Such certainty ought to worry those thinking of buying in to the idea of a Trumpian reflation of the U.S. economy.
The boost from a market-friendly president-elect may run a while yet if Mr. Trump fills out his transition team with mainstream Republicans, to follow the weekend appointment as chief of staff of Reince Priebus . The danger is that markets already have run too far, too fast, and are increasingly vulnerable to any slip as a result.
Consider one of the most extreme moves—that of the 30-year Treasury. An investor who held on to her long bonds lost 6.6% in three days, the worst performance in data stretching back to 1989.
Don’t get me wrong, the direction of the move makes perfect sense. Mr. Trump’s transition team’s unfunded pledge to spend $550 billion on infrastructure would boost borrowing and, by creating jobs at a time of near-full employment, contribute to inflation. Add in big tax cuts for the rich, and it is easy to see why investors increasingly think three decades of falling bond yields may be over. Bonds are less attractive with the prospect of more borrowing and more spending, which means lower prices and higher yields.
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But the key word is “prospect.†Consider just the infrastructure program. There is no word from Team Trump on how swiftly that money will be spent, but it will surely be spread over many years. A pre-election plan from two of his advisers suggested $1 trillion over 10 years, but with only $137 billion of government money in the form of tax breaks for private investors.
Looking on the bright side and assuming all that is new money, that would mean $100 billion of extra infrastructure spending each year, an increase of a bit less than 25% of what federal and state governments spend each year on transport and water infrastructure alone. Anyone who has driven around the U.S. knows the money is desperately needed, but $100 billion amounts to only 0.5% of GDP a year.
Investors who are less hopeful might assume that a lot of this spending would have happened anyway. Even without being cynical, a look at the American Recovery and Reinvestment Act of 2009 shows that spending infrastructure money quickly is hard: More than a year into President Barack Obama’s stimulus, less than one-third of the money allocated for transport infrastructure had been paid out. As Mr. Obama admitted to the New York Times in 2010, “there’s no such thing as shovel-ready projects.â€
Staying positive, perhaps a president with a history of building towers, casinos and golf courses can quickly funnel money into the right roads in the right places. Maybe a real-estate mogul can get shovels into the ground more quickly than a civil-rights lawyer, but it won’t be instant.
All of this, of course, assumes Congress passes a new spending bill and tax cuts swiftly after Mr. Trump takes office on Jan. 20. And even then the markets seem to be assuming a lot.
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http://www.wsj.com/articles/the-trump-trade-is-getting-out-of-hand-buy-some-bonds-1479143922
Such certainty ought to worry those thinking of buying in to the idea of a Trumpian reflation of the U.S. economy.
The boost from a market-friendly president-elect may run a while yet if Mr. Trump fills out his transition team with mainstream Republicans, to follow the weekend appointment as chief of staff of Reince Priebus . The danger is that markets already have run too far, too fast, and are increasingly vulnerable to any slip as a result.
Consider one of the most extreme moves—that of the 30-year Treasury. An investor who held on to her long bonds lost 6.6% in three days, the worst performance in data stretching back to 1989.
Don’t get me wrong, the direction of the move makes perfect sense. Mr. Trump’s transition team’s unfunded pledge to spend $550 billion on infrastructure would boost borrowing and, by creating jobs at a time of near-full employment, contribute to inflation. Add in big tax cuts for the rich, and it is easy to see why investors increasingly think three decades of falling bond yields may be over. Bonds are less attractive with the prospect of more borrowing and more spending, which means lower prices and higher yields.
RELATED
Junk Bonds Sound Stock-Market Alarm
But the key word is “prospect.†Consider just the infrastructure program. There is no word from Team Trump on how swiftly that money will be spent, but it will surely be spread over many years. A pre-election plan from two of his advisers suggested $1 trillion over 10 years, but with only $137 billion of government money in the form of tax breaks for private investors.
Looking on the bright side and assuming all that is new money, that would mean $100 billion of extra infrastructure spending each year, an increase of a bit less than 25% of what federal and state governments spend each year on transport and water infrastructure alone. Anyone who has driven around the U.S. knows the money is desperately needed, but $100 billion amounts to only 0.5% of GDP a year.
Investors who are less hopeful might assume that a lot of this spending would have happened anyway. Even without being cynical, a look at the American Recovery and Reinvestment Act of 2009 shows that spending infrastructure money quickly is hard: More than a year into President Barack Obama’s stimulus, less than one-third of the money allocated for transport infrastructure had been paid out. As Mr. Obama admitted to the New York Times in 2010, “there’s no such thing as shovel-ready projects.â€
Staying positive, perhaps a president with a history of building towers, casinos and golf courses can quickly funnel money into the right roads in the right places. Maybe a real-estate mogul can get shovels into the ground more quickly than a civil-rights lawyer, but it won’t be instant.
All of this, of course, assumes Congress passes a new spending bill and tax cuts swiftly after Mr. Trump takes office on Jan. 20. And even then the markets seem to be assuming a lot.
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