Radio Show: USA: Trump and Markets

Thursday, November 17, 2016 // Written by Enzio von Pfeil

Trump's infrastructure spending plans are ineffectual. Why you should buy in to the recent bond market America.


Donald Trump's economic adviser, and potential candidate to be the next Treasury Secretary, Steven Mnuchin said overnight that the Trump transition team is weighing an "infrastructure bank" to make investments in America's aging infrastructure.  Mr. Trump's economic advisers had previously said infrastructure spending can be achieved without creating a government entity but rather through tax credits.

  1. The concept of Keynesian reflation via the rebuilding of America’s ageing infrastructure makes theoretical  sense.
  2. However, don’t expect immediate growth impulses off such spending!
    1. Very few AMERICANS themselves will don picks and shovels to build roads and bridges. This means that the bulk of this work gets awarded to Gastarbeiter, to guest workers from overseas, aka Mexico. But they spend little of their wages in the USA, repatriating them instead back to their families, e.g. in Mexico.
  3. Thus, the immediate growth effect of fiscal reflation is thus the increased demand for materials – steel, copper, cement, etc.
    1. But whether this increased demand for raw materials is as much of a growth-booster as Trump believes, remains to be seen.

Hedge fund manager Jeffrey Gundlach who oversees $106 billion at Los Angeles-based Double Line warns that Donald Trump has no growth magic wand. He says Federal programs take time to implement and doubts that the president-elect can quickly spur economic and job growth.

1.  I fully agree.  It is very difficult to spur growth quickly in a post-industrialised economy.

a.  As a politician, the line of “I’ll get you a job immediately by spurring growth” was a great vote-catcher, all the more in light of Hillary’s nonsensical focus on his misogynistic views….

2.  Of far greater effect would be his domestic corporate tax cuts a la my old friend’s, Arthur Laffer.

3.  Monetary policy: we know that it’s marginal usefulness has run out of steam

4.  Fiscal policy: we just stated that the bulk of the infrastructure work will be done by foreign labourers who will repatriate their earnings to their families back home, e.g. in Mexico.

Another of Mr. Trump’s economic advisors responded by saying growth will come through enforcing trade agreements. Diana Furchtgott-Roth says the Obama White House has done nothing about the violations of intellectual property laws by China, Russia, India, and other countries. She says President Trump is going to do something about it and enforce the trade laws that our partners are breaking.

1.  Another bit of political lie: trade agreements cannot spur growth! Once you removed imports from exports in the trade equation, you are left with a residual which equates to < five per cent of GDP, at most…

2.  Besides, would enforcing intellectual property rights really spur growth?

3.  Look instead to America’s global trade surplus as discovered in my book, Trade Myths, and give her MNCs a meaningful incentive to repatriate some of their global trade surplus worth $4 trillion a year in order to re-invest back in America….

Meanwhile outgoing President Obama, and Germany’s Angela Merkel have jointly warned against “a return to a world before globalisation.” They called for support for TTIP, the planned EU-US trade and investment pact and rejected isolationism and the rolling back of free trade.

  1. We all know this: reject isolationism and boost free trade
  2. Lesser known is that America’s MNCs generate a global trade surplus of some $4 trillion a year, a surplus which they keep offshore.
  3. Thus, the best growth booster would be to entice these successful US MNCs to repatriate their earnings back home via tax credits AND to get further tax benefits by investing in plant, machinery and equipment as well as education back home in the USA.

That comes as the US-China Economic Security Review Commission, recommends that the US stop China’s state-owned enterprises from acquiring or gaining control of American companies. The US trade deficit with China reached its highest level on record last year and was 6.5% higher than a year earlier.

  1. This US-China Economic Security Review Commission (USCERC) sounds rather academic: it should be forbidding US companies from selling-out to these Chinese SOEs!



The week-long Trump reflation trade has cooled overnight. The sell-off in global bonds which has seen $1.5 trillion wiped off the value of global bond markets in the past week has partly reversed, with yields on US treasuries falling slightly for the first time in 6 trading sessions. The Dow Jones industrial average fell for the first time in 8 days. The US dollar index hit a 13-year high before falling back.

  1. How can US inflation rise with a rising dollar that results in imported Deflation?
  2. Thus, if you believe in a stronger dollar, then buy into US bond weakness!

Investors surveyed by Bank of America Merrill Lynch reported their highest inflation expectations since 2004. 85% of money managers said they expected a pick-up in inflation. Fears of a “stagflationary bond crash” was the biggest tail-risk identified by investors, at 23 per cent – a four-year high.


1.  I am the father of that survey, which we created at Smith New Court Far East back in 1986!

2.  I disbelieve this myth of the herd of demand-pull inflation returning to America:

a.  The idea of too much money chasing too few goods is yesteryear’s story. In our globalized world, the supply curve is infinite: MNCs can produce as much as they want by revving-up their overseas plants.

b.  Besides, if you believe in a stronger dollar, then look for imported Deflation

  1. Finally, if companies do re-tool, then unit labour costs decline off the back of stronger productivity, further depressing demand-pull inflation.

d.  The only true inflationary threat has to come from cost-push inflation through higher input costs such as those of agricultural commodities. But NO Central Bank can control weather patterns!

3.  Re that stagflationary bond crash: I accept to the degree that there has been a bond bubble, courtesy of politicians not reforming and thus forcing central banks to do their work for them.

Instead, buy bonds on price weakness: inflation remains low for a long time.

You can listen to the RTHK podcast here. Enjoy! 


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