From ZeroHedge, Nov. 18:
In his interview with the Hollywood Reporter's Michael Wolff, Donald Trump's chief strategist, Steve Bannon made one particularly notable statement.
When discussing his vision for the economy, he answered with the
following explanation of how he views the interplay of monetary and
fiscal policy under president Trump:
“Like [Andrew] Jackson’s populism, we’re going to build an entirely
new political movement,” he says. “It’s everything related to jobs. The
conservatives are going to go crazy. I’m the guy pushing a
trillion-dollar infrastructure plan. With negative interest rates
throughout the world, it’s the greatest opportunity to rebuild
everything. Ship yards, iron works, get them all jacked up.
We’re just going to throw it up against the wall and see if it sticks.
It will be as exciting as the 1930s, greater than the Reagan revolution —
conservatives, plus populists, in an economic nationalist movement.”
There is just one problem with Bannon's comprehensive vision
to inject $1 trillion in the economy: absent a central bank backstop to
soak up the soaring deficits, rates will explode uncontrollably as the
furious bond vigilantes - awoken after nearly a decade of being frozen
in carbonite - return and wreak havoc after years of impotent
inactivity, sending yields soaring, in the process making any fiscal
stimulus plan impossible, while the economy tumbles into a
stagflationary recession.
Which brings us to
the latest note by SocGen's Albert Edwards, in which he rhetorically
asks if "a continued US Treasury bond rout will mean Trump is in for a
big surprise?"
Needless to say, Edwards thinks the answer is yes. Here's why.
Was it really only one month ago that I reviewed our secular bullish
call on long-term government bonds? A sell-off that was already underway
since July has turned into a rout since Donald Trump’s election. Most
commentators now believe the 35 year secular downtrend in bond yields
is over and that US yields will rise further, causing havoc in financial
markets. This is already apparent with the dollar’s surge and
resultant weakness in emerging market currencies, most particularly the
renminbi. At some point very soon the bond sell-off will even adversely impact equity markets!
Indeed, and as we noted
earlier today, the tipping point may have already arrived. While we
wait for confirmation, this is what Edwards thinks will happen next:
In the very near term a fragile, highly indebted US economy will
suffer a traditional end of cycle acceleration in consumer prices, and
more importantly wages, which the Fed simply cannot ignore. I think it
is entirely plausible that bond vigilantes could force them into two
rate hikes in the first half of next year, with more being quickly
discounted. Even if the Fed refuses to tighten, monetary
conditions will tighten dramatically anyway as bond yields and the
dollar surge, exacerbating the profits recession. This very long economic recovery will then suffer a very traditional death.
This is oddly reminiscent of a very similar and just as skeptical note from Goldman Sachs released previously, and which predicted that any variation
of Trump's policies will lead to a global slowdown, and eventually
recession, no matter how generous the stimulus. Perhaps Trump's
administration is merely a carefully planted pretext by the Fed to
unleash the next - and final - step of QE and/or helicopter money.
Because Bannon's plan of injecting a $1 trillion fiscal stimulus will
certainly not work without the Fed's blessing, especially at a time when
foreign central banks have been forced to sell a record amount of debt
as we highlighted earlier this week.
So how does it all end according to SocGen? Badly....MORE