Trump’s master plan appears to be falling apart at the seams. His presidency was supposed to herald a period of low inflation, high employment and strong growth. He also portrayed himself as a consummate peacemaker.
But the reality is sticky inflation, a sub-par jobs market, rising unemployment and anaemic economic growth. And on the world-peace front, his clumsy approach to peace talks leaves us with more questions than answers. But more about that another time.
To rectify the economic malaise, the US government has resorted to the blame-game. It claims that the numbers had been deliberately rigged to make the president look bad. It has also been claimed that the numbers were manipulated before last November’s election last year to sway voters.
It has also blamed the prevailing poor economic data on the Federal Reserve’s failure to lower interest rates sooner. To ensure that interest rates do come down, the Trump administration will try to pack as many of his supporters as he can onto the rate-setting committee.
He will also try to put his own man into the chairman’s seat. Those tactics might work. The Trump administration might just be able to get “his” Fed to vote for a lowering of interest rates. But putting a fox in charge of the henhouse can have serious consequences. It can, to stay with the analogy, push up the price of eggs.
The Trump administration appears to be forgetting that there is a group of people who are bigger than the Fed. They are more powerful than the US government. They, both individually and collectively, are mightier than Donald Trump. They are the global bond investors.
Those investors will decide where interest should be relative to the way that they see the state of the economy. They won’t be swayed by hyperbole and deception.
The Trump administration might like to think that it can control the various branches of government. It might like to think that it can even control the judiciary. But the bond market is beyond its reach.
It has been said that if we carry a cat home by its tails, we will learn a lesson that we will learn no other way. Point is, bond investors’ main objectives are the preservation of capital. They desire a return of capital rather than a return on capital.
The US administration can try to massage interest rates lower. But bond investors won’t be fooled. They could push bond yields higher to compensate for the greater risk of holding US Treasuries. There are no free lunches in the financial world.
We are, to put it bluntly, very much on our own. That means investing in assets that can perform well under any condition.
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Disclosure: David Kuo does not own any of the shares mentioned.
