Friday, September 9, 2016

The Trump Stock Market Slump — Just Started?

US stock markets are off by more than one and a half percent today (actually tw and a half percent by the close), which coincides with realization that Hillary lost the Commander-in-Chief tele-thingy whatever it was. I didn't watch, but I see one poll indicating that Trump was judged the winner by a margin among viewers of two to one.

That follows a series of polls of voting intention showing Trump either even with Clinton or marginally ahead. Considering the anti-Trump media bias and the incentive the media therefore have to skew the poll results, the implication is that Trump is now well out in front. And that's ignoring the shy Trump supporter phenomenon, which manifests as Trump supporters telling pollsters that they support one of the no-hope third-party candidates, although in the event they intend to put their X next to Trump's name.

For investors, the message is clear. It's time to pay attention to Trump's economic plan, which is that: Interest rates have to go up.

Let me say that again: INTEREST RATES HAVE TO GO UP.

And just to be absolutely clear, let's say it one more time: INTEREST RATES HAVE TO GO UP.

Which raises two question: (1) Why? and (2) With what result?

The answer to the Why? is addressed, indirectly, in my post before last on Why China Booms as America Stagnates. Stimulating demand in a stagnant first world economy exposed to unrestricted Third-World competition sucks in cheap foreign goods and services paid for with debt, and thus does very little to stimulate the domestic economy.

Moreover, America is now at peak debt. The only way Americans could undertake more debt is if interest rates go negative.

But how could sustained negative interest rates be maintained? Folks are already stockpiling cash and buying gold and silver bullion in anticipation of negative rates. In other words, with negative rates the monetary system becomes non-functional.

People won't put money in the bank, they'll buy a safe and stash cash, or coins of precious metal. Banks will then find that the limit on what they can lend is not determined by who is creditworthy — almost anyone may be creditworthy for any amount if they're being paid to borrow — but by the non-existent deposits against which they are permitted to lend.

Banks could lend their own very limited base capital, but why would they do that when, less the negative interest they would have to pay, they will get back less than they lent?

It could be argued that the central bankers hope, by creating a wild negative-interest borrowing spree to create inflation, which would mask the reality of negative (real) interest rates and thus keep bond holders and depositors happy even though the real value of the bonds they hold or their bank deposits is diminishing.

But creating substantial inflation is virtually impossible when more spending just sucks in more stuff from China and the rest of the Third World that now has a virtually limitless capacity (relative to Western demand) to produce stuff that is very cheap indeed. Moreover, even if there is inflation the government pretends there isn't by constantly fudging the data so that workers don't get mad about declining real incomes.

And remember, incomes in the West have a long way to fall before they equalize with those in the Third World, a key objective of globalization.

So interest rates if they go anywhere, must go up.

And what will drive them up?

Inflation brought to America by way of Trump's remaining economic objectives: tariffs, tax incentives and propaganda to cause Americans to buy shoes and shirts, computers and car parts made by other Americans earning American wages, not by Chinese and Indians and Bangladeshis working for less than a tenth of American wages.

Inflation, like negative rates, makes bankers, bond holders, bank savings account owners alike,  reluctant to lend money at less than a significant positive interest rate. Reduced supply means increased price, and the price of money is interest, so interest rates have TO GO UP.

And rising interest rates will drive a switch in all kinds of investment decisions. In particular, bonds will begin to look more attractive relative to stocks. Saving money and living in a condo will look more attractive than borrowing your brains out to buy an overpriced ticky tacky box offered as a wonderful investment, especially as the real estate markets enters what may prove to be an cataclysmic crash.

So if your are long on stocks, bonds, real estate, watch out below.

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