential win triggered a sharp jump in global bond yields and dampened the appeal of riskier trades.
The JPMorgan EM Currency index fell 0.8 per cent on Friday, putting the benchmark gauge on course for a 3.4 per cent decline for the week. If the index closes at this level, that would make it its worst week since September 2011 and the drop would surpass that seen during the so-called taper tantrum of 2013 – when the US Federal Reserve spooked markets by suggesting that it would soon raise interest rates.
5 year loss. More signs of history in the making?
Here is who got hit most.
From Doug Noland, the Mexican peso declined 8.7%, the South African rand 5.3%, the Brazilian real 4.9%, the Japanese yen 3.3%, the Norwegian krone 2.8%, the New Zealand dollar 2.7%, the Danish krone 2.6%, the euro 2.6%, the Singapore dollar 2.1%, the Swiss franc 2.0%, the South Korean won 1.7%, the Australian dollar 1.7%, the Swedish krona 1.6% and the Canadian dollar 1.0%.
The Yuan is actually at a 6 year low. See more of history in the making?!
If inflation indeed has been the real story, then Trump’s stock market honeymoon will most likely be cut short. It will suffer from a big setback as rising rates will become a huge burden to the oversized debt. The debt onus will likewise be backed by reduced purchasing power by the citizenry, and dislocations brought about price instability on the business sector.
Worst, such will rapidly spillover across the globe.
Now if inflation has been a subsidiary issue then the likely culprit may be about the US dollar shorts.
Interesting isn’t it?
Newton’s Law: Duterte’s Honeymoon Expunged as Peso Tumbled to 2009 Lows
If I had lost my patience I would have doubted the reinstatement of the inverse correlation between the US peso and the phisix. But of course, for me, theory precedes numbers. Or numbers should eventually adjust based on theory. It just takes time.
Apparently, the magnified volatility in the peso was equally manifested on the Phisix. The domestic currency stumbled .96% this week while the equity benchmark plummeted 3.49%. In 3 weeks, the PSEi has lost 9.09%. This week’s loss essentially brings the Phisix to almost neutral (actually +.33%) year to date.
Interestingly, the peso now hovers at March 2009 lows. Then the Phisix was in the 2,000 levels.
Also Philippine 10 year treasuries posted a 23.8 bps spike in yields to 4.984%!
To be clear, I’m not saying that the PSEi should fall to this level. Unless things will be so bad, I don’t think this will happen.
I’m just noting of the difference in conditions of different periods.
Yet Friday’s PSEI close breached the May pre-election 6,991.87 low. That low served as the stepping for the Duterte honeymoon—via the second leg of vertical price ascent that returned 15.87% in two months!
Last week’s breakdown shows of the completion of the first leg of the Newton’s law.
If history will rhyme, then a second or next leg should be expected.
But since trends don’t move in a straight line, and at oversold conditions both for the Phisix and the peso there should be some rebound in the interim.
The real fundamentals behind the recent meltdown will determine the conditions of the markets.
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