The US Economy: If They Build It

The U.S. economy continues to fire higher as evidenced by last week’s strong list of economic data. Throw on top of the potential for a trillion dollars of infrastructure spending, a trillion dollars of cash repatriation from overseas, several hundred billion in corporate and personal income tax savings, and whatever other savings that can be gained from reduced government regulation, and you have the makings for a growth acceleration to rival the new Model S P100D. (Zero to 60 mph in 2.4 seconds.) So, there should be absolutely no wonder why Treasury yields are ripping higher and pulling the U.S. dollar with it. The markets are now positioning for a 100%—certain FOMC hate hike in December and should get ready for a few more in 2017 as the government, consumers and corporations get busily spending.

The biggest question in most minds is whether any fiscal conservative in Congress will stand up and question how much is being spent. I think that it would be difficult for any member of Congress to question those swing state voters who want jobs created now. So, watch the RRR line up and pass everything today and figure out how to pay for it tomorrow. Barron’s had a good idea to push out the Fed’s maturities to 100 years, which is a great idea given this new fiscal environment that we are in. Interest rates are going higher for now; might as well lock in for the long term even though it will cost you more in the short term.

I see some portfolio managers and strategists that want to fight this tape and bet against a Trump presidency and all this spending. I think that this would be a risky strategy. Especially when you know that the spending, repatriation and tax cuts will happen without much of a fight. Also, the Trump jawboning is beginning to work its way into the C-suite when you hear that Apple (NASDAQ:AAPL) is now asking its suppliers to come up with iPhone U.S. manufacturing plans and Ford is changing its mind on the manufacturing location for one of its car models. Again, you may not be happy with the election results from 2 weeks ago, but you can’t bet against what is likely on the table and this current market momentum. Think about your investment portfolio first and consider what Tom Hanks said over the weekend: “This is the United States of America. We’ll go on. There’s great like-minded people out there who are Americans first and Republicans or Democrats second… I hope the President-elect does such a great job that I vote for his re-election in four years.” Now if only the market bulls could convince Kellyanne to cancel the Trump twitter account.

Steve Bannon has the ear of the President-elect. This will have a direct effect on your portfolio…

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Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.

Hopefully you have already read Ray Dalio’s change in thoughts last week. If you want to hunt for the largest seller of Bonds in the world, I’d start by looking at Bridgewater…

…whereas the previous period was characterized by 1) increasing globalization, free trade, and global connectedness, 2) relatively innocuous fiscal policies, and 3) sluggish domestic growth, low inflation, and falling bond yields, the new period is more likely to be characterized by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively stimulative fiscal policies, and 3) increased US growth, higher inflation, and rising bond yields. Of course, there will be other big shifts as well, such as pertaining to business profitability, environmental protection, foreign policies/alliances, etc. Once again, we won’t go into the whole litany of them, as they’re well known. However, the main point we’re trying to convey is that there is a good chance that we are at one of those major reversals that last a decade (like the 1970-71 shift from the 1960s period of non-inflationary growth to the 1970s decade of stagflation, or the 1980s shift to disinflationary strong growth). To be clear, we are not saying that the future will be like any of these mentioned prior periods; we are just saying that there’s a good chance that the economy/market will shift from what we have gotten used to and what we will experience over the next many years will be very different from that.

The economic data was great last week. Look at this long-term chart of Jobless Claims…

This morning, we learned that initial unemployment claims fell to 235,000 last week (seasonally adjusted). That’s the lowest since November 24, 1973 when it hit 233,000. Of course, the country’s population is more than 50% larger than it was 43 years ago. (CrossingWallStreet)