Global Investment Strategy

GIS December 5 (Clash of Ideologies)

Date: 2016-12-04 - Prepared by: The GISI

The 10-30 part of government bond yield curves is still not steepening, which means that the bond market is not worried about government deficits running out of control. Donald Trump’s economic ideology will be tested in 2017 and 2018. There is no robust method to empirically analyze the market implications of his future policies and make predictions. Comparing 2017 to the 1980s is useless.

Donald Trump’s lower corporate and personal income tax rates, a streamlined tax code combined with less regulation and a smaller government apparatus, are expected to generate a real GDP growth rate of 3% to 4% and an inflation rate of 2% to 3%. This means a nominal GDP growth rate of around 6%. Nominal GDP growth is the key bet.

Between 2011 and 2016, the US nominal GDP growth rate fluctuated between 2.5% and 5% and averaged only 3.5%. If the US economy doesn’t generate a nominal GDP growth rate of 6%—as many in the new administration expect—the budget deficit and federal debt will grow at a much faster rate and the US$ will have to depreciate.

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