Tuesday, December 06, 2016 by Don Wrightman
We have seen the worst bond crash in 15 years following the election of Donald Trump. Global bond investors have seen trillions of their dollars wiped out since the November 8th result. Analysts continue to issue warnings of tough times ahead of us. The investing community believes that a Trump administration will make for much higher inflation, and investors are starting to demand higher interest rates as a result.
History shows that higher interest rates cause an economic slowdown. This makes sense, because economic activity slows when it becomes harder to borrow money. The Obama administration has already set Trump up for a major recession, but the bond crash threatens to bring it on sooner. In the bond market, bond prices fall when yields rise. A reduction in bond prices is bad news for economic growth because we do not wish to see yields rise. Yields have been soaring over the past few weeks, and the yield for a 10-year treasury note has jumped one full percentage point since July.
The 10-year yield is at a critical juncture which might cause the Fed to impose a rate increase in December. Post-election pronouncements by Fed workers have pushed the odds of a rate hike up to 98 percent. Many things in our financial system are tied to yields on U.S. Treasury notes, including skyrocketing mortgage rates. If mortgage rates continue to rise, there will be another housing crash. Other rates that will be affected include auto loans, credit cards and student loans. It will become much costlier to borrow money, which will slow down the overall economy.
Steve Bannon is determined to get a 1 trillion-dollar infrastructure plan through to congress. This will include heavy borrowing and heavy spending for a government that is already on pace to add 2.4 trillion to the national debt in this fiscal year. This all comes at a time where the U.S. economy is showing significant signs of decline. Projections show that the S&P 500 will see a sixth straight decline in year-on-year earnings. The economy has barely been staying afloat for quite some time, and it won’t take much to push it over the edge. There is not a lot of wiggle room left for bad policy.
If the economy suffers early in the Trump administration, stock prices will follow. The Obama administration has set us up perfectly for higher interest rates, a major recession and a giant market crash.