Ultimately, it will be down to Wall Street to challenge Trump
Ultimately, it will be down to Wall Street to challenge Trump
Wall Street will have to ask the questions of the President that his closer advisors do not. And that is not new.
Having treated myself to a four day weekend, and having spent more time reading than writing, I have concluded that this is a golden age for columnists. Any opinion goes. Not only does it go, it goes unable to be challenged. For the range of possible outcomes in the aftermath of the US elections a week ago today is infinite and, let’s face it, even with the road signs bearing the names of the senior appointments to President elect Trump’s A-Team, the path forward looks hard to plot.
I shall not beat around the bush. I am as sceptical of bitcoin at US$ 88,000 as I was of it at US$ 66,000, at US$ 44,000 or US$ 22,000; it remains to my mind a solution in search of a problem albeit one on a sugar rush. It is not alone. The S&P500 broke new ground on Monday closing for the first time above 6,000 pts at 6,001.35 while the Dow Jones Industrial Index also hit a record close at 44,293 pts. The Nasdaq is also at an all time high although it closed only 11.99 pts or 0.06% higher at 19,298.76 pts. Next stop 20,000 pts?
It would be wrong to suggest that this really is without equal for I well recall the days after the Donald’s 2016 election victory, when stock markets were performing in a similar fashion. The numbers relating to US stock markets are truly eyewatering. Year to date the Dow closed up by 17.42% and year over year by 29.2%. The same numbers for the S&P are 25.82% and 35.92% and for the Nasdaq 28.56% and 39.87%, respectively. The less frequently observed Russell 2000 of midcaps is a little lower at 20.12% year to date but go back another seven weeks and the 12 month performance is a staggering 42.79%. UK investors who have seen the FTSE 100 rise by only 10.39% in a year might feel a little jealous of their American cousins but if they look the other way across the Channel to Paris where the CAC40 has over 12 months only returned 5.43%, they might find themselves counting their blessings.
I shall now briefly step onto very thin ice by recalling Mel Brooks’ incredibly funny satirical movie “The Producers” and the song “Springtime for Hitler and Germany”. Yes, I know that the President elect has by many of his detractors repeatedly been likened to that unmentionable Austrian-born German dictator and, wearing my hat of a former student of that period, I warn of overly simplistic comparisons, but the comic song does to some extent reflect the prevailing mood in US risk asset markets. The bulls have occupied the stage and are singing and dancing with such confidence that the bears have no voice. Irrespective of how loudly they try to cry that Trump’s economic blueprint has “inflation” written all over it, markets don’t care to listen. I hold the opinions of my dear friend Morris Sachs of the Inside Baseball with Old Chestnut podcast in the highest of regards and, in this week’s recording, he is very much on the same page as myself in that he foresees a significant steepening of the yield curve.
As at the time of writing, the yield differential between the 2 year and the 10 year US Treasury notes is a humble 3 basis points - 4.30% vs 4.33% - which is the flattest it has been for several months. In late September, the 2 year, the canary in the bond market coal mine, hit a low of 3.54% since when it has risen and risen reflecting declining expectations for lower interest rates. Over a similar period, the 10 year yield has risen from 3.62%.
When asked in his latest press briefing what his position might be and whether he would be inclined to resign, Fed Chairman Jay Powell simply answered “No”. The President elect has made his position quite clear. He wants lower rates. End of! But what happens when an autocratic President begins to fiddle with monetary policy against the trend of rising inflation can be seen in Turkey where President Erdogan’s supposedly populist intervention has led to a near catastrophic outcome. 2024 year to date CPI in Turkey is 49.4% which is quite a result given that in both 2023 and 2022 it was closer to 65%. Powell’s term does not expire until February 2026 and there is nothing the President can do about that. He might then appoint an acolyte although by then his administration will have been in place for over a year and, in the cold light of day, both the economic and monetary policy landscape might by then look very different. Nothing will damage long term interest rates, the ones which determine most American domestic mortgages, more than lax management of the key rates.
Trump might be crazy but he’s not stupid. His appointment of Susie Wiles as his Chief of Staff might at first glance look erratic, but the good lady has a long and distinguished track record in Washington – she already worked there under Ronald Reagan – so she should know what she’s doing. Comparisons to the unhappy and short-lived tenure of Sue Gray as Sir Keir Starmer’s Chief of Staff at Number 10 should not be drawn, although Trump’s 2017 to 2021 White House did have quite a history of high-speed revolving doors. The current British government is in many respects redolent of Trump’s first team selection in 2017 when he tried to placate all sides of the Republican movement. Starmer possibly believes that, if he mixes elements of all sides of the Labour party, he will end up with a balanced cabinet. Wrong, he ends up with a cabinet that is ideologically divided against itself. Trump will not make that mistake again and, in the end, it will be Wall Street that will have to ask the questions of the President that his closer advisors will not. And that is not new. One of the hardest sentences in American English is “No Mr President, you are wrong.” Who, after all, actually stood up to Joe Biden and told him to his face that he was unfit to run for a second term?