What you see is what you get. This is a disappointment to those of us who looked optimistically at the opportunity presented to the new President, one in which a New Experiment could unfold, finally lifting the speed limit on the economy to provide broadly inclusive quality of life improvements. Lately of course, my optimism has given way to more skepticism, but both points of view are still relevant. The market remains mired in the contrast.

Currently we have competing forces at work:

The “Positives”

1. Optimism on the outlook for fiscal stimulus and infrastructure investment
   
   
2. Optimism on the effects of deregulation
   
   
3. Optimism on the effects of various tax cuts
    

The “Negatives”

1. Concern about the negative growth impact of Big Border Taxes and a trade war (protectionism, broadly defined)
   
   
2. Concern about the slim but rising possibility that Trump’s more controversial policies on immigration and international alliances (on both trade and security) may escalate into a protracted civil resistance to his presidency, and/or destabilize global political balance.
    

I’ve long argued in these pages that the key to long term prosperity in the US is lifting productivity, at least for the next seven years or so while the demographic effect of Babyboomer retirement is ongoing. I believe the US can achieve uplift in the productivity of our workforce only through targeted, thoughtful fiscal stimulus and structural reforms. If anything, the definitive takeaway from the last six weeks is that the President’s policy prescriptions aren’t particularly thoughtful, so until something changes, I am more pessimistic about Trump’s ability to achieve the productivity holy grail. However, this is a concern for 2018 and beyond. Over the short term, markets will continue to be driven by the push-pull between the economically “good” Trump policies, and the economically “bad” Trump policies, since he’s disinterested in cherry picking from his campaign platform.

My expectation is that the pendulum of market narrative will continue to swing between the two, based on the day-to-day messaging from the administration. For example, Trump’s acceptance speech was inclusive, constructive, and optimistic, and it kicked off a honeymoon phase where the market (and yours truly) embraced the positives. This sentiment turned abruptly in mid-December when protectionism crept into the discourse, quietly at first, but then in full volume debate about Big Border Taxes and immigration policy. The inaugural address resembled campaign rhetoric more than an inspiration for those around him to craft a pathway to prosperity with new solutions. That negativity intensified, of course, with a foreign policy timeline that stoked justifiable controversy and concern. For markets however, the more recent intensification of the negatives hasn’t mattered. As soon as it became clear in December that the “positives” weren’t the highest priority, equities languished and rates stopped going up.

I believe we are likely to see the economically positive aspects of Trump’s agenda brought to the forefront once again, relatively soon. Replacing Obamacare is proving to be no small task, exactly how best to do a Big Border Tax is a surprisingly tough question, and the outrage that resulted from Trump’s immigration and foreign relations debacles has left the President in need of a win. He clearly pays attention, and no doubt sees it’s time to put some more points on the board.

To that end, I think rates probably continue higher, and risk assets will continue to rally over the short term if and when the narrative starts to swing back to positives. The President himself has remarkable influence on the prevailing discourse, and as such can control the timing at least partially. While risk asset prices, specifically credit and equities, should respond intuitively to any moderation in controversy and transition back toward economic optimism (or lack thereof), the sensitivity of interest rates is more nuanced. While rates should be higher with each incremental step closer to stimulus and tax reform (of which there have been none for six weeks), rates may also end up higher in a trade war, one of the economically negative scenarios. Big border taxes will be inflationary, and though in theory all of the inflation could occur in one big shot, I believe instead the piecemeal process of implementation and subsequent escalation of responses will spread the price impact over time and perhaps increase its magnitude through circular reinforcement. How the Fed responds to stagflation, through policy rate hikes to stem inflation (at the expense of growth) or through loose policy to allow inflation (to benefit of growth) will determine the ultimate destination for US rates in such a scenario, but my belief is that it’s higher than current levels of yields.