By Jamal Mecklai
The Dow Jones fell for 10 consecutive sessions till last Wednesday — this was the first time this has happened since 1974 (when it fell 11 sessions in a row). It bounced back on Thursday and Friday, and, to be sure, the total decline thus far has been modest (just under 5%), but the clouds on the horizon are ominous.
The decline began on December 5, after it had hit an all-time high super-enthusiastic about Donald Trump’s victory. However, as it started to become clear that most of his economically imbecilic policies would actually be implemented, the market has become increasingly worried about the likely impact on inflation and then some.
The last sharp leg down (last Wednesday) came when the Fed, at its last meeting of 2024, did cut rates as expected, but shocked everyone with a sea change in its inflation and interest rate forecasts for 2025 and beyond. It is now projecting only two rate cuts in 2025, rather than the four that had been on their own cards just a few months ago (in September). Fed Chair Jerome Powell said, “For additional cuts, we’re going to be looking for further progress on inflation.”
While on the surface the Fed did not give Trump’s proposed policies any shrift, it is hard to believe that the governors did not, at least implicitly, pay heed to the sure-fire inflationary impact of his “thinking”. There are some in the market who believe the Fed’s next move will be to actually raise rates.
More evidence of Trump’s economic imbecility is his continuing and increasingly loud ranting about how he will use tariffs to ensure that countries do not run huge trade surpluses with the US, this time targeting the European Union. Clearly, he doesn’t have a clue that a country’s trade surplus/deficit is, by definition, identical with the difference between its savings and its expenditure; the only way the US will cease to run a deficit on trade is if it saves more than it spends. Given that the well-known essence of America is “spend now and think about how to pay for it later”, this ain’t happening. The last time the US ran a (very small) trade surplus was 50 years ago (in 1974). Prior to that, it ran a largely balanced external account for several years, but as buying on credit became the American way — the Diner’s Club card, which was the first credit card, began operations in 1950 — US expenditure has always been more (and, often, much more) than its savings, and so trade shifted into deficit and has never looked back.
In parallel, and yet more evidence of Trump’s (and Elon Musk’s) obliviousness to the market, is the continuing drama over the US debt ceiling. Trump, with the first buddy babbling loudly in sympathy, wanted the debt ceiling date pushed by several years, so he is free to do what he likes, although logically if he is planning to cut the cost of government dramatically, this should hardly be a priority. But, clearly, logic has nothing to do with it. Interestingly, several conservative Republicans voted against giving Trump what he wanted, which raises a curious flag as to how freely he will be able to reign. Importantly, the market views all these hijinks with concern, and is certainly going to demand its pound of flesh, in terms of higher interest rates.
It is also conceivable that once Trump takes office (January 20), he will — despite having given assurances to the contrary — try and pressure the Fed to cut rates faster. But, to my mind, the market isn’t going to focus on whether the Fed cuts rates (whether under pressure or not), but on the roll-out of obviously inflationary policies. Already, bond yields have crossed 4.5%, and are likely to rise further.
The simple fact is that, whoever you are, you can’t bully the market, certainly not when you have the deepest and most liquid market in the world, which translates to the privilege of having your domestic currency as the most widely accepted global tender.
Thus, it is hardly surprising that equities are in a funk — the Trump dump, as I call it. The chart shows that, despite the recent pullback, the Dow still has a couple of support levels before it hits a correction (10% decline), and when — rather than if — that does happen, we could see real mayhem.
The writer is CEO, Mecklai Financial.
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