President-elect Donald Trump spent most of his time firing people on his TV hit reality show The Apprentice. Now instead of saying “you’re fired,” he is saying “you’re hired.”
CNBC had a great interview with Trump’s latest two picks to run the US Treasury, Steven Mnuchin, and the Commerce Department, Wilbur Ross. Neither are Alt-Right extremists. Both are mainstream financial conservatives and businessmen, confirming that Trump isn’t as wild as he was on the campaign trail. Their impressive joint appearance signaled that the two departments will be working closely together on economic policies, including taxation and trade issues.
The two clearly have a great deal of experience in running profitable businesses. They presented a significantly more moderate version of some of Trump’s policy proposals than were delivered with fire-and-brimstone rhetoric during the campaign. For those of us hoping that the President-elect would tone down his extreme positions and act more presidential, I have to say: “So far, so good.” That seems to be the collective opinion of stock investors as well, who are continuing to fuel the Trump Melt-up, with the S&P 500 up 3.0% since the election through Tuesday’s close (Fig. 1).
Stock market valuations continue to soar, with the forward P/Es for the S&P 500/400/600 rising to 16.8, 18.5, and 19.6 on Tuesday (Fig. 2). That’s quite extraordinary given that the US Treasury 10-year yield rose to 2.37% yesterday, with its spread with the 10-year TIPS yield suggesting that the inflation expectation over the next 10 years has risen to 1.94% per year, up from the year’s low of 1.18% on February 11 (Fig. 3 and Fig. 4).
Stock investors seem to be betting that the higher inflation and interest rates likely to result from Trump’s policies will be more than offset by the benefits of fewer regulations and lower taxes on corporations, and possibly faster economic growth. They also are betting that Trump’s anti-trade rants during the campaign will give way to more reasonable dialogue with our trading partners.
This more rational approach to achieving Trump’s major economic goals was certainly confirmed by yesterday’s CNBC interview with his picks for Treasury and Commerce:
(1) On tax reform. Mnuchin said, “Wilbur and I have worked very closely together” during the campaign on tax reform. He is shooting to lower the corporate tax rate to 15%. However, there “will be no absolute tax cut for the upper class” because their cut will be “offset by less deductions that pay for it.” There will be a cap on the mortgage interest deduction.
(2) On trade reform. Regarding protectionism, Ross said, “Everybody talks about tariffs as the first thing. Tariffs are the last thing. Tariffs are part of the negotiation. The real trick is going to be [to] increase American exports. Get rid of some of the tariff and non-tariff barriers to American exports.” Ross agrees with Trump’s opposition to TPP: “For one thing, TPP had terrible rules of origin. Rules of origin means can stuff come in from outside the boundaries of the treaty countries? In automotive, the majority of a car could come from outside TPP--namely, could come from China--and still get all the benefits of TPP.”
(3) On financial reform. Mnuchin isn’t aiming to gut Dodd-Frank. He wants to fix it. He said, “We’re going to look at all these things, but the number one problem with the Volcker Rule is it’s too complicated and people don’t know how to interpret it. So we’re going to look at what to do with it, as we are with all of Dodd-Frank. The number one priority is going to be [to] make sure that banks lend.”
(4) On China. Mnuchin was asked about naming China as a currency manipulator. He said the Treasury will certainly look into this issue, but he didn’t say that China will be so labelled from day one of the new administration, as Trump threatened on the campaign trail.
(5) On the Fed. Both Mnuchin and Ross said that Fed Chair Janet Yellen has been doing a good job. That suggests that Trump might desist from any new Twitter attacks on her leadership for a while. On the other hand, Mnuchin said that Trump has to fill two spots on the Fed’s Board of Governors. His appointments aren’t likely to share the liberal views of Chair Janet Yellen, FRB-NY President Bill Dudley, and Fed Governor Lael Brainard.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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