Witnessing the ups and downs of a seasoned politician can provide a strange sense of delight, especially when they stumble. Tuesday night offered a front-row seat to such a spectacle, culminating in Donald Trump’s unexpected victory over Hillary Clinton. This event not only shocked many but also signaled a discontent with the entrenched political norms in Washington. Regardless of individual opinions about Trump, this disruption is a cause for reflection and, perhaps, celebration.
Political commentators, perhaps more qualified than we are, are dissecting the election results ad infinitum. We’ll leave the analysis to them and focus instead on a point we previously raised about potential shifts in the long-term credit market cycle.
If you recall, we highlighted a potential reversal as the yield on the 10-Year Treasury note has been climbing since hitting a low in July. It remains uncertain whether this trend will continue.
The most significant trend reversals are often only recognized in hindsight, much like election outcomes. Charts and predictions can be insightful until they prove otherwise, making close monitoring of daily yield fluctuations essential.
Something Remarkable
Over the past several years, there have been frequent instances suggesting a return to a long-term uptrend in interest rates within credit markets. However, each time has been followed by a fleeting rise instead of a sustained increase, leading to increasingly perplexing scenarios.
Some sovereign bonds, such as certain Japanese securities, have even seen yields dip below zero. Fortunately, the United States has managed to avoid this troubling phenomenon, and let’s hope it stays that way.
This week, amidst Trump’s significant electoral win, something else noteworthy unfolded. On Wednesday, while many were distracted by an 800-point drop in DOW futures, followed by a modest 256-point recovery during trading hours, Treasury yields experienced a dramatic increase, soaring over 11% to reach 2.07%.
Thursday saw further jumps in both stock prices and Treasury yields. What could be the underlying cause?
According to Reuters, speculation regarding Trump’s potential implementation of protectionist trade policies may elevate U.S. wages and contribute to inflationary pressures, consequently pushing bond yields higher.
Additionally, traders might be anticipating Trump’s plans to borrow substantially—potentially increasing the budget deficit—to construct a large wall along the southern border. This move would elevate the supply of Treasuries, likely driving up yields and possibly increasing prices for commodities such as concrete and steel.
Donald Trump’s Plan for Economic Salvation
While borrowing funds for infrastructure projects could temporarily energize the economy and generate jobs, the root issues remain unresolved. The economy is already burdened with excessive debt, and no amount of economic stimulus can feasibly allow it to “grow out” of this predicament—physically or mathematically impossible.
These larger trends have been in motion for decades, driven by shortsighted decisions from politicians of the past. Engaging in further debt-based stimulus only deepens the existing crisis.
For instance, widening deficits exacerbate the gap between debt and GDP, where debt continues to balloon while GDP lumbers forward. Moreover, expanding deficits could provoke a surge in consumer price inflation not seen since the early 1980s.
Trump appears ready to repeat the mistakes of previous administrations. Perhaps, with no viable alternative, he feels there’s little reason to resist. In fact, one could argue that a bold approach might be in order.
We even suggest they should fully embrace this strategy. Trump and the Republican Congress should accelerate their initiatives, plunging the economy into uncharted territory.
It could be an exhilarating journey—and with a bit of luck, there may be some form of salvation on the horizon.
Sincerely,
MN Gordon
for Economic Prism
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