The market is behaving as though everything that the US president-elect has promised on his campaign trail will happen on day one. Fat chance.
Traders and investors alike think that the promised money will come rolling in when tariffs are slapped on Chinese-made goods as soon as he steps foot in the White House. They think that tax cuts will happen immediately.
They think that the power of cryptocurrencies will be unleashed even before the president takes the oath of office. They believe that millions of undocumented immigrants will be rounded up and sent back from whence they came. They even think that vaccines will be banned and fluoride will be removed from drinking water on the first day of the new presidency.
Think again. Sure, the Republican Party has control over the three branches of US government, namely legislative, executive and judicial. He also has de facto control of an influential social media platform. But there is something that he doesn’t and cannot control – the bond market.
Bond investors have already made their views clear. They have started reacting to his “you’ve-got-to-be-kidding-me” pledges. Bond investors don’t take chances.
They think that the policies of America’s next leader could be inflationary. Fed chair, Jerome Powell, has already hinted as much, although he hasn’t said it in quite so many words.
Thing is, the policies of the next leader of the free world are not only impractical but downright dangerous. But that doesn’t mean the upper and lower house will even try to stop them from becoming law. They will kowtow to his every wish in exchange for a quiet life.
But bond investors don’t want a quiet life. Instead, they want to be properly compensated for the money that they lend to America. And the US of A is already in hock to the tune of US$36 trillion. It will need to borrow even more because America’s next budget deficit and the deficits after that will simply be added to the growing national debt pile.
The reality is that the US bond market is a US$50-trillion beast. And bond investors are very unforgiving. The next US government should learn from the mistakes of the UK and its embarrassing “Liz Truss” moment.
The incoming US government might like to think that it can ruffle feathers and upset the system. It might like to think that it can fool all the people some of the time, and some people all the time, but it can never fool the bond market.
Stock market investors need to stay properly grounded. Shares prices could be volatile. But volatility is only risky if we don’t understand what we have invested in.
So, follow the cash, which in our case should be the cash flow from the businesses that we have pout our money into. It can tell us more than listening to the endless drivel from the members of The Flat Earth Society.
Mark Twain once said that a man who tries to carry home a cat by its tail will learn a lesson that can learned in no other way. The incoming US government should take heed. That is assuming there are any cats left to carry, given that the incoming president thinks that illegal immigrants have eaten them.
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Disclosure: David Kuo does not own any of the shares mentioned.
