Monday, November 21, 2016

Dr. Lacy Hunt: This Post-Election 
Stock Market Rally Won't Last
"The outcome of the national election does not change our view on the trajectory of the economy for the next four to six quarters. Markets are repricing because of the assumption that lower taxes, less regulation and higher deficit spending will provide a positive demand shock, followed by a surge in inflation .. The recent rise in market interest rates will place downward pressure on the velocity of money (V) and also the rate of growth in the money supply (M). This is not a powerful effect, but it is a negative one. Some additional saving or less spending will occur, thus giving V a push downward. So, in effect, the markets have tightened monetary conditions without the Fed acting. If the Fed raises rates in December, this will place some additional downward pressure on both M and V, and hence on nominal GDP. Thus, the markets have reduced the timeliness and potential success of the coming tax reductions .. Markets have a pronounced tendency to rush to judgment when policy changes occur. When the Obama stimulus of 2009 was announced, the presumption was that it would lead to an inflationary boom. Similarly, the unveiling of QE1 raised expectations of a runaway inflation. Yet, neither happened. The economics are not different now. Under present conditions, it is our judgment that the declining secular trend in Treasury bond yields remains intact."
LINK HERE to the reference


Anonymous said...

Disagree. Interest rates are unlikely to to return to historical norms for many years. There is just too much vested interest in keeping them historically low with all the debt outstanding, both public and private. Mean time the stock market has barely started to reflect the 'new normal' of interest rate levels in general. Going higher will take time ... wall of worry.

Anonymous said...

Buffett: "As long as our debt is in dollars, it cannot cause us any problems. (We can always print more dollars.)" Oh Warren, please no...

Warren Buffett’s Meeting with University of Maryland MBA/MS Students – November 18, 2016

Question 3: Are you concerned by the size of the national debt?

WB: The gross debt of the U.S. is 100% of GDP, but the net debt (subtracting trust funds) is less, at 70%+ of GDP. Our net debt was as high as 120% of GDP in World War II and as low as 35% -38% in the Reagan years. As long as our debt is in dollars, it cannot cause us any problems. (We can always print more dollars.) Taxes have accounted for 16% – 20% of GDP over time. Medical costs today represent 17% of GDP, up from 5% in 1970. The next highest country spends only 11% of GDP on health care. Corporate taxes equal 2% of GDP down from 4% in the past.

Well if Warren the Almighty says it then it has to be true! Poor students.

Anonymous said...

Compared to many countries the tax rates quoted above are tiny. The USA seems much like a tax free economy to this Canadian living in Canada.