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Trump To Yellen: ‘Print More Money Or You’re Fired’

By Michael PentoMarket OverviewNov 15, 2016 12:27PM ET
www.investing.com/analysis/trump-to-yellen:-%E2%80%98print-more-money-or-you%E2%80%99re-fired%E2%80%99-200164790
Trump To Yellen: ‘Print More Money Or You’re Fired’
By Michael Pento   |  Nov 15, 2016 12:27PM ET
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What kind of President will Donald Trump be? Will he restore America to its former position of greatness, or end up being feckless like a long list of his predecessors? That is yet to be determined.

However, what is clear now is if Donald Trump wants to avoid starting his tenure with an economic crisis similar to that of Mr. Obama he will need to put a lid on long-term interest rates rather quickly. And in order to do that he will have to convince a supposedly politically-agnostic Fed Chair, Janet Yellen, to not only refrain from further interest-rate hikes but also to launch another round of long-term Treasury debt purchases known as Quantitative Easing (QE).

Rising Yields

The move higher in Treasury yields since the election of Trump has been nothing short of violent, but borrowing costs were already on the rise prior to November 8. The Ten-year Note yield began its ascent after it bottomed at 1.36% back in July. This is because central bankers arrived at a new conclusion: that a steepening yield curve would be best for the banking system and economic growth, rather than to just continually push long rates lower. The Ten-year yield climbed up to 1.83% on the day prior to the vote, then spiked to over 2.30% several days after America made its choice for president.

But why is the election of President Trump so bad for bond prices? The answer is twofold. First, Trump’s pro-growth policies of lower corporate and personal taxes, in addition to reduced regulations, are causing investors to sell fixed income products and to place funds in equities. Growth stocks simply offer the potential for better returns than the current historically-low yields found in bonds. Second, and most importantly, a Trump presidency is highly inflationary because his massive $1 trillion infrastructure refurbishment plan, along with his proposal to rebuild the military, will—at least in the short-term—significantly increase annual deficits. In fact, deficits are already soaring; the fiscal 2016 budget hole jumped to $587 billion, up from $438 in the prior year, for a huge 34% increase.

Enormously growing deficits, which will add to the intractable national debt, tends to force a central bank into an ultra-loose monetary policy. But it’s not just the $20 trillion public debt that will put pressure on the Fed to keep printing money. Total non-financial debt has soared from $33.1 trillion at the end of 2007, to a record $45.6 trillion in Q1 2016. That means debt as a percentage of GDP has climbed from where it was prior to the Great Recession (226%), all the way up to 250% of the economy.

A central bank that vastly increases the money supply, one that far transcends the legitimate pool of savings, is the tool used by governments to keep interest rates from skyrocketing. This has been the recipe for runaway inflation since the beginning of economics.

In addition to this, Trump’s protectionist trade policies would implement either a 35% tariff on certain imports or would require these goods to be produced inside the United States at much higher prices. For example, the increase in labor costs from goods made in China would be 190% when compared to the federally mandated minimum-wage earner in the United States. Hence, inflation is on the way.

The incredible nearly 50-basis point surge in the benchmark Treasury yield in the immediate wake of the election is proof of Trump’s fiscal profligacy and his inflationary impact on the nation.

Death Of Bond Bull Market

The end of the 35-year-old bond bull market is upon us. Trump’s trade policies, along with his avowed love of debt, is putting significant upward pressure on borrowing costs. The Donald will now try to convince Janet Yellen to reverse her incipient tightening policy and bring rates back to zero—and eventually even to launch QE IV.

If rates continue to rise it won't just be bond prices that will collapse. It will be every asset that has been priced off that so called "risk free rate of return" offered by sovereign debt. The painful lesson will then be learned that having a virtual zero interest rate policy for the past 90 months wasn't at all risk free. All of the asset prices negative interest rates have so massively distorted including; corporate debt, municipal bonds, REITs, CLOs, equities, commodities, luxury cars, art, all fixed income assets and their proxies, and everything in between, will fall concurrently along with the global economy.

For the record, a normalization of bond yields would be very healthy for the economy in the long-run, as it is necessary to reconcile the massive economic imbalances now in existence. However, President Trump will want no part of the depression that would run concomitantly with collapsing real estate, equity and bond prices.

But the problem is that he will be asking Ms. Yellen to do the exact thing he accused her of doing during the campaign. Namely, being a political puppet of the President. If the Fed is truly apolitical, she will politely refuse. Nevertheless, what Yellen and Trump don’t understand is that our nation is both debt-disabled and asset-bubble addicted, which requires interest rates to be near zero percent or the whole ersatz economy will implode. The devastating bond bubble’s collapse will bring Trump to that reality very soon. And if Ms. Yellen doesn’t agree to pick up the speed on the printing presses she may hear the words “Your Fired”, even before her tenure is up in February 2018.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Trump To Yellen: ‘Print More Money Or You’re Fired’
 

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Trump To Yellen: ‘Print More Money Or You’re Fired’

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Comments (4)
Mark Scott
Mark Scott Feb 08, 2017 11:58PM ET
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too many cucks think globalism is great. I guess it seems that way when the real numbers of unemployed are manipulated. Funny how this great system seems to crash every few years and the only ones who get wiped out are the people who had nothing to do with its collapse. Face it people, its a failed system. The West has a higher standard of living and trade deals with 3rd world like countries mean 1 thing. NO JOBS. that creates social tension throughout communities and countries. Then they bring in people who actually openly say they want us dead and give them more money and freebies and if u stand up against it you get shouted down as a racist by indoctrinated punks who dont understand they are cannon fodder in this communist new world order. a government has a duty to protect its citizens, to provide the ability to allow people to make a living, support their families and nothing more. Our tax dollars is to be spent on us in the form of infrastructure and education and protection.
joe zhou
joe zhou Nov 16, 2016 3:10AM ET
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What is implementable in Trump's agenda is more focus on internal economy and spending less in "decorating" Russia and China's doors with warships. If the US continues to squander its taxation money world wide, Americans will have more issues than solustions.
Luke Izlar
Luke Izlar Nov 15, 2016 10:51PM ET
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God do you even hear yourself? . . " Nevertheless, what Yellen and Trump don’t understand is that our nation is both debt-disabled and asset-bubble addicted, which requires interest rates to be near zero percent or the whole ersatz economy will implode. " "also to launch another round of long-term Treasury debt purchases known as Quantitative Easing (QE).". . That's like saying a drug addict just needs more drugs! Trump knows the truth better than most, we need a crash, a true deleveraging event, to have any shot of a real recovery.
Solomon Lalani
Solomon Nov 15, 2016 5:13PM ET
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Your article makes sense. Can you please also write if Trump's economic agenda would even be possible for implementation? And in which possible steps? I have my severe doubts that shifting manufacturing from (cheap USD 2-5/day labor) overseas back to US (with high wages, promised USD 15/hour labor) is even possible. This sounds populist and hence music to US voters, but almost impossible to do. Also, if US puts a tariff of whatever percentage, that would only make things unaffordable for US consumers, as 1% increase in protective tariff generally has 1.5% increase in price (Trump has been talking of up to 35% tariff, which means 50% increase in price at least). Also, I think US cannot afford QE4, with or without Yellen at Fed. DX/US consumer's purchasing power will lose its value to such an extent that US' influence in global economy would be severely compromised, thus making it even more difficult for Trump to put tariff and bring back jobs in US
Fernanda Stefani
Fernanda Stefani Nov 15, 2016 5:13PM ET
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Maybe Americans will then simple be consumist. Do you think this is even possible, being the paradise of consumerism?
Mark Scott
Mark Scott Nov 15, 2016 5:13PM ET
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lol, do u not understand that the globalisation, seriously stupid free trade pacts with numerous countries that have a standard of living that will allow them to pay their workers a few cents, This was never going to be an instant fix, but really what has the world got to lose. Its already breaking down both socially and economically because the power has been taken from the people and given the an elite class. When a family brings in money from jobs they still spend the money, they pay tax. Free trade only works if wages are the same in both countries or naturally the cheapest waged country gets all the jobs. Tarrifs work, It encourages people to buy products from their home. It will take time to work out but in the end it will allow people to control their own lives without the need of government assistance making people happier and making social division
 
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