Forget supply side economics. Current market participants are betting on Keynesian stimulus. Simply put, they are hoping for an increase in demand brought about by $1 trillion in additional spending over the next ten years. This is at the heart of President Elect Trump’s economic stimulus plan. Yes, he also wants to reduce regulation and encourage more domestic capital investment, but the real push behind the attempt to increase the economic growth rate is in infrastructure spending.
Forgetting for a moment whether such a program will ever make it through Congress, will it work? That is not an easy answer. Inflation is likely to climb faster as growth accelerates, leading to higher interest rates. This is because the economy is close to full employment with very little slack. New capacity will have to be built before inflation does not become a problem and that takes time. Other constraints exist like a vast missmatch of skills between the labor force and the new jobs as well as an out of date educational system.
So is the bet a good one? We retain a healthy skepticism; maybe so, maybe not. We will wait for evidence.
In the meantime, we have an investment strategy which does not depend upon faster growth to be successful.
Stay steady, my friends!
the Lonely Bull