In a blog post last Friday I provided evidence that the extent to which a US president is “pro-business” has very little to do with the stock market’s performance during that president’s term in office. Regardless of whether the associated policies are good or bad for the economy, the key to the stock market’s performance over the course of a presidency is the market’s position in its long-term valuation cycle. On this basis there’s a high probability that the stock market’s return over the course of Trump’s first — and likely only — 4-year term will be dismal, no matter what Trump does. However, the policies of a president can have a big effect on the performance of the economy.

It’s obviously early days for the Trump Administration, but the initial signs are not positive. The main reason is that “regime uncertainty” is on the rise.

“Regime uncertainty” is the name given to the tendency of private investors to pull back from making long-term financial commitments due to uncertainty about what the government will do next. According to an essay by Robert Higgs, it was one of the factors that prolonged the Great Depression of the 1930s. Government intervention is generally bad for the economy, but it tends to be even worse when it happens in an ad hoc way.

As discussed in a Bloomberg article last month, the economically-depressing effect of government by ad-hoc command was also addressed by Friedrich Hayek in “The Road to Serfdom”. The problem, in a nutshell, is that if the government’s actions are predictable then people are able to plan, but if officials are regularly issuing commands it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

The signs were not good when Trump started singling-out individual companies for special treatment even before he took the oath of office and got worse when Trump started talking about imposing a 20% tax on Mexican imports as a way of forcing Mexico to pay for a wall between the two countries. Does he really believe that forcing US consumers to pay 20% more for products made in Mexico amounts to making Mexico pay for the wall?

And the signs recently became more worrisome due to the sudden imposition of immigration and refugee bans. The effects of these bans on the US economy will not be significant, but the concern is what they imply about the decision-maker’s level of understanding and willingness to ‘shoot from the hip’.

The immigration ban imposed on seven Muslim-majority countries is a particular concern because of its blatant irrationality. Making America safe from terrorism is the official justification for the action, but over at least the past 40 years there has not been a single fatal terrorist attack perpetrated on US soil by anyone from any of the banned countries. On the other hand, Saudi Arabia is not covered by the ban despite having supplied 15 of the 19 terrorists directly involved in the 9/11 attacks and being well known as a state sponsor of terrorist organisations. I am not suggesting that the ban should be expanded to include other countries, I am questioning the knowledge and logicalness of a political leader who would decide to do what has just been done.

To top it all off, late last week Trump began threatening Iran for no good reason via his preferred medium for conducting international diplomacy: Twitter. What will he do next?

Taking a wider angle view, the protectionist agenda that the Trump Administration seems determined to implement will have numerous adverse consequences, most of which aren’t quantifiable at this time because it isn’t known exactly what measures will be taken and how other governments will react. All we know for sure is that Trump wrongly believes that international trade is a win-lose scenario and that trade deficits are problems for governments to actively reckon with.

Perhaps the initial warning signs are not indicative of what’s to come and Team Trump will settle into a more logical, impartial and cool-headed approach, but right now it looks like Donald Trump is going to make uncertainty great again. If so, private investment will decline.

Putting aside the fact that prior to the US Presidential election last November almost everyone believed that a Trump victory would result in a weak stock market, the popular view now is that the stock market has strengthened since the election due to the incoming Trump Administration being more pro-business. It is arguable whether the Trump Administration really will be “pro-business” (early signs are that it won’t be), but in any case the historical record indicates that the currently-popular view is total nonsense.

According to the historical record, the stock market’s performance during a Presidential term has nothing to do with the extent to which the Administration is pro-business. Let’s consider some examples to help make this point, using the Dow Industrials Index as our stock-market proxy and the November election dates as the starting and ending points of a presidential term. It makes sense to use the election dates rather than the inauguration dates given that the financial markets will begin to discount the economic effects of a new president immediately after the election result is known.

First, F.D.Roosevelt probably led the most anti-business administration in US history, but during FDR’s first 4-year term the stock market had a phenomenal gain of about 160%.

Second, Ronald Reagan was supposedly a very pro-business president, but during his first 4-year term the stock market gained only 26%. The stock market’s gain during Reagan’s first term was not only a tiny fraction of the gain achieved during FDR’s first term, it was also less than the roughly 40% gain achieved during the first term of the supposedly anti-business Obama Administration.

Third, the stock market did much better during Reagan’s second term, enabling Reagan to chalk up an 8-year stock-market return of about 120%. This, however, wasn’t substantially better than the 90% gain chalked up by the anti-business Obama and pales in comparison to the 240% gain achieved by the Dow over the course of Bill Clinton’s two terms.

Fourth, two of the worst stock-market performances occurred during the supposedly pro-business administrations of Herbert Hoover and GW Bush. The Dow was down by a little more than 10% over the course of GW Bush’s two terms and by an incredible 70+% during Hoover’s single term in office.

To summarise the above, the historical record isn’t consistent with the view that a more pro-business President results in a stronger stock market.

There are, of course, a number of influences on how the stock market performs during any presidential term, including the amount of domestic monetary inflation and what’s happening throughout the world. One influence, however, dominates all others. That influence is the point in the valuation cycle at which a presidential term starts and ends. The reality is that some presidents get lucky with timing, others don’t.

I’ll explain what I mean with the help of the following long-term Dow chart. The chart was created by Nick Laird at goldchartsrus.com, but I added the red notes to indicate the first election victories of various presidents.

The above chart shows that when it comes to the gains achieved by the stock market during a presidency, timing is critical. For example, despite FDR implementing a set of policies that were economically disastrous, the stock market rocketed upward during his first term because at the start of the term the Dow was well below the bottom of its long-term channel. However, by the start of FDR’s second term the Dow had recovered to near the middle of its long-term channel, resulting in much weaker subsequent performance. For another example, there is no doubt that Hoover and GW Bush were terrible presidents, but they were certainly no worse than their successors and yet the stock market’s performance was relatively dismal during their presidencies. This is mainly because their presidencies began with the Dow above the top of its long-term channel.

Trump’s presidency is beginning with the Dow at the top of its long-term channel. This pretty much guarantees that the US stock market’s performance over the course of the next 4 years will be dismal, regardless of whether or not Trump’s policies are “pro-business”.

[This post is an excerpt from a TSI commentary published two days ago]

The Fed meets to discuss its monetary policy this week. There is almost no chance that an outcome of this meeting will be another boost in the Fed Funds Rate (FFR), but there’s a decent chance that the next official rate hike will be announced in March. Regardless of when it happens and regardless of how it is portrayed in the press, the next Fed rate hike, like the two before it, will NOT imply a tightening of US monetary policy/conditions.

The two-part explanation for why hikes in the FFR no longer imply the tightening of monetary policy has been discussed many times in TSI commentaries over the past few years and was also addressed in a March-2015 post at the TSI Blog titled “Tightening without tightening“. The first part of the explanation is that with the US banking system inundated with excess reserves there is no longer an active overnight lending market for Federal Funds (banks never have to borrow Federal Funds anymore because they have far more than they require). In other words, when the Fed hikes the FFR it is hiking an interest rate that no one uses.

The second and more important part of the explanation is that Fed rate hikes are now implemented by increasing the interest rate PAID by the Fed on bank reserves. That is, Fed rate hikes are now implemented not by charging the banks a higher rate of interest but by paying the banks a higher rate of interest. To put it another way, whereas in the “good old days” rate hikes were implemented by removing reserves from the banking system, the Fed now implements rate hikes by injecting reserves — in the form of interest payments — into the banking system.

So, what’s widely known as monetary tightening is now a Federal Reserve action that actually has the effect of LOOSENING monetary conditions.

Orwell’s “1984” had the slogans “War is Peace”, “Freedom is Slavery” and “Ignorance is Strength”. Thanks to the Fed we can now add “Loosening is Tightening”.

The US Constitution is often held up as an ideal to be aspired to, but it is actually far from ideal.

One reason it is far from ideal is that the section setting out the powers of Congress (Article 1 Section 8) is too general. For example, it gives Congress the power to “lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” The terms “Taxes” and “general Welfare” had different (much narrower) meanings back then, but it’s not hard to understand how this statement could be construed to justify much of the growth in the federal government over the ensuing 200+ years. Another example concerns money. The Constitution gives Congress the power to “coin Money [and] regulate the Value thereof.” It’s not hard to understand how the words “coin Money” could be interpreted to mean “create Money”, since “coin” and “create” (in reference to money) were effectively the same thing when the Constitution was penned.

It is often claimed that the Constitution requires money to be gold or silver coin, but this is not the case. The only mention of gold or silver is in the section that sets out the limitations on the powers of individual states (Article 1 Section 10). This section prohibits any State from making “any Thing but gold and silver Coin a Tender in Payment of Debts”, but imposes no restrictions on the power of Congress to coin money and regulate the value thereof.

Should the Constitution have been much clearer in defining money as gold and/or silver?

The answer is no, because the government should not have the right to determine what is and isn’t used as money by private individuals. The Constitution should simply have forbidden the government from having anything to do with money. In particular, rather than empowering the government to coin money and regulate the value thereof it should have prohibited the government from exerting any influence over the supply or value of money.

What is/isn’t money should be chosen by ‘the market’. It’s likely that the market would choose gold and/or silver if it were free to make the choice, but the freedom to choose something other than a precious metal should always be available. That’s why a “Gold Standard” is not a worthwhile objective. The government doesn’t have the legitimate right to impose gold as money any more than it has the legitimate right to impose pieces of paper as money.

The US Constitution opened the door to much of what happened later. It’s therefore likely that if the writers of the Constitution had the chance to do it over again knowing what is known today, they would cobble together a very different document.