THE ZEITGEIST: january 26, 2017
INAUGURAL ECHOES
Americans were split 50-47% over whether they liked President Trump’s inaugural address. (The slight edge for the approvers demonstrates, I suppose, that at least a few Hillary voters liked it.) Most of the punditry hated it. George Will went so far as to call it “the most dreadful inaugural address in history.” Love it or hate it, though, nearly everyone agreed that it was distinctively Trumpian. I would go further and say the address reflects many of the hallmark mood shifts that we have long suggested would accompany America’s entry into a “Fourth Turning.”
First, it was dark. Among the 24 words Trump used that have never been used before in an inaugural are the following: bleed, carnage, depletion, disrepair, ripped, rusted, stolen, tombstones, trapped… Had enough? You’d never guess the Dow was about to hit 20,000.
Second, it was primal and pragmatic, down near the bottom (not the top) of Maslow’s pyramid. It was all about building, executing, protecting, winning, and freeing ourselves from fear.
Third, it was resoundingly populist. “January 20th, 2017 will be remembered as the day the people became the rulers of this nation again,” he announced in his repeated vindication of “ignored” and “forgotten” Americans.
Fourth, it was authoritarian. Safety takes precedence over ideals. Action over talk. “There should be no fear. We are protected and we will always be protected. We will be protected by the great men and women of our military and law enforcement. And most importantly, we will be protected by God.” Strikingly, Trump invokes the deity of the Old Testament, not the Gospel.
Finally, and most obviously, it was nationalist. With his proud “America First” declaration, Trump echoes--unknowingly, he insists--the isolationism of the 1930s. As we have pointed out elsewhere (see “Globalism in Retreat”), this shift in American opinion long antedates Trump’s election. It has been underway in America for over 15 years, and probably began even before 9/11. But now the “new nationalism” is triumphant. It is embodied in America’s President. Here is the 1997 prediction we made in The Fourth Turning:
In foreign affairs, America’s initial Fourth Turning instinct will be to look away from other countries and focus total energy on the domestic birth of a new order. Later, provoked by real or imagined outside provocations, the society will turn newly martial. America will become more isolationist than today in its unwillingness to coordinate its affairs with other countries, but less isolationist in its insistence that vital national interests not be compromised. The Crisis mood will dim expectations that multilateral diplomacy and expanding global democracy can keep the world out of trouble. [page 276]
WHAT HAPPENS NOW?
Over the past two weeks, I’ve spent lots of time talking to clients—over two dozen of them in California and London. I can report that Trump is clearly at the forefront of most of their questions about where markets are heading. Their big concerns are—in no particular order—fiscal balance, tax reform, tariffs, and deregulation. In all these areas, their questions can basically be boiled down to three: (1) what will Trump attempt to do? (2) what will he succeed in doing—and when? and (3) what will happen to the economy and markets once he does (or doesn’t) succeed?
Three big questions about four big policy areas makes for plenty of discussion. The best way to approach them is by means of hypotheticals. If Trump rapidly gets most of what he says he wants, I think, the outlook is near-term favorable for employment, GDP, inflation, and earning expectations—and is meteorically favorable for the dollar. If not, then not.
So what are the odds he will get most of what he says he wants? Fiscal balance poses the greatest mystery. While the expectation of sizable fiscal stimulus is the lynchpin of the Trump trade, most the GOP in Congress are fiscal hawks. Maybe they will break and run under Trump’s influence, and then sign on to a budget-busting bonanza like the GOP did in 1981 with ERTA (the Kemp-Roth Tax Cut)—so entertainingly described in David Stockman’s The Triumph of Politics. Or maybe they will coalesce this spring around a Tea Party core and defy Trump just as they defied Obama in 2011 by refusing to lift the debt ceiling. The possible scenarios here are widely divergent.
Tariffs also pose a mystery. Trump’s notion of a selective punitive tariff on off-shoring firms is ridiculous and utterly unworkable. He will back away from this. But a general or country-specific import tariff is still on the table—along with efforts to translate Trump’s vision into a more civilized (WTO-friendly) border adjustment provision attached to corporate tax reform. Any of these measures, if introduced in a fiscally neutral manner, would be powerfully positive for the dollar.
In my discussions, I sometimes heard two interesting if dissident viewpoints. One is the failure-of-success scenario, wherein Trump gets most of what he wants—but with such a dramatic impact on rates, prices, wages, and the dollar that the wheels quickly come off the wagon and global markets crater. The first wheel to come off in my opinion would be emerging markets.
Another is the bad timing scenario. Valuation-minded investors, who figure a P/E-correcting crash is coming sooner or later, reason that Trump would be ill-served by buoyant markets early in his term, since it leaves all the bad news toward the end. If Trump were really like Reagan, he would have his crash early (the SPX fell by roughly 35% in real dollars between December of 1980 and August of 1982) to position himself for a Morning-in-America bull market rebound come time for his re-election. An early crash might even help Trump hammer his initiatives through a panicky and unpopular Congress.
does not compute
As I just noted, the question of what Trump wants to do (as opposed to what he will succeed in doing) is its own tantalizing mystery. This is not just because Trump drapes his intentions in vague and campaign-style rhetoric. All politicians do that--though, to be sure, no national leader has ever before worked out his trade policy on 3 am tweets. It's more perplexing than that. Trump's stated policy agenda is hard to interpret because so many pieces of it are so clearly contradictory to where he claims he wants America to go.
The most recent case in point is Trump's stand on the dollar. In last week's interview with the Wall Street Journal, Trump dissed the dollar by calling it "too strong," by saying it was "killing" our exports, and then by launching into a diatribe against unfair practices by which foreigners were undervaluing their currencies. OK, so far so good. Part of Trump's program to "make America great again" is to make U.S. industrial exports more profitable, enabling them to expand production and employment and "bring back" blue collar jobs. Let's put aside whether Trump's strategy will do much to improve middle America in the long term. At least on the margin and in the short term, his logic is sound.
But here's the conundrum. As I have explained elsewhere at length, every major economy policy initiative of Team Trump is expressly designed to push the dollar upward. Sizable fiscal stimulus will raise U.S. ROR and suck foreign capital inward, raising the dollar. More hawkish Fed policy, ditto. The deregulation of capital-intensive industries, ditto. And then there are his import tariffs, aka border adjustments. When you shut off the supply of dollars to foreigners by putting the tournequet on imports, what do they think that does to the foreign demand for our exports? Answer: Those fewer dollars bid up the dollar's price on FX markets until the current account returns to its status quo ante.
Here's another way to think about it. Trump's policies would reduce the total dollar flow entering the U.S. (through tariffs) and then increase the share of that flow buying financial paper rather than exported goods and services.
This isn't rocket science. You don't need graduate degrees to grasp it. And in fact the markets figured this out instantly upon Trump's election when they took his agenda seriously and bid the USD up by nearly 6% in ten days. It looked to markets as though Trump was proposing a deficit-fueled consumption and investment boom that would be great for everyone except exporters. The reincarnation of Reagan's first term indeed! Early on, Reagan didn't mind the rising dollar: He bragged about how it demonstrated America's "renewal" in the eyes of the rest of the world. Only after his second election did he have to get serious about closing the deficit and pulling the dollar back down.
Curiously, Trump doesn't seem to understand this script. He's complaining about the high dollar even before implementing policies designed to push it further up. So why didn't the high dollar bother him before? Maybe because, as often happens when engaging in faulty economic reasoning, Trump and his business-minded advisors are confusing cause and effect. A strong dollar, yes, may be a symptom of a strong economy. But raising the dollar does not itself cause the economy to strengthen, especially if you're worried about exports and multinational earnings.
A similar confusion may befuddle Trump's views on Fed policy, which have see-sawed back and forth on whether Yellen is too dovish or too hawkish. Again, we have the cause-and-effect problem. An accelerating economy often causes rates to go up. But raising rates rarely if ever causes the economy to accelerate.
By far the best thing President Trump has done for the economy is to re-instill confidence. As the saying goes, business confidence is the cheapest form of stimulus. The challenge is that this confidence is premised on a policy program whose internal contradictions are not entirely understood by its architects. Even if Trump's expansionary economic agenda (as understood and discounted by the markets) could very well succeed, it may all be dead letter if it runs smack into Trump's populist political agenda--to say nothing of Congress's fiscal rectitude.
NewsWire
- A new op-ed calls Barack Obama the “Millennial whisperer” for his high outgoing approval ratings among young Americans. While Obama did make significant progress on many of the issues that Millennials care about, the authors wisely point out that the contrast between Obama and the Clinton/Trump campaign vaulted his popularity among Millennials even higher. (Los Angeles Times)
- New data show that affluent 35- to 51-year-olds represent 40% of robo-advisor users, up from 31% a year ago. Never a group to trust mainstream institutions, Xers instead are investing through cheaper, passive funds that promise the same (or better) returns as actively managed funds. (Cogent Reports)
- Mall owners are filling vacant space with unlikely residents—“online” retailers. Although e-commerce has often been heralded as the death of the American shopping mall, Amazon and startups like Happy Returns are starting to embrace the perks of brick-and-mortar locations. (The Wall Street Journal)
- Boomer Dwight Silverman discusses why he and his wife became “renters by choice” once their kids left the nest. Though plenty of Boomers are aging in place to stay close to family, others like Silverman without local family are attracted to the cost savings and the often-plentiful amenities of apartment living. (Houston Chronicle)
- Gardening professional Mariella Trosko notices more Millennials embracing gardening—especially for the purpose of growing food. Millennials are mindful of their overall health and of what they put in their bodies, making small-scale gardening a huge hit for them. (PennLive.com)
- Over the past year, Taco Bell has quietly taken steps to offer healthier food—including hiring a dietician and adding a vegetarian menu. The hush-hush manner in which the chain has revamped its operations has given options to health-conscious consumers without alienating fast food purists. (Business Insider)
- A much greater share of Millennials say they trust user-generated content compared to brand-generated content (47% versus 25%), a gap that shrinks significantly among Boomers (36% versus 24%). While Millennials are inclined to rely on peers and experts for accurate product depictions, Boomers want to see the product in action—regardless of who is advertising it. (Olapic)
- Obituary publishers note that more listings than ever contain references to drug use, such as words like “overdose” and “addict.” The increase reflects not only the growing incidence of drug overdoses in the United States, but also a newfound willingness by families to discuss drug use frankly in an attempt to warn others. (Bloomberg Business)
- Millennial parents have received about $11,000 in the past year from their parents in the form of unpaid labor and financial assistance. Even as more Millennials are having kids of their own, they’re not afraid to lean on their parents for support. (TD Ameritrade)
- Though Southern California has a higher share of Xers than much of the country, its Xers are leaving in droves. Why? Rising rents and weak high-end job creation has Xers moving out of Los Angeles, Orange, and Ventura counties to more suburban (and affordable) areas like Riverside and San Bernardino. (Los Angeles Daily News)
Did You Know?
Room for One? A staple of American travel culture is dying out: According to Bloomberg Business, fewer motels are displaying the “Vacancy/No Vacancy” signs that once dotted American roadways. Some establishments are ditching these signs as a way to stand out—like California’s Oceanview Inn, which instead displays signs reading “Welcome” or “Sorry.” Other motels reason that vacancy indicators are no longer needed at all. Branded motel chains often use uncertainty as a strategic advantage. (Full-up establishments can refer walk-ins to another location within the chain.) Additionally, with an increasing share of leisure bookings taking place in advance online, vacancy signs are becoming superfluous. To be sure, adventurous Boomer travelers—who may not check for availabilities before showing up in town—still make up a meaningful slice of leisure travel revenue. (See: “The New Senior Traveler.”) But with risk-averse (read: planning) Millennials aging into their prime spending years, walk-in bookings may become a thing of the past.
