February 14, 2020

Please reload

Recent Posts

Smoke & Mirrors

February 14, 2020

 President Trump and his administration have constantly bragged about the economy with Trump at the helm being “the greatest in the history of the country”. In Davos this past January he claimed an unprecedented “comeback” for an economy that was in “dismal state” when he took office and that “The United States is in the midst of an economic boom the likes of which the world has never seen before”, as reported by the Washington Post. In this month’s State of the Union he claimed to have “inherited a mess from Obama”. All this, like just about everything else that comes out of this man’s mouth, as well as that of his cult followers and enablers, is simply not true.

 

Presidents in fact do not have a lot of power to drive the economy, but they can put policies in place that either hurt it or help it. Although unemployment in the US is low and job growth is holding steady (something to be expected as more and more boomers retire), this administration’s trade wars have in fact diminished business confidence and companies have resisted new capital spending and hiring more workers as a result. These trade wars have greatly affected the American farming community and auto workers in particular, who were already struggling to keep up with global competition before senseless tariffs were imposed. The rules based liberal international order is no longer threatened by just the usual suspects but by its main underwriter, the U.S.

 

Under Obama there were thousands of regulations put in place that were extremely detrimental to economic growth; however there were some good ones, like those put in place to protect big business from polluting rivers and oceans; or those requiring financial institutions to behave responsibly and not rob their clients blind. Interestingly enough, a lot of the regulations Trump is removing are the ones that are most needed in today’s climate. Some of what he is doing by eliminating regulation is helping the economy and we applaud that, but we cannot endorse the many regulations he is removing that will ultimately cost every citizen more.

 

The fact is that GDP growth is much lower under Trump than it was under either Bush or Obama. It was Obama who inherited a horrendous mess which included the worst financial crisis in a generation and he turned it around by the time he left. Trump inherited a recovering economy and although it has continued on the uptrend, his policies, for the most part, have been detrimental to higher growth. The expansion has continued but at a very low rate, primarily as a result of all of the debt in the system, which he has only made worse. Generally during good economies, this debt is paid down, but under Trump’s “best economy ever” the debt levels have only gone up. This to us is the single biggest concern under this presidency.

 

GROWTH UNDER TRUMP NOT AS GOOD AS UNDER EITHER BUSH OR OBAMA

 

 

 

Over 2019, after rising at an annualized rate of 3.1% during the first quarter, for the rest of the year growth was actually in the 2% area even with the added stimulus of $400 billion during the fourth quarter. Hopefully all that money will eventually translate into permanent job growth, and it certainly has helped the unemployment number, although we would argue that the main beneficiary of all this liquidity remains the stock market.

 

With rates at near zero yet consumer price inflation remaining depressed, asset price inflation has been driven upwards via the stock market and real estate. When increased liquidity does not increase economic activity, you are in a liquidity trap. Additionally, as the economy is running below full productive capacity, low rates are in effect a tax on savers and lenders, driving funds seeking sufficient returns into the equity markets. Ultimately rising asset prices exacerbate wealth inequality further fueling the rise of populism as represented in the US by the radical left, and Bernie Sanders in particular.

 

This administration brags about unemployment being the lowest ever and it is indeed a low number, but the participation rate (% of people in the workforce) has barely moved and remains lower than it was ten years ago. Has unemployment been all about new job creation or has it been about baby boomers retiring faster than new workers are entering the workforce?

 

With population growth under 1% over the past ten years labour force growth has decelerated by 0.5%. An aging population weighs on productivity, which remains well below average. Only India has birth rates above the replacement rate. All G7 countries and BRIC countries are below replacement birth rates.

 

Trump likes to brag about job growth like “never been seen before”. Although it has been good, that again is simply not the case.

 

JOB GROWTH UNDER TRUMP UNREMARKABLE

 

 

Average wage growth did pick up under Donald Trump for a while, as he inherited a tightening labour market, but it never matched that of George W. Bush and it is now back on its way down again as a result of ongoing trade disputes that are having an impact on the economy and the jobs market.

 

WAGE GROWTH UNDER TRUMP UNREMARKABLE & DROPPING

 

 

This is a problem for the middle class in America, which is disappearing. People in low end jobs are finding they need to have more than one job to make ends meet. This is not sustainable in a democratic society and it was the poorer getting poorer that eventually led to the French Revolution. When you have nothing to lose, you are not afraid to chop off some heads. Although not yet at this point, the election of somebody on the radical left is exactly the first step one would expect in this scenario. It is important to have a job, but it needs to provide a decent wage so you can support yourself and your family.

 

Where you could count on Republican administrations in the past to control spending, under Trump the opposite has been the case. Obama inherited a once in a generation (hopefully) financial crisis which required stimulus packages to bring the economy back from the brink and required increased deficit spending to do so, but by the time he left it was starting to go the other way. Trump has just made matters worse. By insisting on running massive deficits, it looks like the US deficit will be adding over a trillion dollars to the total debt each and every year. If you add in unfunded social liabilities that number is estimated to be at least 30% higher.

 

EXTREME DEFICITS DURING “GOOD” TIMES WILL HURT FUTURE GROWTH

 

 

We have of course enjoyed a boom in the S&P 500 which President Trump is very quick to take credit for. However, although the market has risen to new highs, it has not been much different than other bull markets. The key question is how this was achieved, given 40% of the companies in the S&P did not make any money last year. Moreover, below investment grade bond spreads, largely believed to be the canary in the coal mine, have been widening alongside an increase in default rates. The rise in equity markets for now appear to be complacent towards this.

 

STOCK MARKET INCREASES DRIVEN BY LIQUIDITY EXPANSION RATHER THAN EARNINGS GROWTH

 

Unlike previous stock market increases which were brought about through expansion of earnings and overall economic growth, the level of debt in the economy today has forced the Federal Reserve into providing liquidity to keep the economy going. This basically means that without this liquidity, the markets would be struggling. Other than one year of one offs, driven by tax cuts and share buybacks, the market rise has been primarily a reflection of intervention by central banks. As the charts above and below clearly show, when the Fed tried to normalize the balance sheet and rates in 2018, the market immediately dropped. It was only when they stepped back in, that it resumed its climb.

 

The chart below is the most concerning because during good times you are supposed to be normalizing interest rates, not adding as much liquidity as you would during the greatest financial crisis. But this is where we are today, in order to produce the smoke and mirrors required for a Trump reelection.

 

UNPRECEDENTED STIMULUS NOT SEEN SINCE THE GREAT FINANCIAL CRISIS OF 2008/9

 

Total US debt now totals $22.7 trillion, which is $11.2 trillion higher than it was in 2009. It is also up 17% from 2018 which itself was up 28% from 2017!!! Just on interest alone the debt will increase by maybe as much as another trillion each year and that interest compounds the debt even further. Interest cost is now 13% of the budget. If you normalized rates, to say around 4% in line with long term averages, you would bring the cost of just financing the debt to around 20% of the total budget (assuming the budget does not grow from here).

 

This is not the Republican Party of the past (which we admit we favoured for its conservative fiscal policies), that believed in global free trade (in order to keep costs down and which in fact benefited the majority of Americans) and above all, promoted a small government with low debt. How does this end?: By borrowing even more and indebting all future generations? By cutting back on benefits? By printing money until eventually turning into a Venezuela or Zimbabwe?

 

Overall this administration has not achieved great results. Economic growth has been anemic at best. Sadly, it is most of the true Trumpers (the ones without college education, the farmers, those without pension plans and healthcare that will require social security) who are being hurt the most by his policies. There is just no way that anybody that can read facts and figures, as clearly illustrated, and argue that this man has been anything especially good for the American economy. He just clearly has not.

 

Americans can choose to believe the Trump reality fantasy show for a variety of reasons. It is probably hard to find a billionaire that would be truly upset about paying lower taxes, for example. The politicians in Washington of course are all quite aware of all the facts but choose to support going against everything that once made America great, in order to keep their jobs. The Republican Party, instead of fighting for inclusiveness and bringing new voters towards their party, have decided to support divisiveness, conspiracy theories, and making the opposing party their greatest political enemy. Being in Washington appears to be exclusively about putting power and self interest over country.

 

The most curious reason for supporting a leader who continuously lies to you every single day, regardless of all the facts shown to prove these lies, is that for a lot of Americans, political position at birth appears to be as ingrained as a cult religion. Even intelligent people are today rationalizing the most absurd of events. Fox News has been an amazing propaganda machine for this administration as they repeat the lies and alter the facts to suit their story line. One should remember that the owner, Murdoch, and his news stations, had to pull out of the UK because there, unlike in North America, you cannot call yourself a news station and deliberately promote fake news as Tucker Carlson and Hannity were found to have done (and continue to do in the US every single day). Perhaps Americans should demand the same integrity from their prime time “news” political advocates. To be biased, as CNN clearly is, for example, is one thing. To be completely altering the facts, to brainwash the population into believing an alternate reality exists, is quite another.

 

Treating all Americans like they are too dumb to figure things out is a dangerous game. Treating the faithful Republican voters like mushrooms, by keeping them in the dark and feeding them manure, will not end well. Eventually people will take the time and pay closer attention as the truth comes out, and there will be consequences that could be long lasting for this party.

 

When it comes to the economy, the numbers do not lie and are available in official websites for all those truly interested in the truth to see. As outsiders looking in, the emperor is clearly not wearing any clothes.

Please reload

Please reload

Archive

© 2016 Summerhill Capital Management