Trump, Lincoln, Churchill, Hegel, Gundlach
David R Kotok
Cumberland, November 22, 2016
Speculation and diverse economic and market forecasts abound on the heels of the Trump win and Republican Senate and House victories. We won’t waste time repeating them here, save for one that we will address at the end of this Thanksgiving Week commentary.
First, we (all 38 of us at Cumberland) want to wish our clients, our friends, our families, and our readers a festive holiday in this uniquely American tradition.
Speaking of great American traditions, Lincoln’s Gettysburg Address is assuredly one of them. Many a student had to memorize it and deliver it in a classroom. I am one of those pre-Safari, pre-Wikipedia antiques.
I think about how much society has changed, such that we now have the President-elect tweeting about the popular Broadway Show Hamilton and the cast’s interaction with Vice President-elect Pence, who was in the audience. The tweet and Lincoln’s “Four score and seven years ago” are both part of America’s history of November 19, although 153 years apart. Hat tip to Joe Nocera (NY Times) and Mike McKee (Bloomberg). Each of these November 19 events evidences American political theatre, and each is to be taken seriously.
Lincoln’s speech is an icon of history. Trump has taken the tweet to new heights in political usage. He knows the power of social media. He will use it in the Congressional debates over his policy proposals. Twitter, like WikiLeaks, is among the winners of this political season. Such is the new dawn in America.
Winston Churchill, an ally of the United States and another iconic statesman, rose in the House of Commons in 1947 and observed, “No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time.…” Churchill didn’t originate the quote, but he did make it famous. One can only speculate whether Sir Winston would have substituted a tweet for an oration.
Former Bank of England Governor Mervyn King invoked an 1832 quote of Georg Wilhelm Friedrich Hegel as an epigraph for chapter 9 of his book The End of Alchemy. Hegel lectured on the philosophy of history and said, “What experience and history teaches us is that people and governments have never learned anything from history, or acted on principles deduced from it.” King’s book, with its powerful chapter on the coming crisis, is among the permanent references in my library.
We don’t yet know what the new administration will look like, although that is changing quickly. We certainly know that markets have taken a roller coaster ride in the pre-election and post-election period. Markets are beginning to act as though changes are coming in inflation and interest rates and growth rates (perhaps), as well as in labor income (may rise) and infrastructure spending (likely) and regulatory change (in finance) and taxes (lower) and defense spending and a long list of things that will all evolve over the next year.
One forecast jumped out at us. Chris Whalen (Kroll) referred to it in his recent piece entitled “Return of the Bond Vigilantes”: “Barron’s notes that Jeffrey Gundlach, CEO of DoubleLine Capital, predicts a 6% Treasury note yield in the next four to five years…” Now that is an attention getter.
So we will end this Thanksgiving-Week note by taking the other side of that forecast. Yes, it is possible that the federal deficit will double under a President Trump. The Congressional Budget Office has it at about $1 trillion in four to five years. The worst of the pessimistic forecasts are doing what Moody’s analysis calls “Mr. Trump at Face Value.”
We’ve read the Moody’s detailed report and examined its four scenarios. If the worst of them comes to pass, Gundlach is going to be right. In fact, Moody’s has a worst-case Trump deficit of over $2 trillion by the end of his first term and a debt-to-GDP ratio of 100% with a 10-year Treasury yield of nearly 7%. But that is based on all of Trump’s rhetoric being made real without any modification or tempering.
We estimate the odds of that bleak scenario to be very low. We certainly would not make portfolio changes today based on that five-year forecast. And to do this before the new administration is even officially in office seems a little excessive to us.
Three other scenarios, labeled “The economy under current law,” “Trump Lite,” and “Mr. Trump goes to Washington” lead to a much lower bond shock than Gundlach describes. Sure, the 10-year US Treasury yield is higher. The estimated range in four years is 3.6% to 4%. That is about a point to a point-and-a-half higher than today. And that assumes a little more inflation and a little higher growth and some increase in the deficit.
All scenarios except for “Trump at Face Value” are manageable from an investor’s view and are reasonable in their construction. We expect that one of them will closely resemble the outcome if we revisit this issue five years from now.
Let’s stop the hand-wringing and enjoy Thanksgiving. And let’s be thankful for this wonderful country where the cast of a Broadway show can lecture the soon-to-be VPOTUS and the soon-to-be POTUS can tweet about it on the day we remember Lincoln. Let’s remember Churchill’s citation and try to ignore the gloom of Hegel –although, as students of philosophy, we must respect that view, too.
Have a thoughtful holiday and great debate with your pumpkin pie.
We end with this final note in tribute to our wonderful country. The Portland news report that over half of the anti-Trump protestors didn’t vote is true. In Sir Winston’s “all the others” one is not likely to encounter such freedom.