Stock Surge Presents Risks for the
Trump Administration
By MARK SPITZNAGEL DEC. 15, 2016
The “big,
fat, ugly bubble” in the stock market that President-elect Donald J. Trump so
astutely identified during his campaign now becomes one of the greatest
potential liabilities of his presidency.
If that
bubble bursts soon, the pain will correctly be understood to be the result of
monetary manipulations during the Obama years. But if it persists and the
United States economy manages to further postpone its long-overdue recession
(following an expansion that was barely that), Mr. Trump’s ostensibly
“free-market” policies will unfairly bear the blame when the markets finally do
return to reality — perhaps a year or two down the road.
The
postelection Trump rally in the stock market is evidence of euphoric optimism
about the fiscal stimulus, reduced regulations and lower taxes that are hoped
for. And yet we mustn’t forget where we are today, with distorted pricing in
virtually all markets and extremely levered public and private balance sheets,
all driven by monetary interventionism on a scale never seen before: By most
measures, the stock market is as expensive as it has been for a century, save
only the giddy late 1990s.
We must also
remember what got us to this spot: namely, extreme, collectivist
interventionism by the heavy hand of the state. Perhaps never before have we
had such a clear case of a controlled experiment in the effects of economic
(and especially monetary) interventionism. Problem is, the election of Mr.
Trump is adding noise to this otherwise transparent experiment, and is
extremely risky for supporters of his policies because he is poised to take
office near such a peak in economic distortion.
The
challenge, therefore, is for the incoming administration to let the authorities
own the initial pain that is sure to come, such as the pain of pulling off the
bandages, while letting the later recovery be his — as it should be. Though the
Obama administration was able to blame a previous administration’s presumed
free-market policies for eight years of lackluster recovery, it will be much
harder for Mr. Trump to transfer blame for any economic crisis that occurs on
his watch.
There’s
something about a government that steps back to let free markets fix themselves
that invariably renders it a ripe target for blame. “Couldn’t you have done
something?”
After all,
if the rally following his surprise election bears Mr. Trump’s name, the danger
is that so, too, will the inevitable correction that neither he nor the Fed can
stop. What could result — and what we should all fear, specifically — is the
political pendulum swinging violently back toward big government and even
greater market interventionism.
If Mr. Trump
can focus on the long term and encourage asset prices and investments to
correct themselves early (to the extent that he even holds such sway over
them), perhaps this controlled experiment can remain obvious to everyone.
Worthy or not, as the current general for advocates of the free market, he
should hope to lose the short-term battle to win the bigger war, to gain
positional advantage for the looming contest ahead.
Mark
Spitznagel is the founder and chief investment officer of Universa Investments,
and is a former senior economic adviser to Senator Rand Paul of
Kentucky.
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