Trump’s Inherited Economy Is No Reagan Era

Peter Schiff’s recent podcast addresses the mistaken comparisons of Trump’s proposed economic stimulus plans to Reagan’s. Investors are looking for Trump to deliver the same results of economic stimulus, deregulation and smaller government are misreading the differences between the early 80s, post-Carter economy, and today’s realities. “There really isn’t any precedent between now and the Reagan era,” Peter states.

Rising interest rates are here. Future inflation is coming. These economic realities create a much different situation for a Trump’s stimulus plans. Peter explains:

“When Reagan came in, we already had high inflation, and the expectation was inflation was going to come down. Now, we have low inflation and the expectation is that it’s going to go up, except it’s going to go up a lot more than people think. Also, when Reagan came in, interest rates were extremely high, and they had no place to go but down. Now, they’re extremely low and they have no place to go but up. The market is a very different position now than it was then.”

What’s more, Reagan’s entered a government significantly less mired in national debt. Going into debt to finance tax cuts and stimulus was doable because we carried relatively little debt obligations. Now, that’s changed dramatically.

A more apt comparison to Trump’s plan may be with George W. Bush’s approach. Peter reminds us of a Bush’s stimulus plan for cutting taxes while increasing government spending: “Remember when Bush 43 came into office after 8years of Clinton, the market was excited. But the bubble was already deflating that we inflated under Clinton. And what did Bush do? He cut taxes and increased government spending. Remember the initial stimulus checks. He did Keynesian stimulus and what was the result? Bigger deficits. The surpluses went away.”

“People are ignoring the big rise in interest rates and assuming that none of it matters. That all of a sudden higher rates don’t matter because we’re going to get all of this extra growth from these so called tax cuts or government stimulus. Well, the reality is if interest rates rise, it doesn’t matter about the stimulus. The sedative that will result from higher rates will more than offset it. Plus, the markets are assuming that higher rates will have no effect on US asset prices or the economy. They’re wrong on both counts.”

If Trump follows a similar stimulus road, the move will create a bullish market for gold and commodities:

“The stock market did not do well under 8 years of Bush. But you know what went up when Bush was president? Gold, oil, emerging markets because the dollar tanked. In fact, the dollar bubble we had in the second term of Clinton deflated during the first and second term of Bush. We’ve gotten an even bigger dollar bubble now that blew up in the second term of Obama. So, Trump is inheriting that bubble too. If he’s going to do the same thing as Bush and make the deficits bigger, then the dollar bubble is going to deflate that much quicker, the bull market in gold will resume … so really the opposite of what investors expect is going to happen.”

Highlights from the show:  

“It’s been a while since my last podcast and I’ve gotten quite a few emails from people wondering what happened to me. I was out of the country for about a week, and I did manage to get one podcast off from my hotel room. But when I got back, I was backed up with work, and by the time I caught up, I came down with a case of laryngitis, which has still not completely gone away. I want to start off by talking about the stock market.”

“The Dow hit a new record high today; inter-day we got to 19,824 – we closed at 19,796, getting closer and closer to the 20,000 level. NASDAQ, on the other hand, was down today. But one of the interesting things about this is that the rally is predicated on Donald Trump and all of the great things that are going to happen as a result of his election. And of course, the very people who are buying this Trump rally are the same people who are telling us what a disaster it would have been if Trump won. He won – but now they’ve reversed course. I’m sure if Hillary had won, the market would be rallying now with a different spin – we dodged the bullet of Trump.”

“The markets were looking for an excuse to rally, and there were a lot of shorts in the market, so now, we’re rallying. But the interesting thing about this is, if you remember when Donald Trump was running for President, he kept talking about the ‘big, fat, ugly bubble’. He was talking about the stock market.”

“Now, if you listen to Trump talk, he loves the stock market – he’s taking credit for the gains in the stock market. He wants us to judge him based on when he was elected, not based on when he is inaugurated because he is trying to claim credit for the gains in the stock market. Wait a minute – if the stock market was a big, fat, ugly bubble before Trump was elected. And if now the stock market is much higher, isn’t it bigger, isn’t it fatter, isn’t it uglier now? If that’s the case, why doesn’t Donald Trump still call it a bubble? Because when he was a candidate, it was Obama’s bubble. Now, it’s his bubble. He owns the bubble, and, therefore, he doesn’t want it to pop.”

Trump vs Reagan

“The market was cheap when Regan was elected. We had a huge bear market … from 1966 to really 1982. When Reagan was first elected, there was a honeymoon and stocks rallied for the first month because it was going to be a big change from the Carter years. But then we had a bear market for two years. Stocks went down about 25% even though they started off cheap.”

“Now, stocks are very expensive … based on very low interest rates, which are not nearly as low now as they were when Trump was elected. In fact, the yield on the 10 year treasury got above 2.5% today for the first time in two years … Oil prices … and other industrial commodity prices are rising because people are expecting more inflation.”

“What enabled all of the Reagan tax cuts was enormous debt. We had all of this untapped borrowing capacity, and we were able to sell the bonds to the private sector because we offered high yields. Well, now we’re 20 trillion dollars in debt. We have no capacity to run up the debt to the same degree. Nor can we sell it because we can’t afford to pay the interest.”

“A lot of people are telling me “Hey, Trump’s a business man.” Yeah, but government isn’t a business. It doesn’t run like a business. It’s very difficult to think we’re going to get rid of any of these inefficiencies of government.  Government by its very nature is inefficient … All that waste, fraud, and abuse has a constituency.”

Trump vs GW Bush

“If you move rates higher, by definition, stocks and real estate are less valuable. They’re more valuable the lower the rate.”

“Plus the whole economy is built on cheap money. Yes, it’s a phony foundation, but if we take it away, and that phony economy that we erected on that foundation of cheap money comes toppling down. I don’t believe that Trump nor any of the Republicans in Congress want that to happen because they don’t want to be blamed for it … That’s business as usual … Even though we have some knowledgeable guys in the Trump cabinet, it’s not going to change any of these dynamics.”

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