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October 26, 2018 | Larger than life

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Did the Trump bump become the Trump dump? The theory was gaining ground on Friday afternoon as US markets lurched towards the worst October in eight years. The S&P was near correction territory (that’s a drop of 10% from its high) and the tech-heavy Nasdaq was torpedoed by disappointing results from two of the FANG guys – Amazon and Alphabet. The VIX spiked. Risk came off the table.

So was this Trump’s fault? And when will it be over?

As with everything else these days, there’s a conspiracy theory: manipulators are trashing the market thinking the Democrats will sweep the midterm elections on the 6th, stack the Senate, repeal the Trump tax cut, then move to impeach the guy. That would be the end of a presidency devoted to stoking the fires of growth by slashing corporate taxes, cutting costly regulations, creating jobs and erecting barriers to imports.

On the other side (there’s always an other side now) some people blame Trump for inflating stock prices for exactly the same reasons. Too much growth, they say, too fast has brought a resurgence of inflation, and prompted the Fed to raise interest rates nine times to try and cool it off. The US dollar soared, trashing emerging markets and helping slow global growth.

But the biggest bad, critics claim, is a one-man trade war. It’s pitted the world’s two biggest economies against each other, increased costs, reduced global efficiency, booted corporate overhead, sunk Chinese stocks and rattled investors across the world. In less than two years, a single leader has unwound decades of trade talks and deal. Now companies like Ford say steel quotas and tariffs have added $1 billion to internal costs, in a giant backfire of the ‘America First’ Trump agenda.

Higher costs to companies mean increased prices. Meanwhile protectionism hurts exports but boosts domestic employment. More workers means wage pressures. Inflation means higher interest rates, wiping out some benefit of the tax cuts which helped create it. And elevated rates. A vicious circle is created. Meanwhile reduced tax revenues and high spending mean bloated government deficits, pressuring the bond market and increasing yields. Around she goes.

 

Without a doubt, Trump looms large. After he was elected the stock market took off, hitting record highs this year on a wave of growth, profits, wages, protectionism and Tweets. Over and again, he used the soaring market as a proxy for his prowess, bragging that it validated his growth-at-any-cost policies. But now headwinds have hit. Being Trump, he’s fighting back, calling the Fed ‘crazy’ for raising rates and blaming the pain on swollen bond yields.

But it’s more than that. The tribalism, nationalism and parochialism now pervasive in public life is troubling to free markets. They hate the China spat. They fear a hard Brexit will rip the EU apart. They smell disruption in Germany and see it in Italy, where alt-right politicians have tapped into a vein of public rebellion.

Markets are apolitical. They just wanna make money and party. The nationalists want to fight. So it’s a lousy mix, when the Trump glow is gone.

How long will this endure?

Twelve more days is a likely guess, until the morning of November 7th. Seems fitting. We’ve obsessed over this man for two years now. Whatever happens in that election, populism will inevitably falter. It always does. That nation-state model got old fast. Markets fretted over trade. Now they worry about growth. Happy to bite the hand that fed.

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October 26th, 2018

Posted In: The Greater Fool

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