Monday, September 18, 2017

Trump's Stock Market?

This is truly an historic stock market.  Since November 8th, 10 months ago, the broad market has risen about 20%.  But why?

Analysts will say we are in an unusual time of low interest rates, cheap oil, relative peace, and technological advancement.  True enough.  But those were all true before November 8th.

To be clear, we had already been in a multi-year bull market leading up to the election.  But instead of continuing on the same slope, or changing direction, stocks have been rising at an even higher rate under Donald Trump.  No serious person can say this change in slope has nothing to do with Donald Trump.

But there is a paradox in all this:  If stocks jumped immediately after the election of Donald Trump, why are they continuing to rise on their new trajectory now that his congressional agenda has hopelessly stalled?  You'd think the market would be savvy enough to see that Donald Trump has almost no congressional allies on either side of the aisle and will not be able to accomplish anything of significance through normal congressional order.

Apparently, the market doesn't care.

To the naked eye, and to the founders, ours is a government of co-equal branches that make, enforce, and interpret laws.  The economy is impacted to the extent those laws interfere with or facilitate commerce.  

But under a microscope it really doesn't work that way anymore.  Today it is regulations, executive orders, and Fed policy more than laws that run the economy.  Congress, Chuck Schumer, Nancy Pelosi, Mitch McConnell and Paul Ryan are mostly just noisy bystanders.  Even the judicial branch is powerless because they have allowed this overreach for decades.

As government has assumed vast powers over every aspect of life in the U.S., more and more of that power has ended-up with one branch... the executive.

Donald Trump and his appointees have been quietly and effectively rolling back harmful regulations and executive orders.  During the campaign Trump promised to cut two regulations for every new one, and he is keeping that promise.  The markets understand the Trump agenda doesn't need Congress.

Even taxes, which are specifically enumerated to Congress under the Constitution,  are largely under the power of the executive.  

To the naked eye, and to most economists, it is marginal tax rates that have the most economic impact.  Economists endlessly discuss how best to structure a "progressive" and "fair" tax system. How much should we tax the rich, and how much should we tax the middle class, etc?  These are actually not economic questions at all in the long run.  They are political.

Under a microscope, or in this case more accurately panning out, it is total government spending that represents the true tax on a country.  If we borrow or create new money to help pay for that spending it still represents a tax, albeit a delayed one.  Total government spending and what value is obtained for those dollars has true economic impact, not what tax rate is collected from any one individual or class of individuals.

Modern Presidents have vast power over quite a bit of government spending and what value is obtained for each dollar.  The markets understand that Donald Trump is and has always been a rather frugal operator.  They expect him to do the same as President.

Markets move in both directions on countless variables, but as long as everything stays the same (wink, wink), expect the Trump market to continue to outperform.  

We're not supposed to be a one branch economy, but that's what we've become.

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