Trumphoria!

The more things change, the more they stay the same

• Jean-Baptiste Alphonse Karr, 1849

The more things change the more the stay the same

The more things change the more the stay the same

Ah, is it just me or does anybody see

The new improved tomorrow isn't what it used to be

Yesterday keeps comin' 'round, it's just reality

It's the same damn song with a different melody

…

• Bon Jovi

Trumphoria!

As the curtain closed on an eventful 2016 and Old Man Tyme rang in a new year, the US Stock and Bond Markets moved in opposite directions.

Mr. Trump’s electoral triumph unleased euphoria among Consumers, Small Businesses, and Stock Market Investors – apparently buoyed by the promise of lower taxes, infrastructure and defense spending; and job growth.

The Great Bond Massacre

The Bond Markets however, were to put it mildly, decidedly less bullish. Ten Year Treasury Yields, which had been drifting up since the summer near all-time lows, rose sharply across the yield curve.

To accurately gauge the level of ‘pain’ in the economy caused by rising interest rates, it is useful to look at historical rate increases YoY and the relationship to GDP YoY growth.

The correlation coefficient is -37.3% with a lag of 11 quarters. Rising interest rates are clearly a negative for the economy.

Rising interest rates are clearly a negative for the economy…

Causes

But, why are interest rates rising across the board? And, what are the likely consequences? As for causes, the speculation is that Mr. Trump’s election heralds global reflation with rising inflation and interest rates. We at RISCintelligence prefer to refrain from speculation and confine ourselves to Facts and historical Mathematical Correlations.

First, the Facts -

The Fed has lifted the Fed Funds rate off of the Zero Lower Bound (ZLB) floor with two 25 BP increases since December 2015. And, it has signaled more rapid increases in 2017 and beyond. Inflation is on the rise. This explains the rise in short-term yields.

At the same time, foreign central banks and sovereign wealth funds have been selling treasuries at the fastest pace ever.

Foreign central banks and sovereign wealth funds have been selling treasuries at the fastest pace ever…

This explains the rise in long-term interest rates. But why are foreigners liquidating treasuries? For example, China has been liquidating US Treasuries at an unprecedented pace. A possible explanation is that they need U.S. Dollars and they are not generating enough of a surplus via trade. The surplus has been decreasing YoY …something that only occurred during the Great Recession.

China’s trade surplus with the US has been decreasing YoY - something that has only occurred during Recessions…

Consequences

While there is considerable room for speculation about the causes behind rising interest rates, there can be little doubt about the consequences.

According to Macroeconomic Dynamics Theory (MDT), ↑ interest rates lead to ↑ Debt Service Burdens for the Business & Consumer Sectors, leading to ↑ Debt Defaults, which result in ↓ Money (Credit) Creation and ↓ GDP Growth. Read more about MDT here….
http://www.riscintelligence.com/macroeconomic-dynamics-theory?pag=archive&id=MTk=

The following are the correlations between interest rate changes and Key Indicators of major economically sensitive sectors of the economy.

1. Housing

1. Light Vehicles

1. Airlines

1. Restaurants

Will Trumphoria Trump Reality?

Will rising Consumer & Business sentiment help the Economy & Stock Market weather the adverse impact of rising interest rates – especially in an already weak economy?

History is clear on this subject.

In the graph above, we show the relationship between Interest rates, Bank Delinquency and GDP growth. Note how rising interest rates late in an economic cycle have always led to rising bank delinquencies and charge-offs – which have led to recessions.

On the other hand, as the first graph in this report shows, consumer and business sentiment surveys as well as the stock market have limited predictive value … they tend to stay up until the economy is almost in recession.

Therefore, Reality will likely Trump Trumphoria.