Don't Be Ridiculous, We Should Cheer Trump's Stock-Market Obsession
The president rejoiced, telling supporters that the “stock market is booming.” A few days later, and eager to more directly associate the market’s direction with his policies, this same White House occupant bragged that “I don’t have to tell you about the stock market and where that’s gone.” Who was this self-promoter? It was President Barack Obama, in 2014.
About Obama’s boasts, good for him. Quite unlike mindless measures of economic health like GDP, the stock market is blind to bias. It just is. Importantly, it reflects the views of everyone (bullish buyers, bearish sellers, along with the sidelined), as opposed to artificial measures of economic health that are generally created based on the false assumption that consumption is the driver of economic growth. Sorry, but it isn’t. Consumption is always and everywhere an effect of production, and production is driven by investment. The more investment, the greater the production. Investment is the most crucial driver of the progress we call growth, so yes, presidents should brag when an investment indicator is moving upward.
On the other hand, presidents generally don’t know why they’re bragging. In Obama’s case, he plainly felt his policies were the source of market vitality. In truth, it was the growing absence of his policies that cheered investors. Markets never price in the present; rather they price in the future. In the early days of the Obama administration stocks priced in a very bleak future. Then things turned. Obama became distracted by healthcare legislation, a mis-named “stimulus” plan, plus a proposed law meant to limit carbon emissions.
The bad news is that the first two passed, but the third didn’t. Still, the early flurry of legislation spooked voters, and this was good. Very good. So disturbed were they that they gave the Republicans control of the House of Representatives in 2010. This was crucial simply because it largely ended the legislative portion of Obama’s presidency. There were surely errors (Obama signed into law tax increases in 2012 after initially extending the Bush tax cuts) along the way, but gridlock mostly defined the final six years of Obama’s presidency. During that time the dollar’s long slide reversed. This matters because a falling dollar is a tax on investment in much the same way that a rising capital gains tax is. Needless to say, periods of Washington divide generally correlate with positive market returns.
Which is why stocks performed so well in the run-up to the 2016 presidential election. Hillary Clinton partisans were horrified by Donald Trump, and Trump partisans horrified by Clinton. A passionately divided nation is logically catnip to investors always and everywhere looking into the future. The division shrinks the threat of a major error coming from Washington. If Clinton had won, Republicans would have united in opposition, much as Democrats have united in opposition to Trump. Investors once again like this. Lest readers forget, markets rallied on the broad assumption that Clinton would win.
Markets have certainly rallied under Trump too. This arguably shouldn’t surprise anyone, regardless of ideology. In Trump’s defense, he’s proven less nutty than his campaign rhetoric indicated thanks to well-received judicial choices, sensible pushback against regulations, and a walkback (think immigration) of some of his more extreme campaign positions. All that, plus other than a tax bill that wasn’t very consequential either way, Trump hasn’t been a legislative factor. For good or bad, he couldn’t even get the much-loathed ACA repealed. Investors once again love a lack of legislation.
Which brings us to the recent market turbulence. On its face it was minor. Also, arguably healthy. Economies gain strength from periods of weakness thanks to the weak times forcing a cleanse of bad habits, misuses of labor, bad investments, and lousy companies. If economies only grew, Detroit would still be a leading U.S. city, while Seattle would be a ghost town. Much the same, markets gain strength from weakness too. During corrections the bad and marginal are starved of resources so that they can be replaced by the good and great. This is healthy. It’s the ups and downs in markets that power progress. Absent them, a massive GM would still be wasting capital, while Amazon and Google likely wouldn't exist.
As for the analysis behind the market declines, it’s been typically bad. Much has centered on the Federal Reserve, and the central bank’s purported desire to raise the target rate for overnight bank lending. Supposedly this spooked investors, except that the Fed’s lean in favor of rate hikes has long been known. Furthermore, it’s never been explained why a change in the overnight lending rate among increasingly inconsequential banks could cause the price of equities (just a measure of all the dollars a company will earn in the future) to go down. The Fed argument is typically silly.
Except that it gets worse. According to an analysis at the New York Times, it’s the “Roaring Economy” that “Spooked the Stock Market.” Supposedly all the growth from the not-very-large tax cuts will cause prices of goods, services and labor in the U.S. to rise due to demand outstripping supply, and this will cause inflation. The myth that growth causes inflation will not die. Who cares that impoverished Venezuela is experiencing actual inflation now (always a devaluation of the currency); economists and pundits choose to chase a mirage: "inflation" that isn’t.
To be blunt, booming growth doesn’t cause inflation. For one to demand goods and services, one must produce them first. To demand is to supply. As for capacity, Apple doesn’t manufacture its products in the U.S. Neither does Nike. Walmart imports from around the world. Boeing builds its planes in factories around the world. The laughable assertion that economic growth causes inflation is headless, mindless, and it presumes that the U.S. economy is an impregnable island. In truth, economic growth is the greatest enemy rising prices have ever known given the basic truth that investment powers growth, and it’s investment that brings down the cost of everything while reducing the labor inputs required to produce everything. Say it over and over again: prosperity doesn’t cause inflation. Prosperity is about falling prices.
Back to reality, it's hard to say what is the source of market turbulence that reflects infinite opinions from around the world. The answer to riddles like the previous one routinely vex billionaires, so why would reporters at the New York Times know?
Still, if yours truly had to guess, the drivers are not the ones being offered up. Correction drivers include the Fed’s mugging of Wells Fargo whereby it set limits on the ability of the private business to prosper. If Washington can strangle a powerful bank, what else can it?
And then there’s President Trump himself. He’s lately made more noise about tariffs and a weaker dollar. Ok, but trade is as natural to us as breathing. Trade is about specializing, and through specialization, working more productively. For governments to put up barriers to trade is the equivalent of them forcing each citizen to cut off his or her right hand. Either way, the productivity lost is staggering. Markets must price Trump's disturbing belief that imports harm us.
As for the dollar, money is what facilitates the trade that enables specialization, plus it facilitates the investment that fosters huge productivity leaps. Investors are buying future income streams paid out in money, so a devaluation of the dollar is by definition a tax on investment. It’s not likely to happen, but if Trump were to publicly state the importance of free trade combined with a stable dollar to lubricate exchange, stocks would soar. That he’s saying the opposite is logically not helping the investor outlook.
To improve his rhetoric while pleasing investors, Trump should base the good or bad of his every utterance on the reaction of the stock market. Stock markets are ultimately a reminder, or a just-in-time poll that is more accurate than an actual poll about the sentimment of investors. If investors are thrilled, growth will be thrilling.
Investors are the source of prosperity. They prefer a Washington that’s as quiet as possible. That’s why we should cheer Trump’s stock-market obsession. If so, he’ll ideally learn what harms the stock market only to golf more, while legislating less. Should he do just that, Trump will have lots to brag about.