Trumponomics and Grains of Truth Help Explain Effective Messageby
On Tuesday, Donald Trump Suggested Consumers Leave Equities
Rates are "Artificially Low," a Rise Could Be "Scary Scenario"
In a Fox Business Network interview with Stuart Varney on Tuesday, Donald Trump spoke about markets and economics. He meandered, pulled numbers out of the air, said things that no major-party candidate for President had said before. It was a Trump interview: Confusing. Inconsistent. And also partly true.
He is neither a business-friendly supply-sider, nor a Keynesian stimulator. He collects the most popular proposals from each party’s traditions, then demurs on how to pay for them. On Tuesday, he seemed to describe a private investment bank for $550 billion in infrastructure spending. Then he seemed to suggest it would be funded through a federal bond issue.
The problem with dismissing his all-of-the-above approach to policy, however, is that some of what he says is absolutely true. Trumponomics does not exist in the way that Ryanomics or Hillarynomics do -- as a set of assumptions about human behavior, arranged to support a platform of policies. But it does exist. Donald Trump has a gift. He is able to poke at the places where consensus among academics has given way to confusion.
In his interview with Varney, Trump said he’d gotten out of equities, and implied that those with 401(k)s should, too. This, he reasoned, because of immigration, and because of Syrian refugees.
Candidates for President don’t normally call the top of a market, and there is no sign that hedge funds or sell-side equity strategists are looking at Syrian refugees. But then came a paragraph of Trumponomics -- a list of uncomfortable things that might be true.
"Look, interest rates are artificially low," he said.
Interest rates, in fact, are awfully low, and experts are not really sure why. Yield on the U.S. ten-year Treasury is at 1.54 percent. Investment-grade corporate debt is at 2.78 percent. You could refinance a 30-year mortgage today at less than 3.50 percent.
Together, these numbers are extraordinary. It’s not clear whether they’re "artificially" low -- that is, whether they’re being dragged down by the Federal Reserve. It could be that fixed-income investments in the U.S. are the best safe bet while the rest of the world looks crummy. Or that a glut of global wealth, which according to Credit Suisse has seen record levels over the last three years, is driving the value of all safe investments down.
The natural rate of interest -- where interest rates should be to maximize employment while keeping inflation steady -- can’t be directly measured. Janet Yellen argues that this rate is also historically low right now. But not all Fed officials agree. In other words, Donald Trump may be right.
"If interest rates ever seek a natural level," he said on Tuesday, "which obviously would be much higher than they are right now, you have some very scary scenarios out there."
One thing making sovereign debt sustainable, in the U.S. and elsewhere, is historically low interest rates. Federal outlays on interest as a percentage of GDP haven’t been this low since the 1970s. High debt-servicing costs are the kind of thing budget wonks get the night sweats about. The nonpartisan Congressional Budget Office includes this as a risk in its regular reports on the federal debt. It wouldn’t cause the federal government to collapse. But it would make fiscal decisions even harder for Congress.
For market participants, the "very scary scenarios" are the ones they don’t understand. Traditionally, equity markets move in the opposite direction of debt markets. If interest rates are unnaturally low, then equity values are unnaturally high, and bound to snap down -- in July the S&P 500 reached another historical high of 2175.
But maybe rates aren’t unnaturally low. Maybe all these unprecedented things are just things we don’t understand, and the traditional methods of balancing debt and equity no longer apply. That is a scary scenario. Donald Trump could be right.
And he was right when he said that "The only reason the stock market is where it is is because you get free money."
Indeed, the explicit goal of the Fed’s policy of quantitative easing was to encourage a shift in savings away from safe assets, and into higher-risk assets, like stocks. People who work in financial markets refer to this as the "punch bowl." As in the Fed brought it to the party, and when the Fed takes it home, the party is over.
Thus ended a complete paragraph of thoughts from Donald Trump on financial markets that would be acceptable talk at a faculty dinner at MIT. This is Trumponomics. It’s effective because some of it is true.