Reflation Cannot Save Tantrum Trump from a Painful Recession

This article was first published by me on Talkmarkets:

Donald Trump is a real estate guy. He knows American real estate skates on thin ice. His contract with Wall Street is to try to supply more bonds through deficit spending to Wall Street. But the senate will likely not be behind this deficit spending as it relates to infrastructure. Trump has indicated that he wants to cut corporate taxes from 35 to 15 percent, and spend more on military and infrastructure.

The reflation trade that we are seeing is a tantrum against the bond market. Long bond yields are up to over 2 percent. But what is the reflation trade and what can it accomplish? Investopedia has a precise definition of reflation as government sponsored business expansion:
Although almost every government tries in some form or another to avoid the collapse of an economy after a recent boom, none have ever succeeded in being able to avoid the contraction phase of the business cycle
The question then is, are we in the middle of a boom or at the end of it? If we are at the end of this boom, reflation will only make things worse, and the recession deeper. Who will take it the hardest?

Likely those who will incur the most pain will be the working class supporters of Trump, along with the rest of main street. Who will benefit most from the reflation before the crash? Well, try investors in real estate of course. Here is a chart from Dr. Edward Lambert that proves we are at the end of the business cycle:

Here is my explanation of this chart in a recent article:

So basically, the chart shows two things. The red is the traditional CBO measure of the output gap, which is real GDP minus potential GDP. The green is Edward Lambert's measurement of the effective demand limit caused by labor's share of income being low. He is saying the growth cycle has already passed and the green line indicates the road to recession. He says the Fed missed the interest rate cycle already!

So then, my personal opinion is that Trump is doing what he knows and what will benefit him. If he is prospering, by the reflation of real estate, then in his mind, that nation is prospering. I remain skeptical, because this reflation could make the inevitable recession even worse for the guy on the street. The investors will leave early, having bought low. They will sell high.

But the average people may seek to tap HELOCs, or spend to improve their houses, and then when they are ready to sell, the recession could already be upon them and hurt them.

As far as interest rates are concerned in the treasury tantrum, I believe that there is massive demand for long bonds, so that I disagree with one article on partner site Seeking Alpha. The author, Harry Kourouklis, says there are multiple attacks upon long bonds, that are in the works. First is Trump's reflation. Second is China's explosive inflationary growth, which the author also notes in another article. 

It is difficult to measure the demand for long bonds, other than getting hints from people who see the demand from the inside. Rick Rieder said there is monumental demand. Monumental is a pretty strong word. Needing more bonds in a margin call at your derivatives account if collateral declines in value too quickly, is a sure sign of bond strength. It would seem that there can be agreement with Marc Faber that buying into the selloff of bonds makes sense above 2 percent yield on the 10 year.

Reflation is here, for awhile. Reality will set in if Dr. Lambert's predictions of recession hold. Math don't lie, so investors should assess his views seriously.


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