Before I dive in, note that if you have read my missives in the past you realize I am no big fan of our current economic state built on a house of cards supported wholly by low interest rates and earlier by QE. I think the Fed has done us a disservice of propping up the economy, including many companies that deserved to die. So if we enter into a recession right after the Don takes office it is not on him. But given his intent to drop taxes and do fiscal stimulus, I do not expect an immediate recession, just a much worse one after he kicks this can down the road.
http://www.zerohedge.com/news/2016-11-28/welcome-hooverville
You see our economy is limping and my solution to the problem is quite simple. It is called a recession.. We are on the threshold of another recession. Recessions are the washing machine of the economy. They clean out the crap, the companies that do not deserve to survive, and thereby allow the other companies that are struggling against low interest rate debt funded zombie companies to finally break loose of the chains and survive. The economy is bogged down with debt and worthless companies built on debt and we need a good recession to wash out the junk. And when - not if - that occurs, that is when Donald needs to do his infrastructure program and tax cuts - NOT NOW. So my one big issue with Donald is timing on some of his plans I like. He needs to save his ammo for when it makes sense and not use it all now, before a recession, to prop up dead companies further and exacerbate the recession that is coming. If he does it all now, he will have no ammo when he needs it, and worse yet he will shoulder us with even more extreme debt at significantly higher interest rates making recovery a very slow and painful process.
Trump wants to slash taxes for corporations to benefit domestic companies and attract more business to the U.S. He wants to impose trade tariffs and tear up existing trade deals. He opposes any significant increases to the minimum wage. He wants to deport millions of illegal immigrants to improve the job availability for Americans. He wants to punish China for monetary manipulation. He wants to spend a trillion or more over 10 years on infrastructure to spur more jobs and reduce unemployment. He wants to increase military spending. He wants the Fed to keep interest rates low. And several other things all of which supposedly be paid for by an improved economy. Let's get a tad more perspective on some of these in the overall scheme of things. I do not intend to tackle them all in this one post, but will cover some points now and others as I go.
Debt is Gonna' Come Knocking
We have already seen interest rates climb significant since the Don got elected and if he does half of what he says, they will climb significantly more, which adds even more fuel to the Feds desire/need to increase interest rates, as we recently saw with their latest boost.http://www.zerohedge.com/news/2016-11-22/stocks-have-priced-nirvana-where-debt-doesnt-matter-best-luck
And debt will only be exasperated by increasing rates, which seem inevitable. You see the interest rates hurt both the government (i.e. taxpayers) and corporations, both of which have a pile of debt. The U.S. is pushing $20 trillion and servicing that debt at historic low rates has been not that big of a deal. But if the rates increase to around 5%, then we can be looking at around a trillion dollars in interest a year just to service existing debt. Add a few trillion onto the pile for tax reductions and infrastructure and the government's hands are financially tied and it will not be able to do much once the recession does hit. But hey, didn't Donald say he was going to reduce debt?
https://www.bloomberg.com/news/articles/2016-11-22/fed-hike-is-certainty-for-bond-traders-as-market-odds-reach-100
http://www.forbes.com/sites/leesheppard/2016/11/13/trumps-tax-plan/#526ff1c01110
http://fortune.com/2016/10/17/donald-trump-tax-plan-jobs/
We Are Ignoring the Participation Rate
So let's look at some facts here. First, unemployment is at 4.9%. Now this is pretty clearly due to two factors. Number one, the participation rate, i.e. those wanting or looking to work, is down to 62.8%. Number two, service sector jobs.http://cnsnews.com/news/article/susan-jones/
The participation rate means nearly 100 million people who could or should be working are not even looking. This is the lowest participation rate in decades. And it is weighted toward younger workers (or non-workers as it is). So why aren't they working? There are indeed plenty of jobs out there, but they are mostly service sector low paying minimum wage type jobs, not the factory jobs. The former has grown substantially under Obama and the latter has gone down. One way to increase the participation rate is to increase minimum wage for these service sector job, but Trump is against doing so to any significant degree. The other way is to create more higher paying jobs, which Trump is obviously focused on doing.
Now it may seem obvious that if we increase the number of higher paying jobs in the U.S., like factory jobs, then the participation rate may go up. So let's think about this, you give companies in the U.S. tax incentives to stay here, you charge them tariffs if they move jobs overseas, you give them trade protection by tearing up trade deals and imposing tariffs on foreign companies and you expect more higher paying jobs.
Well, a lot of U.S. companies export their products overseas and tearing up the trade deals will lead to tariffs against them by foreign countries, making it harder for them to sell their wares. Moreover a strengthening dollar will increase the effective price of U.S. produced goods sold overseas. The yen, for example, has fallen against the dollar by 11% since Trump got elected, meaning Japanese produced goods are 11% cheaper in the U.S. and U.S. produced goods are 11% more expensive in Japan. How is that going to help U.S. companies that do a lot of exporting? The FANGS had some really bad days following Trump's election, though they have recovered since. And U.S. companies are not just going to shut down foreign plants. They will still use those to manufacture products for foreign markets and not have to pay a U.S. tariff. There may be incentives to build more in the U.S. for the U.S. market, but that will be limited in my view because the exchange rates will give plenty of incentive to produce overseas, even if there is a tariff.
Look at Carrier Corp. Trump claims victory in convincing them to stay in the U.S. and not build a plant in Mexico, thereby saving 5000 U.S. jobs. Well, this victory cost the Indiana taxpayers $7 million in tax breaks to Carrier and Carrier promptly raised its prices after the decision. Yep, a real win/win there.
Getting back to the participation rate, I note a significant percentage (based on the age of those not participating) of the participation rate is simply people not wanting to work.
http://www.zerohedge.com/news/2016-12-21/number-millennials-living-home-mom-reaches-75-year-high
People who would just as soon stay home in their parent's basement or live off welfare. Getting these folks to take any new factory jobs or infrastructure jobs is going to take some pretty high wages. But rest assured, factory wages (and service sector wages) will have to go up as we are shipping a few million illegal immigrants out of the country and building a wall to keep them out, so companies that are already dealing with a 4.9% unemployment rate will be desperate to get workers and have to pay significantly more. Trump may be wholly against raising the minimum wage but his economic plans will do plenty to raise wages, and prices, and inflation.
To the extent companies cannot raise prices to offset the increased wages because foreign companies have a massive exchange rate advantage, there goes those tax incentives out the door (assuming companies do not simply spend the saved tax dollars on dividends and buybacks like they did with money borrowed under the Feds low rates). Prices will also have to go up, increasing inflation, increasing interest rates, increasing dollars needing to service debt and decreasing profits. Yep, sounds like a good plan.
Don't get me started on the whole Social Security picture and how those illegal aliens, if we make them pay taxes instead, are actually quite beneficial to aiding our terrible demographics as the baby boomers retire.
I think this covers a couple of the major points. More to follow, including what will other countries do to us when we tear up treaties and impose tariffs and does a country that already spends more on the military than then next 10 countries combined really need to spend more, especially when we are becoming more isolationistic in our foreign relations?
1/3/17 Update
Following up on the above, here is a nice piece by Lance Roberts, who covers well the debt piece of the pie and what Trump faces. Unfortunately, Trump's infrastructure, tax cut and military spending plans will increase debt, which I fear will come back to bite us worse when (not if) the recession does come. And at the government level, by the way, a lot of our debt has been purchased over the years by countries that Donald is likely going to piss off or already has. Always a good plan.http://seekingalpha.com/article/4033815-trumps-4-percent-gdp-will-remain-elusive?ifp=0&app=1
