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The Pricking of the Trump Bubble?

February 11, 2018


Last Friday night we went to a dinner hosted by our financial advisor, who talked about the current state of the financial markets. His message was reassuring–basically that the economy is fundamentally healthy and there are no real indications that another recession is on the horizon. He made a persuasive and cogent case for his optimism, and I do hope he’s right. But my gut keeps telling me that the next few years might not be quite so rosy.

I will admit up front to some schadenfreude over the market plunge over the past few days, simply because Trump has been so loudly trumpeting the recent climb in the DJIA as his personal achievement, which it clearly is not. But a bear market certainly is not going to do the country (or me personally) any good, however satisfying a bit of karma payback might feel.

So here’s what makes me worry. Let’s start with the fact that the stock market isn’t the country or even the economy. Barely half of Americans own any stocks at all, and the wealthiest 10 percent account for 81 percent of the value of all stocks and 91 percent of directly held stocks and bonds. That means that for half of the people in this country, the ups and downs of the stock market have no direct impact on their wealth or well-being. Back when people actually had pensions, more people might have had a stake in the markets, but pension funds are a dwindling presence in America. And only about one-third of American workers contribute to a 401(k) plan or some other tax-deferred retirement plan. That means that when stocks go up, it’s primarily the rich who benefit, not the average Joe.

Then there’s the issue of wage growth, which has been unusually slow as the economy has climbed out of the Great Recession. Indeed, there has been a kind of downward ratchet effect on wage growth since the last two Bush-era recessions, as illustrated in this graph from a study by the Atlanta branch of the Federal Reserve Bank. There had been some encouraging signs that as unemployment has dropped wages are at last beginning to rise, but the increases are still anemic compared to previous recoveries. And the direction of the moving average suggests that the rate of increase is not necessarily on an upward trajectory.

wage growth

Today’s New York Times published an analysis showing that companies are increasingly giving out one-time bonuses instead of salary increases, which are more permanent and set a new baseline for compensation. The article notes that “bonuses have not made up for wage stagnation. The inflation-adjusted median income of men working full time was lower in 2016 than it was in 1973. And their lifetime earnings–which include salary, wages, bonuses and exercised stock options–have mostly dropped since then.” All of this also suggests that the benefits of the recent bull market have accrued to a rather small and rich slice of the US population and the rest have benefitted relatively little if at all. The question is this: If most people aren’t seeing their incomes go up, how much of a recovery is it really?

Indeed, the post-election bull market seems to be in large part a product of what Alan Greenspan once called “irrational exuberance”–based on a giddy euphoria in corporate America that their taxes would be slashed and those annoying regulations would vanish and they could party like it was 2007 again! This in itself should be reason for concern.

Everybody just loves tax cuts, but the one that just passed, combined with last week’s spending bill that will keep the government running, will roughly double the deficit in the next fiscal year. ( I will refrain from further comment on GOP hypocrisy regarding deficit spending. And no, the Democrats are not equally to blame for running up the deficit.)

This means that the federal government will have to borrow a lot more money to cover the gap between falling revenues and increasing expenditures, which in all likelihood means that interest rates will rise faster than they otherwise would have. In general, the stock market doesn’t like it when interests start rising, and this could also have a dampening effect in other areas such as real estate, as well as increasing inflationary pressure.

Then there’s the regulation thing. Wall Street and corporate America hate them, but the fact remains that the greater danger lies in too little regulation rather than too much. Just look back at the economic damage that de-regulated capitalism has caused since the “Reagan Revolution”, starting with the ’80s savings and loan crisis, the “Black Monday” crash in 1987, Enron, the bubble that set off the first Bush recession, and finally the real estate and banking bust of 2008 that precipitated the Great Recession.

Now we have an administration that is gleefully bent on smashing the entire regulatory system that we have set up over the past 50 years precisely to mitigate such problems. Scott Pruitt has gutted the EPA, Mick Mulvaney is destroying the Consumer Financial Protection Bureau, federal investigation of corporate malfeasance has all but ceased, and (perhaps most alarming) the Dodd-Frank regulations imposed in the wake of the Great Recession are under concerted attack. This looks like another financial disaster waiting to happen, even if we don’t know exactly what it will be.

Then there is the historical track record. Republicans may be the party of business, but historically the American economy has grown significantly more when the government was under Democratic control. Since the Reagan years, every recession has begun under a Republican administration, and this has been an unusually long economic expansion.

Moreover, we are in an extraordinarily unstable time politically. Confidence in the institutions of American government is at an historic low. Corporate America may love Trump, but a majority of Americans do not like him. The Mueller investigation is a looming danger to the administration. We don’t know how this will all turn out, but we can be pretty sure that some kind of constitutional crisis is on the horizon. Regardless of what that means for American democracy, the markets generally do not respond well to political turmoil.

Finally there is the possibility of an unforeseeable event–the Black Swan.  It could involve North Korea or another armed conflict in the Middle East, or something else quite unanticipated. Of course, that could occur at any time, but we now have an exceptionally erratic person in the White House, which raises the likelihood that some incident could suddenly escalate into something far worse with who know what consequences.

I respect the expertise of financial professionals and the market analysis they do, but at the same time it seems to me that there are just too many cross-cutting macro trends in the economy, government, and society at large to feel very confident at this point. I just have this feeling that the party is winding down and a hangover is on the way. Hope it’s not a bad one.











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