The Ball Is In The Donald's Court: The New Triumvirate

by: John M. Mason

Summary

There is a lot of optimism being generated by President Trump's pronouncements and he has the stock market at new highs, longer-term interest rates rising and a stronger dollar.

Now President Trump must deliver and execute his plans; plans that lack a lot of specifics at the present time.

This optimism is a good sign and indicates that the markets want President Trump to succeed, and so what remains is for him to get to work and actually perform.

The stock market reached another new high, the yields on longer-term US Treasury securities are up and the value of the US dollar is stronger. This seems to be the "new triumvirate," the "new reality" of the Donald Trump regime.

In a real sense, the ball is in President Trump's court, and whether this all works out or not is dependent upon how the president plays the game.

The stock market has reached new highs on the optimism that President Trump will deliver on his promises of tax reform and relief, infrastructure, and deregulation. It is like investors are letting go on the pent up frustrations carried over from the past. It is like a door is open that had been shut and everyone is rushing through into the sunlight.

JPMorgan Chase Chairman and CEO Jamie Dimon put it this way at the bank's annual investor day: "the new presidential administration has political, legal, and regulatory areas going from 'flashing red to flashing green.'"

And, the stocks of financial institutions are leading the charge to the new record stock market highs. At the same time, bond prices are falling and the yield on US Treasury yields are going higher. Bond traders are seeing a stronger economy with more inflation.

These traders are taking their cue from the Federal Reserve System whose officials are more and more talking up a possible increase in the Fed's policy rate of interest at the March meeting of the Federal Open Market Committee.

The Fed being "data driven" translates into the market perception that Fed officials would not be talking the way they are if they were not building up to the actual increase in the policy rate.

Signals are that economic activity is picking up and inflation is coming in closer to the Fed's target of 2.00 percent. Furthermore, the economic data flowing in from Europe seem to support this uptick as both economic growth and inflation numbers in the European Union are rising.

Within this environment, Federal Reserve officials seem to be talking more aggressively about raising rates at a pace consistent with the "forward guidance" they gave markets in December 2016.

There is still some doubt about the Fed increase in rates because of the fact that Fed officials provided similar "forward guidance" in both December 2014 and December 2015 and eventually backed off each year. They produced just one rate increase in 2015 and 2016, both in December.

Fed officials don't interpret these moves as "restrictive" in the sense of trying to slow down economic growth. The interpretation is that these increases would bring interest rates closer to the level they would be if the economy were behaving in a more "normal" way.

In that sense, the increase in the Fed's policy rate and the rise in yields on longer-term Treasury issues represent a return to "normality," a return to levels that are closer to those that existed when the economy was operating more closely to historical averages.

But, the rising interest rates are also resulting in a stronger value to the US dollar. This is happening because the US economy, even growing only at a compound rate of 2.1 percent over the past seven and one-half years, is doing better than most other developed countries in the world.

And, the US economy is expected to continue to set the pace over the next few years.

This has led to the stronger US dollar, something that the traders in the foreign exchange market have seemed to want for a couple of years. As I have written over this period, traders seem to have pushed the value of the dollar higher, every time they had the opportunity to move. It is my view that this will continue for the foreseeable future.

This situation, it seems to me, is a good one for the United States. Although some analysts do not interpret the situation the way that I do and argue for a weaker dollar, I believe that in the current circumstances, a strong dollar can mean a strong America.

So, I see this new triumvirate in a positive light. What is the one thing missing?

Well, the policies President Trump is calling for don't have much substance at this time. That is, the things that Mr. Trump is proposing are just ideas right now and need to be filled out with more specifics. That is, the ideas may be very appealing to the market and represent the foundation for the optimism that exists within the market place, but the crucial fact that is missing right now is the blueprints to execute his vision.

Thus, the ball is in President Trump's court and it remains to be seen whether or not he can deliver. The markets hopes he can, and right now, they are betting that he can. Let's hope that the markets are correct in their assessment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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