November 14, 2016, 4:45pm EST
We talked last week about the Trump effect on stocks. With a new President promising aggressive growth polices and a supportive Congress in place to make it happen, the Trump plan is now being coined as Trumponomics.
As we discussed last week, the markets are reflecting this hand-off, from a Fed driven economy to a pro-growth government driven economy, positively — pricing in a period of hot growth. And it couldn’t come at a better time — in fact, it may come at the perfect time.
The Fed has been able to manufacture stability but not demand and inflation. Fiscal stimulus is designed to fill that void — to boost aggregate demand and inflation. That’s why the bond market has shifted gears so dramatically, now reflecting a world with a trillion dollar infrastructure spend on the table, tax cuts, deregulation and incentives to get $2.5 trillion of U.S. corporate capital repatriated. Prior to last week, despite all of the best efforts from global central banks, and a Fed that was telegraphing a removal of emergency policies, the bond market was reflecting a world that was in depression, with the 10-year yield well below 2% in the U.S. and negative rates throughout much of the world. Today the U.S. 10 year traded above 2.25%, returning to levels we saw last December, when the Fed made its first post-crisis rate hike.
As we’ve discussed, growth has a way of solving a lot of problems, including our debt problem. Politicians and economists love to scare people by emphasizing the enormity of our debt (close to $20 trillion). But our debt size is all relative — relative to the size of our economy, and relative to what’s going on in the rest of the world.
Take a look at this table…
| General Government Gross Debt as % of GDP | |||
| 2007 | Latest | Change | |
| United States | 63% | 104% | 65% |
| United Kingdom | 44% | 89% | 102% |
| Japan | 187% | 229% | 22% |
| Italy | 103% | 132% | 28% |
| Germany | 64% | 71% | 11% |
| Canada | 64% | 92% | 43% |
Source: Billionaire’s Portfolio, TradingEconomics.com
You can see, in a major economic downturn, debt tends to rise. And it has for everyone. The downturn has been global. And the rise in debt has been global.
The fears that a big debt load will lead to a dumping of the dollar, hyper-inflation and runaway interest rates don’t fit in this picture of a broadly weak recovery from a paralyzing global debt bust. Coming out of the worst global recession since World War II, inflation hasn’t been the problem. It’s been deflation. Inflation will be a concern when the structural issues are on the mend, employment is robust, confidence is high and the real economy is working. That hasn’t happened. But an aggressive and targeted government spending plan can finally start changing that dynamic.
And the markets are telling us, an inflationary environment is welcomed – it comes with signs of life.
Gold is the widely-loved inflation hedge. And gold isn’t rising out of concerns of overindebtedness. It’s falling hard in the past week, in favor of growth.
With this in mind, we may very well be entering an incredible era for investing – after a long slog. And an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade, or more. For help, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up 16% this year. That’s 2.5 times the performance of the broader stock market. Join me here.