Academy Blog

Causes of Inflation in The Trump Economy, the future of Stocks & Bonds

[fa icon="calendar"] Dec 30, 2016 12:28:13 AM / by Robert Brinkman

Robert Brinkman

Inflation _Rob Brinkman-01.png

 

The S&P 500 is Up a Little Over 5.0% Since the Trump Election, but Most Investor Portfolios Aren’t  – Why? 

A picture is worth a thousand words.

161222-Stocks-vs-bonds.png

Yes, ‘stocks’ are up, but as you can see from the red line above, bonds have been hammered, and most people have just as much money in bonds (bond mutual funds) as they do in stocks.  Even our platform of tactical bond managers were affected, what gives?

Everyone, I mean everyone (including investment managers), thought Hillary was going to win the election.  Given that, it was baked in that interest rates would stay at their current level, because a perpetuation of the Obama economy by Clinton would mean a continued stagnation.  Though the Federal Reserve has wanted to raise rates, our economy wasn’t strong enough.  Just remember what happened last December when the Fed raised rates ¼ point and the market fell off the table.

Then comes the Trump victory, along with it enthusiasm for Trumpulus and Trumponomics, which gave us a double shot in the arm – the stock market went up AND the Fed was able to raise rates without stocks throwing a temper tantrum.

 

One Thing We Must Remember – Wall Street (which represents both stocks AND bonds) ALWAYS Reacts Before an Event. What Event?  Inflation.

Ever since 2009 our Federal Reserve has been trying to create inflation.   They’ve been doing it with their primary tool of printing money (Quantitative Easing, ZIRP) to the tune of $20,000,000,000.  Unfortunately their stimulus hasn’t worked.  It didn’t stimulate enough small businesses and corporations to hire more people, pay them more, buy more equipment or invest in new technologies.

The Causes of Inflation (and Inflation in general) is an equation:  Money Supply x Velocity (how much money moves around).  We have a record amount of money in our system ($46,000,000,000), but it hasn’t been moving around much due to:

· Sluggish economy

· Low consumer spending due to flat wage growth over the past 7  years

· Banks scared to lend money, because they still have a high ratio of Under or Non-Performing Loans

But, because of Trump, money movement will increase substantially because he is committed to:

· Infrastructure Building

· Wall Building

· Pipeline Building

· A friendlier tax and regulation environment for U.S. Corporations, which means they will invest and Build.

The operative word above is ‘Build’.  Remember what I said before, Wall Street always acts BEFORE an event.  With the anticipated building, there is also an anticipation of an increase in money movement (Velocity), which will drive inflation up and that means interest rates go up.  Want some evidence?

 

Okay, if the above isn’t true, then why in this graph did rates go up so dramatically BEFORE the Fed announced their increase?

FedRates.jpg

So on November 8th not only did we elect a new President and new economic direction, but we also officially ended a 30-year bond bull market.  We are now officially entering into the bear bond markets. Why?  It’s math – see the below image.

InterestRates.jpg

If interest rates go up, bond values go down – period.  It will be VERY difficult for the average investor to make money in bonds over the next several years.  You have a chance if you can manage your own ladder of INDIVIDUAL bonds, but that’s not how the vast majority of people own bonds.  Most own bond mutual funds.

If you want to understand the challenges bond fund managers face, watch this video where I explain it in the context of owning Target Date funds.

On our Safe Harbour Retirement investment platform we’re adding managers that are experts in a rising interest rate environment.  The big difference between our private wealth managers and your typical mutual fund manager is we can go inverse with instruments that hedge against the pain bonds will experience.

And that pain will catch a lot of people off guard.  In most people’s mind Bonds = Safety.  That definition will disappoint investors who aren’t paying attention.  I lived through this during the first half of 1987 and then again from July 1993 through July 1994, when interest rates spiked up.  And those were ‘spikes’ in an overall downward rate path.  Those increases occurred at the 7% and 6% level respectively.  We’re not at 7 or 6.  We’re at 2%.  What we experience moving forward will not be a ‘spike’.  It will be a return to normal rate levels.  

We have a long way to go before we reach ‘normal’, which spells a long trail of pain until we get there…buckle up…

 

FREE PORTFOLIO RISK ANALYSIS

 

Topics: stocks and bonds, Bond Markets, Trump, causes of inflation, Trumpulus

Robert Brinkman

Written by Robert Brinkman

Rob Brinkman is the Founder of Safe Harbour Retirement, LLC and has been an Advisor for 31 years, opening his first investment firm for Edward Jones in 1987. He has been a Registered Principal and Executive for one of the largest Investment/Insurance companies in the world. He speaks Internationally and was selected by Jim Collins, author of the New York Times Best Selling book Built to Last, to panel his pre-release of the again Best Selling book Good to Great. For the past decade Rob has been focusing on mentoring and coaching business owners and the high net-worth on how to leverage their success more toward a life of meaning and significance. An expert with tax and investment issues, he writes blogs www.robbrinkmanacademy.com and produces video ‘white boards’ for numerous websites every month.

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