In the course of a week – three days, actually – the stock market went up $1.4 trillion, and bonds shed a trillion. This is seismic. Epic. Almost Kardashian in its awesomeness. It makes fools of people sitting in cash waiting for a post-election stock dump. Even bigger fools of those thinking financial volatility would boost real estate.
Twas all the doing of one dude. The unforeseen election of Donald Trump created a set of conditions and expectations which now rock reality. Equity investors are making out like lovesick caribou. Mortgage rates are already inching higher. Bonds are in a historic global selloff. And it all gets real(er) in five weeks.
Bond yields have been shooting higher (and prices tanking) since Tuesday night as investors figure the start of the Trumpian years will mean an end to the growthless ones. After all, this is a pro-business leader supported by a pro-business Congress in a combo which hasn’t been seen for decades. Trump aims to bolster US jobs through protectionism, trade barriers and tariffs, plus spending a boatload on defence, bombing ISIS back to the 14th Century, shipping off a good chunk of the labour force (undocumented immigrants), spending hundreds of billions on infrastructure (including the Mexican wall) and slashing government regulation while gutting corporate taxes.
While this is likely to balloon the deficit, it’s all hugely inflationary.
Yes, kids, inflation. Ask your gramps. That’s when demand exceeds supply and unit costs rise. It creates something called a wage-price spiral, which is kinda the opposite of MBAs working as baristas. The number of new jobs exceeds the supply of applicants and incomes rise. People with more disposable income spend more, and because Wal-Mart is less full of crap from China (and more from Toledo), it creates a virtuous circle for the American economy. Prices, wages, profits and economic growth – all up. As inflation rekindles, so do interest rates.
Bonds hate inflation and love deflation. For the past eight years the American economy has recovered at the slowest pace ever following a recession. Washington has spent trillions trying to reverse that, flushing money through the real estate market and even giving people cash to buy cars. The Fed spent more money than God buying up its own bonds, while cutting the cost of money to the bone – all to encourage borrowing and spending. For all that investment, growth has limped ahead. Interest rates could be raised only once – by a quarter point – in ten whole years.
But apparently all it took to change things was one goofy billionaire who formulates policies in tweets, says he can negotiate any world leader out of their Stanfields and will make everything great again. Because he can. So shut up.
Here’s what we know. US stock markets have soared to record highs since his election. Bondholders have been liquidating madly. Money is pouring out of fixed income and into growth assets. The odds of a rate hike on December 14th have plumped to more than 80%. Gold and commodities have been tanking, the loonie along with them as the greenback jumps. Canadian bond yields are leaping along with those around the world. Five-year mortgage rates are already creeping higher, thanks to Wild Bill’s big changes last month (more to take effect at the end of November) as lenders pass through costs. Already TD has jacked its prime mortgage, affecting millions of customers.
The benchmark US 10-year note yield swelled almost four-tenths of a point this week – massive. A Fed senior official all but confirmed the American central bank is ready to resume its tightening, with unemployment back under 5% and core inflation approaching its target – even before the Trump train starts rolling.
Virtually none of this was foreseen on Tuesday. If it comes to pass as markets expect, then growth, wages and rates – all depressed for years – will be inflating. Bonds and houses – at historic bubble levels – will be creamed. Only the scope and timing remains to be seen.
As long as you’re not an undocumented Mexican Muslim woman environmentalist pacifist bureaucrat, you can almost like this guy.