Markets' post-election party may lead to a hangover
Trump has promised a new order of low taxes and high spending as well as a regime of tariffs, the like of which has not been seen in living memory.
Can you remember the so-called walk of shame? I have this image of a girl sitting on the tube at 10:30 in the morning, hair dishevelled, makeup gone, in her ballgown and everybody in the carriage looking at her thinking “I know what you’ve been up to…”. That’s how markets look today in the aftermath of the stupendous rally in US risk assets in the aftermath of the immense victory of Donald Trump and of Trumpist Republicanism in Tuesday’s US election.
Before I go one inch further, the sweeping victory is no more a nationwide endorsement of Trump than the UK’s Labour party boom in July was or is an endorsement of Sir Keir Starmer and his team’s brand of neo-1960s Socialism.
Where the UK result was an electorate giving an unpopular government a brutal spanking, turbocharged by the first past the post electoral system, it is is above all a screaming repudiation of Biden and of the sense that an urban East Coast elite had conspired to instruct the people, all of the people, how to think and what to do.
It was Abraham Lincoln, widely regarded as America’s greatest President, a Republican, who observed that you can fool some of the people for all of the time or all of the people for some the time but that you cannot fool all of the people for all of the time.
Just as it can be argued that the UK election was lost by the Tories more than won by Labour, if, as and when the Democrats reflect on their defeat, they will have to conclude that it was their self-satisfied claim to being sole occupiers of the moral high ground and moral arbiters of all things rather than wide enthusiasm for Trumpism that decided the day.
With all due respect to the defeated Vice President Kamala Harris, it was not she who lost the election. It was the whole Democrat edifice and credit must be paid to her for having given her best.
Yesterday, in the aftermath of the extraordinary results – Harris was just the Guy on the top of the bonfire of Democrat power - I exchanged a note with a senior insurance executive in the Caribbean. I know her well as she runs the company that insures my little shack on the beach. As a woman who has fought herself through a wall of endemic misogyny – being of colour is obviously not a disadvantage in the Caribbean – she sees Harris, being both a woman and of colour, of having never stood a chance. I disagreed with her. I understand that it might appear as though Middle America was not ready to have a black female President imposed on it by the Liberal cabal in Washington, but I think that is wrong.
Harris was an accidental candidate – I stick by my opinion that Joe Biden had become too doddery to recognise that he was too doddery to run and that it is not he but Jill Biden’s failing to advise him to step down who is to “blame” for Donald Trump’s victory parade up Pennsylvania Avenue. The electorate did not solely reject Harris. They rejected what they feared would be a Biden Mk II administration and for that the Democrat party hacks themselves bear responsibility. It was they who carried Biden unopposed through the primary process. Harris was an accidental sacrifice.
I see one of the closing scenes of one of my favourite films, Dicky Attenborough’s epic 1977 adaptation of Cornelius Ryan’s “A Bridge Too Far”. In it, Generals Frederick “Boy” Browning and Roy Urquhart reflect on the disastrous failure of the airborne landings at Arnhem in September of 1944 which proved to be the overly ambitious spearhead of Operation Market Garden.
Urquhart, played by Sean Connery muses. “I went in with ten thousand men. I came out with two”.
Browning, played by Dirk Bogarde, replies: “Monty is pleased and proud”.
“Pleased?”.
“Yes, Market Garden was 90% successful”. I think you can follow me.
So, markets went into overdrive with the Dow closing up by 1,508 pts or 3.57% at an all-time high of 43,728.05 pts. The S&P added 146.28 pts or 2.53% and the Nasdaq 544.29 pts or 2.95%, all in anticipation of the Trump boom.
Standout gainers were Goldman Sachs, up by 13.1% at the close followed by JP Morgan at 11.54% and not irrationally construction machinery giant Caterpillar, up by 8.74%. But beware, it was not all one way traffic. Eleven of the Dow’s thirty component stocks closed in the red. The most significant mover on the day, however, was the dollar.
The DXY index that measures the wider value of the greenback shot up from 103.42 to 105.25. Meanwhile bonds sold off heavily with the 10 year Treasury note having opened at a yield of 4.26% and as results drifted in falling to a yield – yield and price are inverted so if yields go up prices go down – of 4.45% while humming the tune “There could be trouble ahead”.
Trump has promised a new order of low taxes and high spending as well as a regime of tariffs, the like of which has not been seen in living memory. While the confetti and the streamers are being swept up on Wall Street, the questions are arising as to who is going to pay for this lot.
The quick and easy answer is that it will be the next generation although their future has already been mortgaged to the hilt in the US$ 36 trillion of existing national debt, 122% of GDP and more than seven times the current annual federal tax take. And against this backdrop the Federal Open Market Committee, the Monetary Policy Committee of the Federal Reserve System under the chairmanship of Jay Powell must today make a rate decision. It remains a racing certainty that they will ease by 0.25%, taking the Fed Funds target down to 4.5-4.75% but the members of the FOMC will in their mind’s eye be looking at the girl on the tube.
In one of his many victory speeches, Trump assured that a promise made is a promise to be kept, indicating that his approach to the economy and to trade will be fundamentally different to what the world has known for the thirty of forty years since the rise of globalisation. Trump II does not plan to simply talk of MAGA, he wants to implement it. And pity anybody who might stand in the way. For anybody, by the way, read everybody. The President elect can at least point to having been elected on a majority of votes cast.
There are 74 days between now and the inauguration and much water will flow down the Potomac before DJT becomes the 47th President of the United States and only the second since Grover Cleveland in 1892 to be elected for a second, non-consecutive term.
There is plenty of time for risk asset markets to find themselves with a hangover from yesterday’s post-election party. Fed Chairman Powell will have been burning the midnight oil preparing his post-FOMC briefing. Trump has made it patently clear that he doesn’t much care for the Fed’s independence. He is after all a blooming property developer who thrives on cheap money. The cheaper the better and seeing as inflation pays off most of the mortgage there’s nothing to be said against that either. That he had used inflation to beat the Democrats around the head is yesterday’s news.
Bond markets are less sanguine. The overpowering prospect of increased debt and rising inflation – tariffs won’t make life any cheaper – saw the 2-year/10-year US yield curve steepen to 17 basis points although my guess is that that is still no more than a baby step on the way to it over time becoming much steeper.
Trump might notionally be a conservative but conservation is not in his rule book. He is in fact much closer to Bakunin and Anarchism where the way forward begins with the violent dismantling of the existing social and economic infrastructure and then starting again, albeit in a very different and previously uncharted direction. The Fed as an independent institution is already in his crosshairs.
Both America and the rest of the world can now only sit and wait to see what he has in mind. He has already announced that he wants Elon Musk to be part of his executive team. Musk swept into Twitter and after having renamed it X fired three quarters of its staff. It has not imploded.
Following the 2010 UK General Election, the Tory-Liberal coalition government under David Cameron and Nick Clegg announced plans to curb public spending through the abolition of a large number of quasi-autonomous non-governmental organisations (quangos). This was styled in the national press as a "bonfire of the quangos", making reference to Girolamo Savonarola's religiously inspired “Falò delle Vanità", or Bonfire of the Vanities. Musk will be sent in to light a Bonfire of the Government.
Small government is to Trump not just a concept but an aim. Where the masses of redundant state employees are to find work is another matter entirely. Maybe gardening and cleaning and driving Ubers - although not if Musk’s robotaxis actually work – and all the other menial jobs that will come free when the administration expels millions of undocumented immigrants.
President elect Trump wants to take the country to places it has in terms of tariffs not been since the 1930s and we all know what happened then. As far as debt is concerned, he will be following a path trodden by most of his more recent predecessors, but which was certainly widened and paved by Joe Biden. Equities have been on champagne, bond markets on water. The Fed will cut today but can it afford to cut again in December? Can it afford not to?