Opinion |

What Do Trump, Erdogan and Wall Street Have in Common?

They all love low interest rates and share a dangerous nonchalance about inflated asset prices

David Rosenberg
David Rosenberg
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U.S. President Donald Trump, left, talks to Turkish President Recep Tayyip Erdogan, right, as they tour the new NATO headquarters in Brussels, Belgium, Wednesday, July 11, 2018.
Trump, left, and Erdogan have more in common than one might have thought. Credit: ,AP
David Rosenberg
David Rosenberg

U.S. stocks hit a record high on Tuesday. The sun is shining down on Wall Street and the birds are chirping in Trumpland. But what about the rest of the world?

It would be an exaggeration to say Wall Street is living in a bubble. The fact is the U.S. economy has been growing well enough, it has been generating jobs and wages have been rising.

The problem is that stock markets are supposed to be trading on future expectations, not on the past. Otherwise, investment banks would be paying six-figure salaries to teams of historians instead of economists and quants.

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But Wall Street seems to be living in the glorious past of 2018, when corporate earnings rose 22% and the U.S. economy posted growth of 3.6%, pretty close to the 4% that Trump promised. Yet nearly all of this is due to his tax cuts, and their impact is petering out. Last year’s corporate splurge on new factories, equipment and computers is over.

This year and next year don’t look nearly as good as 2018, yet the stock market rally has lifted the S&P 500 index 25% since its Christmas Eve trough. It’s now at the point that a key market measure, the price of shares relative to company’s forecast earnings (P/E ratio), has reached a worryingly high level.

U.S. economic growth is on a downward trajectory. The International Monetary Fund has cut its U.S. forecast twice in the last six months to 2.3% this year and 1.9% in 2020. There’s even been a lot of talk about a recession. Corporate profits are not going to grow much this year, making the S&P’s P/E ratio look like wishful thinking. Reuters I/B/E/S predicts that earnings will decline in the first quarter and an anemic 3% rise for all of 2019.

What’s making the market so happy can be explained in just two words: interest rates.

My heart goes out to Jerome

The U.S. Federal Reserve raised them four times in 2018, the last time in December when it put investors into a funk and sent shares tumbling.

The Fed had good reason to act – the Trump economy of last year was showing signs of overheating, and in normal times it’s the Fed’s job to cool things down before inflation takes off.

But these aren’t normal times, especially for central bankers who have seen a lot of their ideas about how economies are supposed to function and what their role should be confounded since the 2008 financial crisis. The fact is that the U.S. has had low interest rates, big budget deficits, economic growth and no inflation for decade – a combination the conventional economics posits can’t happen for long.

My heart goes out to Jerome Powell. As Fed chairman, he was doing his job as best he could in confusing times, but his rate hikes made him enemies on Wall Street and, even more dangerously, in the White House.

You would think that as a graduate of the Wharton School and real estate developer, America’s otherwise proudly ignorant president would at least have a grasp of the fundamentals of economics, such as that rates should rise when the economy is growing so quickly and that central banks should be left to do their jobs without interference from elected officials. Wall Street should know a least as much.

But it seems that self-interest has gotten the better of both of them. Without a strong economy to propel it higher, the stock market needs low interest rates to bring in the capital that might otherwise go to other investments linked to the price of money. When Powell insisted on raising it, he was depriving Wall Street of its life blood.

Not happy in America

Trump’s self-interest is to keep the economy in overdrive at least until all the ballots are cast on November 3, 2020. He has touted stock market gains as proof that his policies are working. Higher interest rates would hurt him on both counts. Thus Powell found himself at the receiving end of a flurry of Trump tweets, the modern day equivalent of the Sword of Damocles.

In December and January, Powell reportedly tried to policy-wonk his way out of his problem by declaring that economic fundamentals had suddenly changed for the worse and signalled that the era of rate hikes were over for the foreseeable future on the grounds. Happy stock market, happy Trump.

Happy America? The country would have been better off if the Fed had been left to do its work as it saw fit. It’s not as if economists have a monopoly on economic wisdom, but the blatant interference of a president whose agenda it mainly about vanity is certainly not an alternative source of good policy ideas.

Neither is the stock market’s delusion that the party can keep going on forever.

Trump might discuss this with his pal, Turkish President Recep Tayyip Erdogan, who is also an enemy of high interest rates and kept the Turkish economy on a boil before 2018 elections after which the pot overflowed. The two situations aren’t identical, but they are close enough.



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