E Reflation Cannot Save Trump From A Painful Recession

Donald Trump is a real estate guy. He knows American real estate skates on thin ice. His contract with Wall Street is to try to supply more bonds through deficit spending to Wall Street. But the Senate will likely not be behind this deficit spending as it relates to infrastructure. Trump has indicated that he wants to cut corporate taxes from 35 to 15 percent, and spend more on military and infrastructure.

The reflation trade that we are seeing is a tantrum against the bond market. Long bond yields are up to over 2 percent. But what is the reflation trade and what can it accomplish? Investopedia has a precise definition of reflation as government sponsored business expansion:

Although almost every government tries in some form or another to avoid the collapse of an economy after a recent boom, none have ever succeeded in being able to avoid the contraction phase of the business cycle

The question then is, are we in the middle of a boom or at the end of it? If we are at the end of this boom, reflation will only make things worse, and the recession deeper. Who will take it the hardest?

Likely those who will incur the most pain will be the working class supporters of Trump, along with the rest of Main Street. Who will benefit most from the reflation before the crash? Well, try investors in real estate of course. Here is a chart from Dr. Edward Lambert that proves we are at the end of the business cycle:

Here is my explanation of this chart in a recent article: 

So basically, the chart shows two things. The red is the traditional CBO measure of the output gap, which is real GDP minus potential GDP. The green is Edward Lambert's measurement of the effective demand limit caused by labor's share of income being low. He is saying the growth cycle has already passed and the green line indicates the road to recession. He says the Fed missed the interest rate cycle already!

So then, my personal opinion is that Trump is doing what he knows and what will benefit him. If he is prospering, by the reflation of real estate, then in his mind, that nation is prospering. I remain skeptical because this reflation could make the inevitable recession even worse for the guy on the street. The investors will leave early, having bought low. They will sell high. 

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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