As the world and their dog talk of the new “special relationship,” between the US and the UK, “The Donald & Teresa Show,” looks markedly different from the “Maggie & Ronnie Show” of 1981.
Personality’s aside, it’s unfortunate for both leaders that the economic and geo-political backdrop is so radically different now than 36-years ago and totally beyond the control of both leaders and politicians in general to change it. That is, until the collective social mood of both countries change once more and politicians’ follow it.
Socionomics, the study of social mood which is best identified by the stock-market barometer of a Nation, observes the fact that mood governs events, not the widely perceived reverse, hence the increased polarisation within the US and UK societies as their collective social mood has changed from one of optimism to one of increased pessimism and concern, sufficient enough to vote for big changes, in the guise of “the Donald” and “Brexit.”
Robert Prechter, the father of Socionomics, long ago identified that the popularity or otherwise of political leaders, isn’t much to do with their policies but more to do with their luck in the timing of “their time” in the hot-seat as governed by the barometer. In Reagan and Thatcher’s case it commence at the end of a 16-year secular bear market and lasted through the largest bull market in history, whereas for D and T the respective markets have been completing a massive “topping process,” not conducive for high popularity scores.
Alongside of the above there has been much talk of “Trumponomics” versus “Reaganomics,” in respect of tax cuts and infrastructure spending, the “hope” of which has spurred stocks higher since Trump’s election victory.
However, in order to make valid assumptions on the potential impact of the tax cut on the economy, earnings and the markets, we need to review the differences between the Reagan and Trump eras (Chart and comment courtesy of Lance Roberts at Real Investment Advice.) The tailwinds provided by initial deregulation, consumer leveraging and declining interest rates and inflation (since the early 1980s) provided huge tailwinds for corporate profitability growth, but they are now headwinds:
With a focus on the debt levels noted within the table above, we remind that interest rates, at least the ones that you and I are effected by, called market rates, have finished their 35-year decline from a near 20%pa level of 1981 and have been basing (moving sideways) since mid 2012 (a bit like moving down the gears in a car before going into reverse) and have now commenced their climb higher from July 2016, since when the US & UK 10-year rate have jumped by 100% and 200% respectively (not a typo but fact.)
In conclusion, the economic and market backdrop couldn’t be more different now than in 1981 and will have far differing implications for the “special relationship” now and going forward.
The “Investment market Overview” for the week ending 27th January highlighted those most dangerous four words, “It’s different this time” in respect of the auto sector. You can now relate that to the “hope over reality,” suggested by the markets and their participants, in respect of the new top dogs.