Jim Rickards: Trump’s Stimulus Plan Not Happening

Economist Jim Rickards appeared on CNBC’s “Squawk Box” outlining his 2017 predictions for rate hikes, Trump stimulus, and the coming US recession. Rickards believes the markets are unwittingly pricing in a stimulus plan that will never materialize.

“Trump wants to cut taxes. Steve Bannon is talking to his advisors about a trillion dollars of infrastructure spending, cutting regulations. All of these things are viewed to be highly stimulative. That’s why the market is going up. Pharmaceuticals are going up on the repeal of Obamacare, banks going up on the repeal of Dodd-Frank.”

The markets and the Fed have the perception that tax cuts and spending will continue despite the realities of a fiscally conservative congress, a $20 trillion of debt and a 104% debt-to-GDP ratio.

“But here’s the point,” Rickards states, “the stimulus is not going to come… Congress has already said tax cuts have to be revenue neutral. That’s going to take away the simulative effect. They’re going to balk at more spending.”

While a March rate hike is likely, according to Rickards, the Fed will backpedal when the market corrects or when the next recession hits. “Then the Fed will backpedal from there, starting with forward guidance and perhaps a rate cut later in the year.”

In such a situation, the scramble to move assets into wealth-preserving instruments like physical gold and silver will begin again. 2016 saw this movement many times by investors looking for safe havens. If Rickards is correct in his predictions, 2017 is likely to be a repeat of the same.

Highlights from the interview:

“I expect they will raise rates in March. I think that’s on track. But beyond that, we’re going to go into a recession or the stock market is going to have a very severe correction. Either one of those will cause the Fed to backpedal.”

“The Fed never turns on a dime. They take months to change policy. I think they’ll raise in March. Then something will hit the wall, either the economy or the stock market or both. Then the Fed will backpedal from there, starting with forward guidance and perhaps a rate cut later in the year.”

“There’s basically a head on collision coming between perception and reality. The markets are rising on the Trump reflation trade. Trump wants to cut taxes. Steve Bannon is talking to his advisors about a trillion dollars of infrastructure spending, cutting regulations. All of these things are viewed to be highly stimulative. That’s why the market is going up. Pharmaceuticals are going up on the repeal of Obamacare, banks going up on the repeal of Dodd-Frank.”

“Over at the Fed they’re thinking of two things. Number one, they believe in the Phillips Curve. I personally don’t, but they do… with unemployment at 4.6% and that kind of stimulus coming and they know monetary policy acts with a lag, they want to get out ahead of inflation, so they’re on track to raise rates. By the way, they want to raise them anyway independent of this because they’ve got to raise them so they can cut them in the next recession.”

“But here’s the point: the stimulus is not going to come… Congress has already said tax cuts have to be revenue neutral. That’s going to take away the stimulative effect. They’re going to balk at more spending. We have $20 trillion of debt. 104% debt-to-GDP ratio, so we’re not going to get this trillion dollars of spending.”

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