Pro-Business, Pro-Market, Anti-Fiscal Responsibility
Agree or not, a majority believe that Donald Trump will be good for the economy because he’s a businessman. The kind of business he does relies on debt and its availability in service to growth. He also has some policy views that will be beneficial to businesses and the public in general, through tax cuts. Deregulation will also factor in. That is economically positive stuff, all things being equal.
But all things are not equal. “Equal” would be a nation spending what it earns, on a budget like you and I would need to keep. Or at least spending in excess of earnings to the degree the debts could be readily repaid. Instead, projections were that a Trump admin would actually handily out-do a Harris admin when it comes to debt spending. Debt-to GDP is likely to accelerate from already sublime levels.
The US spends far more than it earns. Exponentially more. To the tune of $35T and counting.
As you can see, the debt grew steadily during the years of Trump 1, basically continuing on with the Obama era debt creation (and spending). This graph shows that Trump 1 actually saw flat debt-to-GDP until it skyrocketed during the pandemic, as Fed and government pulled out every stop they could get their hands on to rig GDP into recovery. Debt-to-GDP actually flagged downward under Biden, although debt-spending has remained very aggressive and elevated.
So let’s summarize the above by saying okay, we’ve got a businessman in there who is going to be more pro-business, pro-economy than his opponent would have been. But we’ve also got the same old debt bag and an administration that is going to seek to make the bag even heavier with non-productive debt-sludge. At what point does a once well oiled machine start to seize up amid the sludge?
Strategy
It has been a long year, or at least it seems that way because I have been parroting “to our through the election” all year and I am tired of it. Thankfully, we are through said election and the landscape is clearing. The view is gaining focus because now I have a major unknown, now known (I had not a clue, not even an inkling, who was going to win that election).
So here is the deal. As long as the market and economy are able to look past the growing debt pile, as long as the bond market allows the Fed to operate (manipulate bonds and create new credit) as usual and the government to spend as usual, we can factor the “Trump trades” into the equation as a positive. That sure is what the market’s knee jerk thought yesterday. Machines programmed as such in the event of a win by the pro-business man.
But to my eye, nothing has changed. We have arrived at the front end (to the election) of the time window and as long as the bond market allows, we will proceed toward the back end (through the election), with its hazy timing that could play out well into H1, 2025 if markets do what they often do and maintain trends longer than you initially think probable.
My plan is to continue as I have, which means playing the game, understanding the Wonderland aspects of the magical Keynesian system that allow for the Wizard (mixing iconic childrens’ stories) to simply pull his levers behind the curtain while the public asks not “why?” but rather, just accepts the results. I want to make an assumption that what has been working to this point will keep working (and yes, I know there is a clear contrarian play here where virtually everyone now believes we are back on a path to prosperity for the wider economy).
I am going to make that assumption because not only have the trends held through the recent lack of clarity and associated mild volatility, but now those intact trends have supported a burst to new highs in the SPX. We are running on momentum and good feelings now. Why on earth can’t SPX register the 6180 target off of this sentiment situation, MOMO, FOMO and all?
Risk? It remains high, due to indicators like the Yield Curve. And now, not just the 10yr-2yr…
But the 10yr-3mo is also still well on its spike toward de-inversion and a new steepener. The 3mo’s lack of confirmation of the 2yr closing in on zero. Above that, it too would be steepening.
VIX got hammered yesterday, High Yield Spreads remain underground, as in dead, as in dirt nap, as in the ultimate sedate condition with not a care in the world. This continues to indicate “no trigger” yet to any coming bear stuff.
One thing to keep an eye on is the slow-moving 2yr yield divergence to the Fed proxy T-bill. With the 2yr rising lately and the Fed still in a cutting regime (T-bill dropping) the divergence is lessening. This could offer extra time for the bullish markets. 2007 was a similar case as you can see that the 2yr rose to meet the T-bill before the market finally topped and rolled over. Don’t discount a similar situation this time. It’s Wonderland, baby. Screw the debt!
Bottom Line
Regardless of what Trump turns out to be, economically, it is the perception of what he is that may matter most to the markets. As long as the bond market does not get hysterical, especially with yield curve steepeners, but also nominal yields breaking impulsively upward, the bull can continue running on momentum, hope, greed and FOMO.
This bit from Sentimentrader also factors in. It is the summary of quant work they did based on the reactions in the VIX and the SPX, post-election.
History is history. Most of that history did not include debt at $35T and it did not include a bond market in rebellion. So those are caveats to the quants’ bull case. But given the intact trends, my plan is to continue as I have. That means a bullish view with a window potentially well into H1, 2025, but also at the ready to halt the bull proceedings at any such time that the short-term risk indicators, like HY spreads, VIX, sentiment extremes or impulsively bearish market activity (that is not instigated by hype) may demand an actively risk-averse stance.
Recession indicators are still in play and Trump or no Trump, the next recession cannot be forestalled, in my opinion. We remain on plan, but now with more clarity and focus. Personally, I will remain in week-to-week mode, carrying the bull plan as long as indicated, but aware that little has changed on the bigger picture macro, which is creeping toward a counter-cyclical “bust” phase for the economy.
