The Great Tug of War: Pro-Trump vs. Anti-Trump

America’s divided into warring camps — pro-Trump, anti-Trump. The market’s divided into the same warring camps…

The pro-Trump faction howls, “His lower taxes, higher infrastructure spending and less regulation will Make America Great Again.”

The anti-Trump forces holler, “He’s starting a trade war. And another currency war — both races to nowhere. Plus, lower immigration saps growth.”

Who wins?

That is the great unknown. So today, we fare forth on the pinions of uncertainty… in search of light… hoping for the best, prepared for the worst…

The pro-Trump crowd had the headlines from the opening whistle. Stocks soared nearly 10% post-election through mid-January. Then they lost their spirit for a week or so, cruising in a tight range, uncertain.

But then the Dow wafted above 20,000 last week, rising on the thermals of renewed optimism. A series of business-friendly executive orders out of the White House provided the lift. Naeem Aslam, top market analyst at ThinkMarkets, on the day of the breakthrough:

Traders have been waiting for more details on infrastructure spending, and now they have it in a very clear format. There is nothing bigger than this. A break of 20,000 for the Dow stimulates fresh capital which has been waiting for this moment to join this party.

Just so.

But the air’s thin at 20,000 feet. And the Dow ran out of oxygen at 20,100 before settling at 19,864 Tuesday. More executive orders, the type the anti-Trump gang warned about, were the apparent cause. The travel ban, for example. And there was talk of a 20% tariff on Mexican goods…

“There’s a lot of uncertainty and a lot of backlash over recent administration policies, and that’s causing uncertainty in the market,” explains Phil Streible, senior market strategist at RJO Futures.

Score one for the anti-Trump crew.

Thus, we find the markets yanked in two opposite directions. One side pushes… one side pulls. Mohamed A. El-Erian is head economic adviser at Allianz SE. He describes it as a tug of war:

Now the markets have entered a period of greater volatility underpinned by a tug of war between the expectation of reflationary policies and the risk of stumbling into stagflation.

Again, he says that tug of war will produce one of two outcomes: a “beneficial reflation”… or a “damaging stagflation.”

Stagflation is as ugly as it sounds — a ghastly portmanteau of stagnation and inflation. Think of the ’70s… if you can keep down your supper.

El-Erian thinks the winner comes down to politics. If the angels tap on Trump’s shoulder, it’s “beneficial reflation.” If they don’t… it’s “damaging stagflation”:

The implementation of a well-designed set of policies built around the president’s three headline initiatives — tax reform, deregulation and infrastructure — would unleash reflationary forces that would validate existing asset valuation, and could take them a lot higher… If, however, the U.S. stumbled into protectionism and trade wars, the markets would give up more of the recent gains, and possibly even overshoot on the way down.

“Overshooting on the way down” could just be academic soft soap for something worse. Heavyweight economist Robert Shiller thinks we’re looking at a real market crash — worse than 1929. Perhaps the Nobel Prize winner is overegging the pudding a bit. Stretching the facts to attract a crowd.

But what if he’s right?

We don’t know if markets go up or go down from here. Or what Trump does next — good, bad or indifferent. But it seems someone’s going to win the tug of war soon or late.

If we only knew who… and when…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning