SMM News/12-8-2016
“Looking ahead, Credit Suisse argues against the view of many pundits that U.S. President-elect Donald Trump’s fiscal policies are likely to hurt gold. The market has factored in an expectation that a mix of U.S. tax cuts, deregulation and infrastructure spending will boost the economy, pushing up real interest rates and strengthening the U.S. dollar. ‘We counter that trade protectionism and anti-immigration policies are negative for growth and positive for inflation,’ Credit Suisse said.”
MK note: Since election day, the markets have reacted as if the Trump administration were likely to be a re-run of the Reagan years. Nothing could be further from the truth.
When Reagan took office the United States was just coming off a disastrous encounter with runaway inflation. If inflation was going to be tamed, the interest rate would have to be pushed to a level higher than the inflation rate, something then-Fed Chairman Paul Volcker in fact accomplished. It killed inflation, restored dollar strength and touched off a long-term stock market rally.
This time around, the United States is coming off a brush with disinflationary disaster verging on a full scale deflation. Different medicine is required. In fact, there have already been rumblings that the Fed will be very careful to keep the interest rate under the inflation rate. The goal is to ignite inflation and undermine dollar strength. Eventually, the effects of the two outcomes, assuming the Fed is successful, will migrate to the stock market.
Two different worlds – Reagan’s and Trump’s – and the incongruity of market expectations measured against cause and effect as illustrated in economic history is telling. Eventually the financial markets will come down from the euphoria and begin to consider what the odds-on economic reality will look like for 2017 and thereafter. Credit Suisse is on to something.
