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Make Inflation Great Again! Is Trump the 'Inflation President'? Spotlight on Bonds, Oil, Gold, Attitudes

A near-universal consensus has formed that Donald Trump is the "inflation president".

The Wall Street Journal, Bloomberg, New York Times, Financial Times, Money, and Fortune all say so. I cannot find a mainstream or even a minorstream publication that begs to differ.

Bloomberg goes so far as to say "Trump is about to make inflation great again." Are interest rates headed to the moon?


Inflation Role Call

The Financial Times says Prepare for a Reversal of Monetary Rule Under President Trump. "Historians may come to see 2016 as an economic policy inflection point. Mr Trump is deeply protectionist, reluctant to reform benefits such as Social Security and favours an extensive infrastructure programme. If implemented in full, which seems unlikely, these bold pledges would add $10tn to the public debt in the next decade."

Bloomberg reports Investors Are Betting That Trump Will Be the Inflation President. "Trump is about to make inflation great again."

The New York Times says The Market Is Betting Trump Will Bring Higher Inflation and Interest Rates. "When the government pours hundreds of billions of dollars into infrastructure when there is mass unemployment, it can help put those people back to work and turn it into higher economic output without creating inflation. But when nearly all the people who want a job already have one, that spending just bids up the pay of people already working, eventually resulting in higher prices more broadly."

Money reports What President Trump Means for Interest Rates -- and Janet Yellen's Job. "A massive increase in fiscal spending to rebuild roads, bridges, and airports, combined with vast deficit-spending in the form of a tax cut, may lead to more money swirling around an already relatively health economy. If you include Trump's threat to impose a new tariffs on Chinese and Mexican goods, the cost of goods that Americans buy at Wal-Mart and Costco could rise by about 3%, according Moody's Analytics"

The Wall Street Journal reports Donald Trump's Win Fuels Bets on Inflation. "Investors appear enthused by rising inflation expectations, partly because Mr. Trump's election and the shifting makeup of Congress, if nothing else, mean a sharp change from a period in which central banks struggled to spur inflation."

Fortune says This Is the Most Important Market Reaction to Donald Trump's Victory. "Forget stocks. The one market reaction that really counts this morning is in the bond market, and its message is: economic reflation is on the way."


Bond Market Reaction

Curve Watchers' Anonymous provides the following charts.

Yield Curve 1988-2016 Monthly Chart

For all the hyperbole, interest rates are barely above December of last year, with yield on 5-year and 10-year bonds actually lower.

Yield Curve Monthly 1-Year Chart


Crude Not Signaling Inflation

Crude Oil Daily Chart

If crude is signaling anything, it sure isn't inflation.


Gold

Daily Gold Chart

Gold is down about $140 from the August 1, high.

Some say gold does well in inflation. That's an easily disproved notion as gold fell from $850 to $250 from 1980 to 2000 with inflation every step of the way.

Gold is more of a reflection on whether or not central banks have things under control. Gold fell from over $1900 to about $1100 when ECB president Mario Draghi made his famous speech: "We will do whatever it takes to save the Euro, and believe me it will be enough."

Early this year, people starting seriously doubting whether central banks do indeed have things under control. Here's a hint: they don't. But perception is reality.

The spike candle three days during the election was panic that Trump would win followed by realization things would not be so bad after all.

In short, gold says little other than there is temporary renewed faith the economy is OK and the Fed is in control.


Questions Still Abound

Is the economy OK? Is the Fed in Control? Will Donald Trump label China a currency manipulator? Enact huge tariffs?

Earlier today, the Financial Times reported EU Set to Impose Punitive Anti-Dumping Tariffs on Imports.

Given that was Trump's election mandate as well, it's a reasonable bet he will do the same. Such a move will force prices up. But please look beyond the price hikes.


Global Trade War Possibilities

Global trade wars loom. And no one wins trade wars.

The already high US dollar is at nosebleed levels bound to hurt exports. Tariffs will cost jobs, not protect them.

Infrastructure jobs will benefit, provided Republicans hold their noses about bigger and bigger deficits. But those shovel-ready jobs will be slower and fewer than most think.

In the end, money will be wasted, as it always is.


Will the Fed Hike?

Let's assume for a second the Fed hikes and prices rise. Hiking rates due to an artificial and arbitrary stimulus like tariffs may not be a smart thing to do.

Rather than looking at prices in a vacuum, one should also look at why prices are rising. Tariffs, like supply shocks due to weather, etc., are not a good reason to hike.

Please note that my position does not imply the Fed should not hike. I actually do not know what the Fed should do. Neither does anyone else, including the Fed.

We are in this mess because of inane Fed policy and we would be better off if the market set rates, not an arbitrary panel of wizards who have gotten everything wrong at every major juncture, blowing three bubbles in 16 years.


Is Trump the "Inflation President"?

No one can say for sure, certainly not me. But I do know that history suggests that universal agreement on economic matters is nearly always wrong.

The last time The Wall Street Journal, Bloomberg, New York Times, Financial Times, Money, and Fortune all agreed on something was four days ago.

They all thought Hillary would win. They all thought stocks would sink. Now they all tell us inflation is a sure thing!

People are sucking in that news like orange slurpies on a 102 degree day. Go figure.

 

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