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Markets have feared apparently ‘exogenous’ events that can spoil bullish sentiment ever since 2007, when years of confidence that correlation risks were well understood were undermined by the housing crisis and subsequent fallout.
So it was always a bit strange for so many to call the end of a 30-year bull run in bonds within days of the election of a US president, before he had communicated more than vague and often puzzling or contradictory policies. There is simply not enough evidence to call the end of such an era, especially in a time of so much uncertainty.
The dip in equities following the election of Donald Trump was probably the most rational, if brief, response the market has had to his presidency so far. Since then Trumpian hierophants have interpreted vague concepts and comments on big infrastructure spending and deregulation as a call into equities and away from bonds.
But for a man who has made his living erecting huge buildings, Trump seems to know little about the costs of big infrastructure projects. And for a man who, by his own reckoning, “will be the greatest jobs producer God ever created” (since throwing Adam out of the garden), he doesn’t appear to have a clue about how policies sure to strengthen the dollar may be at odds with economic targets that require a weaker dollar.
Crushed by costs
The New York Times reported in February that Trump’s new chief economic adviser, Gary Cohn, had to inform him that large infrastructure spending would require partners from private industry to keep the government from being crushed by costs. The president’s reaction, according to the Times, was telling: “Why did I have to wait to have this guy tell me?”
We do not yet know how able the new administration will be in enacting big corporate tax cuts or spending big on US infrastructure, nor the timeline for such policies. We do not yet know whether or not his apparent preference for bilateral trade deals will have the intended effect. We still know very little at all about what realities Trump’s administration will effect.
Federal Reserve chair Janet Yellen didn’t seem so certain that Trump’s policies would deliver as some expect, saying: “It is too early to know what policy changes will be put in place or how their economic effects will unfold.”
A strong dollar and weak growth abroad has “restrained” manufacturing output – a keystone of the rhetoric that propelled Trump to the White House. And there is a good chance that as long as US growth outpaces the likes of the UK and Europe, the dollar will only continue to strengthen.
Even assuming Trump’s fiscal and economic policies and goals do take shape and that that shape rests on logical foundations, there are other risks that could easily unravel economic progress.
It is entirely plausible that the 30-year bull run that supposedly ended last November is far from over.