It's been a strange few days on the Donald Trump front: He's said something about himself that I really believe and something about the economy that's mostly true.
Personally, Trump has been a lot like Adolf Hitler lately; I am not referring to his general tone, but to his statement that Immigrants are “poisoning the blood of our country”echoing, almost word for word, what Hitler wrote in My struggle. But Trump assures that he has never read My struggleand I believe him, just as I believe he has barely glanced at the Bible or any of the great books or, I suppose, The art of the deal. It is clear that reading is not his thing. What happens, presumably, is that Trump talks to people who have read Hitler, with admiration, and that is how Nazi language sneaks into his speeches. Do you feel calmer?
Economically, the stock market has recently approached all-time highs, but Trump has disparaged these gains because he believes they only make “richer to the rich”. It's hard to imagine a worse person to convey this message, since when Trump was president, he constantly boasted about the stock market and predicted that Joe Biden's election in 2020 would cause the stock market to crash. An aside: one thing I have not seen emphasized in the debate on vibracessionor “vibes” recession—why are Americans so pessimistic about an economy that appears very strong?—is the fact that Trump himself continues to say things about the economy that are flatly false, including his claim that The price of bacon has “quintupled” during Biden's term. In reality, it is up 18%.
However, Trump is right to imply that most people won't see much personal benefit from rising stocks. A slim majority of Americans have some involvement in the stock market, largely indirectly through retirement accounts. But for almost all people, these holdings are small, while the richest 10% of families own on average millions in shares.
Although, most people don't directly concern themselves much with stock prices, do you know what they do? Bond prices, which are the other side of interest rates. (Higher bond prices correspond to lower interest rates, and vice versa.) Interest rates soared through much of 2023; The 10-year bond yield hit nearly 5% in October, up from about 2% before the pandemic. However, yields have since retraced a considerable portion of that rise, and are down more than a percentage point. Because? As I'll explain in a minute, no one really knows. But rising interest rates threatened to have negative effects, so seeing them retreat, even a little, is good news.
Why are high interest rates a problem? Firstly, because they discourage investment. Companies are less willing to make capital outlays when interest costs are high. For example, high interest rates were a factor in the delay or cancellation of several offshore wind projects. Mortgage interest is an essential expense for home buyers, so high rates are bad for the real estate market and for home construction.
High rates also pose other problems. In the American system, high mortgage rates tend to lock people in, making them reluctant to sell because it would mean giving up fixed mortgages at lower rates. And the decline in the value of banks' bond portfolios helped spark a brief banking run in March. For now, this panic seems to have been contained, but the fall in rates clearly reduces the risk of a second round.
Oh, and the cost of US government borrowing is having a big impact on the federal fiscal outlook, which isn't very promising, but looks less dire than it did two months ago. Therefore, the rise in bond prices is good news for everyone. What is going well?
Basically, no one knows. When an individual stock goes up or down, it could be a reflection of traders' special information or experience. But bond traders work with the same macroeconomic data available to anyone with Internet access.
Analysts have offered various explanations for the rise in interest rates this year: it was the federal budget deficit, which ballooned due to a decline in revenue; It has been the impetus that the Biden Administration's industrial policies have given to business investment; has been optimism about future economic growth driven by artificial intelligence. But as far as I know, there is no solid evidence to support any of these hypotheses.
And there has not been enough information to justify a significant revision of these accounts. We have received good news on inflation, pointing to significant reductions in short-term interest rates (controlled by the Federal Reserve) in the next year or two. But that shouldn't have a big impact on long-term interest rates, which are supposed to reflect the Fed's expected policy over many years; howevereven 30-year rates have fallen by around one percentage point.
I suppose what we are looking at is basically market psychology rather than deep economic forces. However, whatever is happening, it is good news. The rise in the fixed income market has given us a Christmas gift, and a reason to be more optimistic for 2024.
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