Market Watch - November 29, 2016
Following a steep sell-off shortly after the confirmation of Trump’s victory, the market has reached several new all-time highs. The market is smarter than any of us, comprised of millions of pieces of information from millions of people and corporations, coalescing all of that information into the price of the market. While sometimes wrong in the short run, the market is never wrong in the long-term.
Markets are driven by hope and fear, and this market is telling us that currently there is “no fear” of a significant market decline. More importantly, the market looks ahead, and is telling us the economic future of the United States is outstanding.
Question: What is the market’s underlying impedance for such a positive economic outlook?
Answer: There are numerous factors, and here are some major ones:
(1) We have a record number of illegal workers in this country, and we have a record number of welfare recipients; for example, food stamp recipients equal 47 million people. The replacement of jobs held by illegals, with U.S. citizens who are currently receiving welfare, will reduce unemployment, reduce welfare payments, and capture cash earned in this country that was formerly sent out of the U.S. by immigrant workers.
(2) Tax laws are proposed to change, allowing for tax-free repatriation of more than $2 trillion of U.S. Corporation’s earnings overseas. Coupled with $2.5 trillion of currently available unloaned funds in commercial banks, such repatriation would be a “free-market” way to keep interest rates down. More money will be competing for loans, causing lenders to keep rates low until demand catches up with loanable funds available. This provides for natural economic forces controlling interest rates rather than interest rates being controlled by the imposition of government rules or the policies of the Fed.
(3) Restore integrity to the State Department, the Treasury Department, the Justice Department, and the Commerce Department, and clean up loose ends in the voting and immigration laws. These types of endeavors give great confidence to business, which is affected mightily by government legislation and behavior. Trump’s economic team indicates an interest in improving all departments of government because, in their opinion, such improvement will provide the economic comfort towards government that businesses need to continue to take risk, expand, and employ more people.
(4) A drastic revamping, or repeal, of the Affordable Care Act. That will give relief to both employers, and employees, plus, most people do not know this, but on January 1, 2016, because of the provisions in the Act, there was a very large tax increase, which has been enacted, that may be repealed.
The market has priced in the possibility of the above, plus many other new administration proposals, which are deemed “good” for the long-term U.S. business outlook.
Question: Since the market is already at record levels under Obama, should credit be given to that administration for the current favorable economic circumstances in which we find our country?
Answer: It could, but the new administration will have challenges because of debt created by Obama. It’s important to realize there are more academics in the Obama administration, which have never worked in the private sector, than any other administration in history. By their insistence in so much new debt (“stimulation”), and re-distributing it strictly in the form of welfare, the Obama Administration added $10 trillion to the national debt, which promoted tremendous new hiring in this country over the last eight years. However, by a ratio of 14:1, the hiring was government jobs vs. private sector jobs until 2014, the latest statistics available. That increase in employment has driven the government’s budget much higher. If the Trump administration does what they have promised, government employee growth will pretty much come to a standstill, providing more cash in the economy available for hiring in the private sector. That cash should add to the national tax base, providing some of the extra funds needed to pay interest costs on this new $10 trillion of Obama Administration debt.
Economically, using Keynesian logic of creating huge amounts of public debt to “jump start” a sluggish economy, the Obama Administration debt creation DID get the economy going. Now, to see Keynesian logic through, we need to slow the growth of government and encourage growth in the private sector so all of these new government expenses can be paid for by additional taxes from business expansion.
Question: Mentioned above is that people may not have “fear” that the markets will react poorly over the next few years. Is there “hope” in there?
Answer: There is. Almost 42% of our GDP is a result of government spending. Government growth will probably slow down, leaving more cash in the private sector for investment. That is good for jobs. The non-participation rate in the labor market is the 2nd highest in 40 years. That could come down substantially. We have had, unbelievably, seventy-three successive months of job growth, and while much of it was government jobs, future jobs are likely to be mostly in the private sector. Private sector growth promotes economic growth. Public sector growth drains money from the private sector, and is therefore economically unproductive; and many times, economically negative. Trump has promised to spend $1 trillion on infrastructure, money for which is already in various trusts like the Highway Trust Fund. That should produce many private sector jobs. Home ownership is the cheapest it has been in our lifetime. Renting is twice as expensive for renters as owning a home is for homeowners because of the low cost of interest. The probability of continuing, low, long-term interest rates provides huge opportunity for people to buy their own homes. The housing market is currently exploding, and the probability of continuing future strength looks bright.
Lastly, Trump has pledged to rid this country of troublemakers who have sought “amnesty” from other political situations. To see that America is not going to make the same mistakes the European countries have, is hopeful. To feel safe is something Americans heretofore have taken for granted.
All of the above sends a feeling of hope to people who are looking to improve their lives.
Conclusion
Economic growth in the United States has been slowed the last several years to less than 2% annually. The $10 trillion of stimulation used for welfare was financed through government borrowing. None of the $10 trillion was invested in any assets that could return cash in order to pay for the new debt. Currently, too much cash is needed to service debt. Other negative economic indicators persist: one out of 7 Americans are on Food Stamps; adjusted for inflation, U.S. family income is down 8.5% from 2000; American men without paid work is 32%, up from 19% fifty years ago.
Putting all of these economic facts into the pot, yet seeing the market establishing all time highs on a weekly basis, indicates the American people might be getting a change in administrations at just the right time to save us from a financial calamity. Further public debt creation could leave us with so much debt that it simply could not be amortized. The new administration has made economics, and not a social agenda, their priority. The market is telling us that such a change has created a rosy outlook for the economy over the next several years.
A word of caution is due regarding investing in the stock market at this time. The market is over priced with P/E ratios 50% higher than average. A market selling at historical PE ratios would be priced at around 12,500, instead of 19,200 points. Yields on stocks remain low. Since 2007, the number of families participating in the stock market has been reduced from 65% to 52%. Real Estate and savings accounts have been the benefactors of this 25% drop in families no longer invested in the market. At these price levels, investors seem more cautious about getting into the market than they have been in the past.
Even though times are good, at these price earnings ratios, it takes many more years to receive a return on money invested than in the past, particularly with the economic impact of low dividend yields included. While the market is vital, and strong, it’s not a bargain. An investor’s best bet is to enjoy the ride and be very selective about further stock commitments..
Carpe Diem.
George Rauch
November 29, 2016
