Year 5 of Bizarro World
This may be the laziest equity market I’ve ever experienced. Worse than 1999/2000, worse than 2021. The wild swings in reaction to Trump trade policy news in the absence of fundamentals don’t sit well with me. Such market volatility does not suggest healthy capital markets.
The equity market is 100% focused on Trump trade policy when it is the spending of the Trump Administration in 2020, The Biden Administration and 2021-2024, and the $2.0-2.5 trillion fiscal 2025 deficit trajectory of the current Trump administration that ought to have markets concerned (to say nothing of interventionist monetary and fiscal policy, but investors don’t seem to care that the capital markets are no longer private markets).
The U.S. is a debt-addicted economy with $36 Trillion in Treasury debt outstanding, another $70 Trillion in unfunded liabilities (those Social Security and Medicare/caid benefits will never be paid out close to “full”), and a $2.0-2.5 Trillion fiscal ‘25 deficit suggest that the 10YR yield ought to be significantly higher - certainly north of 5% - and that equities ought to be significantly lower.
The fiscal and monetary white knights can print Dollars all day to prop up the economy and credit markets. However, there is a steep price to pay in the form of a devalued Dollar. Look no further than recent history. The cost of goods and services at real-world prices have certainly increased beyond the artificial CPI measure, thereby significantly devaluing the Dollar (and slowing the economy in real terms) since 2020.
At the risk of sounding like a broken record, I believe that Nominal GDP less real-world price increases of goods and services since 2020 equal a Real GDP figure that would show a flat-to-down U.S. economy, if in fact CPI/GDP deflator was calculated in an honest manner rather than being polluted with substitution and hedonics.
There is no “win” here for Powell or Trump. The fiscal 2025 10% discretionary budget cut ought to have been allocated toward paying down the public debt, rather than passing on those cuts as a 10% budget increase to the Department of Defense.
The fact that the U.S. is standing up a Federal crypto reserve (thank David Sacks for that waste of capital), and a U.S. Sovereign Wealth Fund (Scott Bessent should know a country theoretically can’t operate such a fund without large fiscal surpluses), demonstrates that Washington D.C. is not serious about dealing with America’s greatest threat - its dire fiscal situation.