Reagan vs. Trump/Markets/Tax Cuts

 

Trader Scott’s Market Blog

November 19, 2016

(As an intro to this post and for better perspective, this previous blog post Trump v. Clinton” was written before the election):

For decades we’ve heard the proclamations about how wonderful, stimulative, pro-growth bullish and incentivizing the “huge tax cuts”/policies from Ronald Reagan were. They have been touted as being the reason for everything and anything great which happened during his term and even afterwords. (I’m surprised they couldn’t cure cancer also.) The original Bush clown couldn’t catch a break, as anything good which occurred during his failed Presidency was often characterized as being because of the “huge Reagan tax cuts”/pro-growth policies. But before continuing, let me say that I don’t dislike President Reagan. Of all the Presidents since I was born, during the Johnson years (not Andrew Johnson), I sort of like Richard Nixon, Jimmy Carter, and Reagan. And especially when measured against the other buffoons during my time period, those three seemed like Thomas Jefferson. And also, I am a libertarian, hence have zero problem with: tax cuts (if they simplify and are rate flattening); government spending cuts (if they are true “permanent” cuts, such as completely eliminating whole Departments of Government); and real, honest deregulation. The people who criticize Reagan for his “huge tax cuts” causing the ballooning deficits are wrong. The deficits were caused by increasing spending. But back to the “huge tax cuts” and my reason for continuing to put the huge tax cuts in parentheses. It is because it’s a fraud that those tax cuts were “huge”. This wonderful article from the Mises Institute written 35 years ago, gives more details about the actual numbers. President Reagan did enact a very large tax cut in 1981. But he foolishly neutralized much of it with new Social Security taxes (thanks to the brilliant maestro Greenspan) and also TEFRA, which was the largest tax increase in history. And President Reagan also tacked on more tax increases and rescinded some of the “huge tax cuts”. So in my simple mind, the so-called Reagan miracle is baffling. Don’t people do any research?

And on top of the not so “huge tax cuts”, Reagan ballooned the deficit, which is more likely a good part of the Reagan miracle economic rebound. Gross Federal Debt tripled under Reagan. That’s a miracle right there. So as we enter the Trump Presidency, there is zero discussion of cutting deficits and the debt is set to continue soaring. And while cutting taxes is a good thing, without also cutting spending, we haven’t changed anything. We’re still stuck in the same situation, as Federal Government borrowing and “printing money” will continue to stifle the private sector. But at least President Reagan had plenty of wiggle room at the time to increase deficits (and debt). And the debt was still able to generate net new growth. We’re are no longer in that situation,which is going to be a yuuuge problem going forward.

The following is from a post last month and it sums up why I am not remotely as bullish going forward as the Trump supporters:

.believes the rising interest rates will cause the inflation, not visa versa – I concur, and fromSeptember 2015: “Also, to repeat for the umpteenth time, it’s the INCREASING rates which will finally bring on the inflation and that inflation starts next year.” The rising inflation we have in store for us will likely have a symbiotic relationship with the slowly, but persistently collapsing Government Bond markets (prices). And in regards to the Bond market,President Ronald Reagan first used the slogan “Make America Great Again”.Buthis slogan had a humongous amount of juice and power behind it because we were just coming off of a devastating 35 year Bond bear market. That bear market ended on Oct. 26, 1981, when long term interest rates peaked at 15.21%. So under Reagan, we were about to embark upon the biggest debt issuing orgy we’d ever seen and it is still ongoing. But back then we were still getting net new growth from each new dollar of debt. Now we are so inundated with debt that some countries are getting negative growth from the debt issuance. The world is saturated in debt. Now it is just piled on top of each other like a stinking, rotting massive garbage dump. But even the colossal Reagan/Greenspan Social Security tax increase couldn’t slow down the economy much, because of the power of that debt issuance orgy which was just in the early stages of this current post gold convertibility era. The Bond market had President Reagan’s back. Now we’ve been in a falling/low interest rate environment for 35 years. So either President Trump or President Clinton will have the exact reverse situation and there is nothing they can do about it. The Bond market is going to win.

So here’s my belief – President-elect Trump’s situation is much darker. The secular peak in the massive inflation of the 1970’s occurred around the time of Reagan’s inauguration. So President Reagan was able to operate in an era of persistently moderating inflation. President Trump will see the opposite. So between the debt situation, the inflation bottom, the TBTB bank’s derivative situation, and the secular bottom in global bond market yields, we can now add two more market-based differences. We keep hearing how the US$ strength is indicative of the belief and confidence in America thanks to Donald Trump. That’s ridiculous. I’ve been bullish on the $ for years and it has nothing to do with Donald Trump. The $ bottomed in March 2008, so to suggest the $ bull market has anything to do with Trump is absurd. The impending US$ bull market back in January 1981 (Reagan’s inauguration) was just coming off of a bottoming process (accumulation). This current $ bull market has been ongoing for almost 9 years. I’m still bullish on the $ intermediate term (it’s way overdone short term), but we’re getting closer to a major $ top next year. And the last major difference between the two Presidencies is several commodity markets had major buying climaxes around the beginning of Reagan’s term – crude oil, and also the metals (such as gold’s $875 top on Jan, 21, 1980). It is my belief we are in the process of putting in major lows in commodities in 2016 (and PMs were in December 2015).

The point of writing this is to show that the “huge tax cuts” had very little to do with the economic recovery in the 1980’s. (And the 1980’s did actually have an economic recovery, especially relative to the Obama “economic recovery”.) The bulk of the Reagan economic recovery had to do with secular turning points. Those turning points were in bond yields and inflation, which were coupled with the “magic” of exploding government deficits and an orgy of debt issuance in all economic sectors – government and private. And in no way are these powerful forces in Donald Trump’s favor, as they were in Ronald Reagan’s. So I wish a President Trump well, I voted for him, but the euphoria about his Presidency by his supporters is way overblown. He’s a smart guy, however he has a tsunami of problems facing him. But I’m in this business to make money. Biases are deadly. His Presidency does not alter my views of markets in any way, and in some ways it actually “confirms” them. The policies which he would like to enact would not have any effects (positive or negative) until later next year. But in the meantime the rising yields are real, and they are affecting the economy right now. And I’m sure the completely non-partisan, Mrs. Janet Louise Yellen, would like to leave a big flaming bag of dog poop at the front door of Mar-A-Lago, in the form of an interest rate increase next month. But really, our fate in this world is tied to the bond market, with once again the most important chart in the world – the massive distribution in the long term US Treasury Bond (inverted). Mr. Trump will also face a very powerful global foe who wants nothing more than to see him fail, and once and for all discredit the belief in “capitalism” and “free” markets. So between the looming bond bear market, the bank’s derivative situation, and the other differences discussed, Donald Trump is not any way in as favorable a situation as President Reagan was in on January 20, 1981.

 

About

img_0074bwcrsmTrader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.

 

 



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'Trader Scott’s Market Blog – Reagan vs. Trump/Markets/Tax Cuts – November 19, 2016' have 7 comments

  1. November 19, 2016 @ 11:18 pm Ritesh

    Brilliantly explained

    Reply

  2. November 20, 2016 @ 12:17 am Randal Magnuson

    Enjoyed it!
    I tried to warn my friend a couple days ago about the bond market. .. (he cheekily blamed trump) I set him straight as a true friend would, hope he follows through, try to salvage principal in his 401k…

    Reply

    • November 20, 2016 @ 11:00 am traderscott

      Thanks Randal. We’re closing in on a shorter term turn in bonds into late November, but yes this bond market thing is a yuuuuge problem.

      Reply

  3. November 20, 2016 @ 8:56 am Ying-Fen Chen

    Everyday, when I turn on the computer, log onto the internet, first action I take is to read your blog. Thank you very much, Scott.

    Reply

  4. November 20, 2016 @ 1:26 pm Bob Schmidt

    I agree with Chen. Great information and learnings Scott! Thanks much.

    Reply


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