December 12, 2019
We talked yesterday about the surprisingly more dovish Fed communication yesterday.
By this morning, Trump added to the melt-up formula with hints of a signed trade deal coming. This afternoon reports said terms were officially agreed to by both parties.
With that, stocks have traded to new record highs today. Yields traded to the highest levels in a month. And commodities are moving.
Now, will all of this in mind, it’s very clear that confidence has waned, as time has passed, because of uncertainty about the trade war outcome. Waning confidence has led to declining manufacturing output and weak business investment. That, in turn, has led to lower inflation expectations. And this all has led to a pivot by global central banks to a (near) maximum easing stance.
Does a legitimate signed deal turn it all around? My view: Yes.
As we’ve discussed for the past several months, with rate cuts under his belt, Trump can claim victory on the trade war whenever he wants (he has had the position of strength). He can then turn back to Congress on the next pillar in Trumponomics — a $2 trillion infrastructure spend (which the Democrats want). Remember, he’s the one that walked away from deal talks back in May (he’s in the position of strength).
This would set up for the economic boom scenario we’ve talked about for some time.
Remember, coming out of the Great Recession, we haven’t had big bounce back in growth that is typical following a deep economic contraction. In fact, at this point, we would need six-years of 6% growth to put us back on path of trend growth (from the 2007 peak in GDP).
We haven’t had growth like that since emerging from the Great-Depression. The mid-30s bounce-back started with a reduction of tariffs and government spending programs. That’s precisely what’s lining up (i.e. reduction of tariffs and government spending).