I'm just going on record here. I sent this message to a finance professor at NYU. I share it here to be on record about my concerns in the upcoming years. Please add your 4 year predictions here if you like. Might be fun to look at down the road.

Professor, thanks for the great commentary. My own view is that recent market movements are transitory and based on preconceived notions about what a Trump Presidency would look like. They are about as valuable as the preconceived notions about what the election would be like. The real impacts of a GOP hegemony in the Federal Government won't be seen for years. In my view the signs point to negative interest rates in America from both fiscal policy and monetary policy impacts.

On fiscal policy, once you understand that low interest rates are a symptom of income inequality the current situation makes a lot of sense. If you look at a 100 year chart of income inequality and Treasury rates the negative correlation is unmistakeable (both hitting extremes in the 1930s, 1970s, and now).

The GOP's proposed policies of huge income tax cuts on the wealthy combined with cuts to benefits (like Obamacare) will push more money into the hands of investors and out of the hands of consumers. With inadequate demand, equity growth will be a challenge (equities will already be around record levels) and so more money will flow to the bond market driving rates down. One potential moderation of this would be a large infrastructure / jobs bill, however I don't think the GOP Congress will pass this without equal cuts elsewhere.

On monetary policy, there will be a push to drive up interest rates by many. There is a broad view (I've heard as almost concensus at places like Bloomberg Radio) that if the Fed would just raise rates it would benefit portfolios and spur the economy. This is an incredibly myopic and uneducated view of how the economy works but I think it will be the view held by those taking power in Washington DC. It will be interesting to see if Fed Chair Janet Yellen is allowed to keep her post. Ultimately, the more Washington tries to push up interest rates at the lower end, the more they will come down at the higher end.

Based on these factors, I predict negative interest rates in America before the end of Trump's first term. I have already made some minor adjustments to my portfolio.

This wasn't in my note but I will also add that the deficit will be way up but nobody will be talking about that because people only care about the deficit when a Democrat is President.

Negative interest rates shouldn't be a thing. Basically a "maintenance fee" on your savings account?

Total violation of my safe space.

dajo9;842759943 said:

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I'm just going on record here. I sent this message to a finance professor at NYU. I share it here to be on record about my concerns in the upcoming years. Please add your 4 year predictions here if you like. Might be fun to look at down the road.

Professor, thanks for the great commentary. My own view is that recent market movements are transitory and based on preconceived notions about what a Trump Presidency would look like. They are about as valuable as the preconceived notions about what the election would be like. The real impacts of a GOP hegemony in the Federal Government won't be seen for years. In my view the signs point to negative interest rates in America from both fiscal policy and monetary policy impacts.

On fiscal policy, once you understand that low interest rates are a symptom of income inequality the current situation makes a lot of sense. If you look at a 100 year chart of income inequality and Treasury rates the negative correlation is [U]unmistakeable [/U](both hitting extremes in the 1930s, 1970s, and now).

The GOP's proposed policies of huge income tax cuts on the wealthy combined with cuts to benefits (like Obamacare) will push more money into the hands of investors and out of the hands of consumers. With inadequate demand, equity growth will be a challenge (equities will already be around record levels) and so more money will flow to the bond market driving rates down. One potential moderation of this would be a large infrastructure / jobs bill, however I don't think the GOP Congress will pass this without equal cuts elsewhere.

On monetary policy, there will be a push to drive up interest rates by many. There is a broad view (I've heard as almost concensus at places like Bloomberg Radio) that if the Fed would just raise rates it would benefit portfolios and spur the economy. This is an incredibly myopic and uneducated view of how the economy works but I think it will be the view held by those taking power in Washington DC. It will be interesting to see if Fed Chair Janet Yellen is allowed to keep her post. Ultimately, the more Washington tries to push up interest rates at the lower end, the more they will come down at the higher end.

Based on these factors, I predict negative interest rates in America before the end of Trump's first term. I have already made some minor adjustments to my portfolio.

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You have an incredible talent for writing your assumptions/opinions as factual certitude. I still can't figure out if you are consciously aware of that.

Is there only one cause of low interest rates (the only one you mention income equality)? I'll submit its a little bit more complicated than that. In a technical sense, interest rates are set by the fed and other central banks, and income equality is one of many considerations (and I'm guessing not a very significant one).

We have had inadequate demand for the past 8 years. Equity growth has not been a challenge. There are lots of other factors driving equity growth, including tax policy and the comparative strength of other economies.

What I've learned over the years (and yes I was an Econ major at Cal):

Economics is more of an art, than a science. This is because each conclusion/prediction is based on a multitude of simplistic assumptions (of which your post contains many) about facts and dynamics that are poorly understood by economists (and others). Moreover, there are often unforeseen intervening events (such as wars/political events like brexit) or new factors not previously considered. For example, your post doesn't mention (and it appears you have not considered) a variety of other Trump policies that will have economic effects (e.g., stimulating revenue neutral revisions to the tax code, trade policy and/or eliminating regulatory restrictions including on energy).

Psychology matters. As I'm sure you know, there is a lot of study about markets with incomplete information and, in addition to that, we have no idea what Trump's election will mean to consumer and/or business confidence.

Presidents don't have as much control over the economy as lots of people assume. Policy matters, but there are a ton of other factors that a president doesn't control.

The economy has always run in cycles of growth and recession. Recessions, in part, are a consequence of imbalances and inefficiencies that inevitably develop in the market. Government policy matters, but those policies will never be able to avoid recessions/ensure growth.

"Economists" predictions and recommendations are, to varying degrees, biased by their political views. There will often be subjective choices endemic to policy choices (growth v. deficits v. inflation or income equality v. growth). Paul Krugman (a Nobel winning economist) is so blinded by his bitterness and partisanship, that he has made wildly inconsistent statements and recommendations. He is an extreme example, but all economists bring some of this to the table.

dajo9;842759948 said:

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This wasn't in my note but I will also add that the deficit will be way up but nobody will be talking about that because people only care about the deficit when a Democrat is President.

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:nono: Many people care about deficits only when a Republican is Pres. Some like me care about all deficits.

BearGoggles;842759968 said:

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You have an incredible talent for writing your assumptions/opinions as factual certitude. I still can't figure out if you are consciously aware of that.

Is there only one cause of low interest rates (the only one you mention income equality)? I'll submit its a little bit more complicated than that. In a technical sense, interest rates are set by the fed and other central banks, and income equality is one of many considerations (and I'm guessing not a very significant one).

We have had inadequate demand for the past 8 years. Equity growth has not been a challenge. There are lots of other factors driving equity growth, including tax policy and the comparative strength of other economies.

What I've learned over the years (and yes I was an Econ major at Cal):

Economics is more of an art, than a science. This is because each conclusion/prediction is based on a multitude of simplistic assumptions (of which your post contains many) about facts and dynamics that are poorly understood by economists (and others). Moreover, there are often unforeseen intervening events (such as wars/political events like brexit) or new factors not previously considered. For example, your post doesn't mention (and it appears you have not considered) a variety of other Trump policies that will have economic effects (e.g., stimulating revenue neutral revisions to the tax code, trade policy and/or eliminating regulatory restrictions including on energy).

Psychology matters. As I'm sure you know, there is a lot of study about markets with incomplete information and, in addition to that, we have no idea what Trump's election will mean to consumer and/or business confidence.

Presidents don't have as much control over the economy as lots of people assume. Policy matters, but there are a ton of other factors that a president doesn't control.

The economy has always run in cycles of growth and recession. Recessions, in part, are a consequence of imbalances and inefficiencies that inevitably develop in the market. Government policy matters, but those policies will never be able to avoid recessions/ensure growth.

"Economists" predictions and recommendations are, to varying degrees, biased by their political views. There will often be subjective choices endemic to policy choices (growth v. deficits v. inflation or income equality v. growth). Paul Krugman (a Nobel winning economist) is so blinded by his bitterness and partisanship, that he has made wildly inconsistent statements and recommendations. He is an extreme example, but all economists bring some of this to the table.

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You bring no predictions to the table. Very brave of you.

I will say, markets went up during constrained demand because the Fed was providing massive liquidity (remember quantitative easing?). The economy is stronger now but not exactly robust. The scenario I described is demand weakness and the Fed removing liquidity.

BearGoggles;842759968 said:

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You have an incredible talent for writing your assumptions/opinions as factual certitude. I still can't figure out if you are consciously aware of that.

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For human beings, it is very difficult (for most, downright impossible emotionally) to identify and question our own presuppositions and metanarratives.

I suppose it's human nature to predict the economy and culture will circle the drain when an individual/party we despise takes power. It's done by both sides when out of power, and perennially by third parties. Hoping for widespread misery in order to be proven personally/tribally right can be very cathartic.

Nasal Mucus Goldenbear;842759977 said:

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For human beings, it is very difficult (for most, downright impossible emotionally) to identify and question our own presuppositions and metanarratives.

I suppose it's human nature to predict the economy and culture will circle the drain when an individual/party we despise takes power. It's done by both sides when out of power, and perennially by third parties. Hoping for widespread misery in order to be proven personally/tribally right can be very cathartic.

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I spent decades questioning economic narratives. That's how I've come to some strong opinions now that I'm in my 40's. Everyone does predict doom when the other side takes power. People like me were right last time. Conservatives were wrong last time. That isn't just coincidence.

I would like negative interest rates. What would a refinanced mortgage rate of -.25% be like?

I have the opposite prediction as you. If Trump truly goes down the road of trade protectionism and trade wars, massive infrastructure spending, tax cuts, and increasing employment and wages for the working class, then we will likely see significant inflation. Indeed, the bond markets have reacted accordingly out of fear of future inflation.

In fact, inflation is likely the only realistic solution for getting out of our current debt burden.

And much like Smoot-Hawley in 1930, trade protectionism will only exacerbate a sputtering economy and will worsen the coming downturn. There will be dark times ahead, my friend.

Quote:

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It will be interesting to see if Fed Chair Janet Yellen is allowed to keep her post.

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The Fed is a politically independent entity. Is there precedent for a new president to force out a Fed Chairperson before their term is up?

BerkeleyChris;842759989 said:

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I have the opposite prediction as you. If Trump truly goes down the road of trade protectionism and trade wars, massive infrastructure spending, tax cuts, and increasing employment and wages for the working class, then we will likely see significant inflation. Indeed, the bond markets have reacted accordingly out of fear of future inflation.

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Why would a Republican Congress let him do any of those things? It'd basically precipitate an ideological schism.

packawana;842759991 said:

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Why would a Republican Congress let him do any of those things? It'd basically precipitate an ideological schism.

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Because of the people who voted in Trump want what Trump wants?

BerkeleyChris;842759989 said:

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I have the opposite prediction as you. If Trump truly goes down the road of trade protectionism and trade wars, massive infrastructure spending, tax cuts, and increasing employment and wages for the working class, then we will likely see significant inflation. Indeed, the bond markets have reacted accordingly out of fear of future inflation.

In fact, inflation is likely the only realistic solution for getting out of our current debt burden.

And much like Smoot-Hawley in 1930, trade protectionism will only exacerbate a sputtering economy and will worsen the coming downturn. There will be dark times ahead, my friend.



The Fed is a politically independent entity. Is there precedent for a new president to force out a Fed Chairperson before their term is up?

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Like packawana said, I think the GOP Congress will limit infrastructure spending and real trade action. I don't see changes coming that will increase employment and wages. If I'm wrong about that my prediction is wrong. But I added a caveat about infrastructure spending.

Yellen's term as Chair expires in 2018.

packawana;842759991 said:

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Why would a Republican Congress let him do any of those things? It'd basically precipitate an ideological schism.

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This is what is so morbidly fascinating about this presidency. The one major position that Trump has been the most consistent about, and for the longest time, is not the Republican position. Some of his major promises have no chance in Hell (duh).

The two most famous guys who predicted a Trump win also predict he will be impeached in his first year. While it's easy to believe the Republicans would much prefer Pence as president, it's funny how strong the feeling is that he will screw up so badly and so quickly that he may be impeached by his own party. Vegas must be putting odds on this, no?

dajo9;842759993 said:

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Like packawana said, I think the GOP Congress will limit infrastructure spending and real trade action. I don't see changes coming that will increase employment and wages. If I'm wrong about that my prediction is wrong. But I added a caveat about infrastructure spending.

Yellen's term as Chair expires in 2018.

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It really depends on how strong of a mandate Trump feels that he has, and how much he can bully the GOP congress to his will. The thing is that Trump is not actually a Republican, he is a populist. It's entirely within the realm of possibility that he could push through infrastructure spending and trade protectionism with the help of the progressive wing of the Democratic party (Sanders would be in favor of this, and he is basically the face of the Democratic party now). As far as I am concerned, he is a wild card, and I wouldn't bank on any of our historical norms applying to a Trump presidency.

BerkeleyChris;842759998 said:

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It really depends on how strong of a mandate Trump feels that he has, and how much he can bully the GOP congress to his will. The thing is that Trump is not actually a Republican, he is a populist. It's entirely within the realm of possibility that he could push through infrastructure spending and trade protectionism with the help of the progressive wing of the Democratic party (Sanders would be in favor of this, and he is basically the face of the Democratic party now). As far as I am concerned, he is a wild card, and I wouldn't bank on any of our historical norms applying to a Trump presidency.

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There will be no legislation that Paul Ryan and Mitch McConnell don't approve of. They control the calendar and the agenda in Congress.

burritos;842759988 said:

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I would like negative interest rates. What would a refinanced mortgage rate of -.25% be like?

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A negative 10 year Treasury rate would probably mean about a +1% mortgage rate for you.

dajo9;842760006 said:

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There will be no legislation that Paul Ryan and Mitch McConnell don't approve of. They control the calendar and the agenda in Congress.

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If Congress does not do anything to materially improve the lives and employment situation of the white working class that elected them into power, they will be excoriated. But first, we will see if Paul Ryan even retains his role as speaker. I suspect not.

BearGoggles;842759968 said:

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You have an incredible talent for writing your assumptions/opinions as factual certitude.

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This is how the OP read to me, too.

My predictions:
1. People fundamentally misunderstand that we are a divided country; it is folly to make big predictions on the assumption that one party will dominate policy decisions.
Our system has a way of bringing things back to the middle. And even having said that, it is simplistic to think Republicans are a unified force with a unified vision that lends itself to predictive modeling. Repubs hated Trump, embraced Trump and hated him again as his poll numbers changed leading up to the election. Such highly volatile environments lend themselves to smaller, iterative policy changes, not large policy changes.

2. History tells us there's a very high likelihood that Dem's take back at least some portion of Congress in 2 years.
To the extent we are making predictions they should be 2 year predictions. That is the amount of time the fractured Repub party has before we are back to formal divided government.

3. Interest rates will go up.
There's nowhere else for them to go; the fed indicated before the election they'd go up .25 to .50 basis points at the next meeting. Classic case where forces are already at play to make something happen and it gets laid at the doorstep of the next guy.

4. National debt will go up.
Both parties are filled with feckless members who's primary interest is gaining and retaining power. This means they have substantial incentives to spend money. The population never votes in a manner which indicates the national debt will be a factor in the next election; the political class has no disincentive against increasing the national debt. The rate of the increase is TBD.

5. Repubs probably succeed in replacing Scalia with a Strict Constructionist. Repubs may get lucky and replace Ginsburg and/or Breyer with more SC's. See the 2 year window.

6. The thing we should truly be worried about are the nukes (I am being serious).
The institutional factors which work to minimize the President's ability to enact sweeping policy changes arguably don't exist regarding use of force.

BerkeleyChris;842759998 said:

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It really depends on how strong of a mandate Trump feels that he has

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He has zero mandate, but he has both houses of Congress so he'll be able to do a lot of what he wants (so long as it doesn't contradict what Congress wants to do).

dajo 9,
First, thanks for your piece, hope it survives on page one for a couple of days, an excellent, Cal worthy topic.

I predict if the tax cuts Trump proposes are legislated (no reason to think they won't be, they are central to Ryan's playbook) there will be an enormous increase in mergers and acquisitions, both of which will nullify trickle down "growth", which Republicans traditionally like to tout as justification for tax cuts for the rich. Why build new plants or service outlets when you can buy them, same for employees (employees are a cost of doing business that must be kept as low as possible).

Trump has been, at best, vague about wage growth. First stating that Americans were over paid and wages needed to be brought down to compete with China (can't believe he really did not understand that differential). Later he said maybe wages needed to be raised but nothing further, in other words, they should be subject to the market. Even if we were able launch massive retraining programs which would require years, significant public support for both education and transporting people to regions where industry growth is a logical investment focus, none of the economic stimulation would happen quickly. Moreover, a Republican congress would not support such expenditures in the public realm, inconsistent with their "pull yourself up by your own bootstraps" meme.

Share prices may experience modest growth as the tax cut fueled cash flows in, possibly minor dividend growth, but it will also fuel a high level of short term trading, amounting to betting from quarter to quarter, as "buy and hold" becomes totally fartless.

Bottom line for me: 1) no reduction in income inequality; 2) little wage growth; 3) emerging middle class markets in China, India, etc. targeted for "demand growth" in preference to our own 4) public burden for maintaining shrinking US middle class (medical costs, housing, infrastructure) reduced to meaningless impact levels in keeping with tax cuts for the rich focus of supply side.

1.) I don't see the rich putting money in bonds at 2%. This wil be more like the 80's- housing, second homes,boats, art, shopping malls
2) Greater defense spending because this is what they do
3) Tech slump. They backed the wrong horse and Trump will show them no favors. There will be a move to repatriate profits and possible tariffs
4.) Counter to this and opposed by the GOP, there will be a push across the country to raise the minimum wage to $15. It's already happened in both red and blue states. This will do damage to corporate profitability, sink the Ubers of the world and increase inflation
5.) The elastic breaks and we start over again.

dajo9;842759980 said:

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I spent decades questioning economic narratives. That's how I've come to some strong opinions now that I'm in my 40's. Everyone does predict doom when the other side takes power. People like me were right last time. Conservatives were wrong last time. That isn't just coincidence.

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Easy to say one predicted something after it happened....I am sure you are a bright person but you make it sound like only non conservatives were right last time? Give me a break. I know a very smart CFA who is conservative who predicted the last crash in housing way before it happened.

BerkeleyChris;842759998 said:

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It really depends on how strong of a mandate Trump feels that he has, and how much he can bully the GOP congress to his will. The thing is that Trump is not actually a Republican, he is a populist. It's entirely within the realm of possibility that he could push through infrastructure spending and trade protectionism with the help of the progressive wing of the Democratic party (Sanders would be in favor of this, and he is basically the face of the Democratic party now). As far as I am concerned, he is a wild card, and I wouldn't bank on any of our historical norms applying to a Trump presidency.

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Power is where power goes as LBJ famously noted. The TPP is dead and neither Trump or the Democrats will revive it. Trump is if nothing else a very astute politician. I really can't see him leaving nothing on the table for his base( which are the blue collar voters) not the Republican establishment. If he reneges on infrastructure he's in trouble and as you say the progressive wing will support him.

GB54;842760036 said:

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Power is where power goes as LBJ famously noted. The TPP is dead and neither Trump or the Democrats will revive it. Trump is if nothing else a very astute politician. I really can't see him leaving nothing on the table for his base( which are the blue collar voters) not the Republican establishment. If he reneges on infrastructure he's in trouble and as you say the progressive wing will support him.

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Agree mostly, though I believe Trump's infrastructure proposals will be heavily influenced by a mutual desire (Trump and Ryan) to have them privately built in which case the builders will recover their investment through tolls and fees levied on users. This means added costs to the middle class to get to any jobs available not in their backyard, if they are available at all, higher internet access fees on the pretext that speed of service is upgraded, high speed rail routes based only on highest level of immediate return (LA to Las Vegas) if they are done at all. Trump will penalise CA for not voting for him.

GB54;842760036 said:

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Power is where power goes as LBJ famously noted. The TPP is dead and neither Trump or the Democrats will revive it. Trump is if nothing else a very astute politician. I really can't see him leaving nothing on the table for his base( which are the blue collar voters) not the Republican establishment. If he reneges on infrastructure he's in trouble and as you say the progressive wing will support him.

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My understanding was that the TPP was an agreement with the other asian countries to keep China in check. I think China is happy that TPP is dead. I don't care one way or the other. Prices going up around the world that keeps consumption in check is actually the best way keep climate change in check.

BerkeleyChris;842759989 said:

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In fact, inflation is likely the only realistic solution for getting out of our current debt burden.

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I think this is the one prediction you can bank on. May not happen immediately, but I don't think there's any combination of possible economic growth and tax increases that can solve the actual debt picture, which includes tens, if not hundreds, of trillions in unfunded liabilities for Medicare, Social Security and governmental pensions. I've told our kids to take out the longest mortgages they can and to hang on to the real estate were going to leave them.

burritos;842760051 said:

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My understanding was that the TPP was an agreement with the other asian countries to keep China in check. I think China is happy that TPP is dead. I don't care one way or the other. Prices going up around the world that keeps consumption in check is actually the best way keep climate change in check.

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TPP is dead but if Trump really does scale back on foreign policy which he's been mostly consistent on so far, then that's bad news for China because it means multipolarity. Japan would begin rearming itself and a power struggle over Asia would commence.

Goobear;842760032 said:

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Easy to say one predicted something after it happened....

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You say to the guy who started the thread with a straightforward unorthodox prediction

BerkeleyChris;842759998 said:

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It really depends on how strong of a mandate Trump feels that he has, and how much he can bully the GOP congress to his will. The thing is that Trump is not actually a Republican, he is a populist. It's entirely within the realm of possibility that he could push through infrastructure spending and trade protectionism with the help of the progressive wing of the Democratic party (Sanders would be in favor of this, and he is basically the face of the Democratic party now). As far as I am concerned, he is a wild card, and I wouldn't bank on any of our historical norms applying to a Trump presidency.

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Trump shrewdly marketed himself as a populist, but some poor slob in Michigan is in for a shock when he finds out that a New York City billionaire is a New York City billionaire is a New York City billionaire.

tequila4kapp;842760012 said:

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This is how the OP read to me, too.


2. History tells us there's a very high likelihood that Dem's take back at least some portion of Congress in 2 years.
To the extent we are making predictions they should be 2 year predictions. That is the amount of time the fractured Repub party has before we are back to formal divided government.

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Normally this would be spot on however 2018 is very different. If you look at the Senate races in 2018 there are likely only 2 potential flips to the Dems. That would create a tie and leave the GOP in charge. Meanwhile there are many Dems running in red states who are vulnerable.

In the House, GOP gerrymandering has created an environment where the GOP holds Congress even if people vote for Dems. Such was the case in 2012. I've seen estimates that Dem's would have to win about 58% of the Congressional vote to retake the House. I think it's most likely the GOP holds Congress through 2020.

GB54;842760031 said:

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1.) I don't see the rich putting money in bonds at 2%.

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The rich have been buying bonds at 2% for 5 years now. The first time somebody told me rates would go up because they have no place else to go was about 2004 when rates were about 4.5%. I believed the guy.

dajo9;842759948 said:

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This wasn't in my note but I will also add that the deficit will be way up but nobody will be talking about that because people only care about the deficit when a Democrat is President.

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All I heard the entire Bush administration was how big the deficit was and how much Iraq was costing... What are you talking about?

Phantomfan;842760167 said:

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All I heard the entire Bush administration was how big the deficit was and how much Iraq was costing... What are you talking about?

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Really? You didn't here it from Congress or Fox News or Facebook. You trying to tell me CNN was worked up about deficits a decade ago? Lol.

Big C_Cal;842760128 said:

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Trump shrewdly marketed himself as a populist, but some poor slob in Michigan is in for a shock when he finds out that a New York City billionaire is a New York City billionaire is a New York City billionaire.

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Yup. America just fell for a big con.