The unexpected rally in equity markets post US elections has been predicated upon a sudden arousal of “animal spirits” in the wake of the new administration’s policies, namely deregulation, tax cuts and infrastructure spending.
The term is closely related to Nietzsche’s idea of “will to power”, and is equally subject to spin. A naïve use of the expression has a connotation of vital optimism, self-confidence and entrepreneurship, but a cynic can see in it a handy euphemism for concealing greed, reckless risk-taking and abuse of power. Judging by the staffing of the Trump administration, and how Corporate America is salivating in anticipation of the promised “goodies”, I am inclined towards the latter meaning.
Goldman Sachs is the epitome of this freeloading behavior. The stock is reaching new all-time highs – up more than 30% since the elections – in anticipation of deregulation in the financial sector. An effort coincidentally led by Gary Cohn, former Goldman’s president turned top White House economic advisor. It is opportune to remember that animal spirits, unleashed by the repeal of the Glass-Steagall act, created the sub-prime mess that ended in the bailout of AIG, the largest in financial history, which indirectly threw a lifesaver to Goldman. Moreover, and to turn the story into a palindrome, Hank Paulson, the US Treasury Secretary who approved the bailout, had just taken the job after serving as Goldman’s CEO.
Regulation is in most cases a consequence of the law of diminishing returns rather than its cause. In Economics, It is a widely accepted axiom that in markets with perfect competition, shareholders would merely be rewarded by the cost of capital. In the real world, companies are able to extract profit by a number of means. The usual way is an ability to dictate prices, sometimes legitimately (using patents, trademarks), sometimes illegally by colluding or creating monopolies; hence the call for anti-trust regulation. In other instances, corporations extract a rent by avoiding to be charged for the costs they impose upon others, what in Economics is known as an “externality”. The pollution of the environment, and the “too-big-to-fail” implicit government guarantee, are good examples of this; creating the need for environmental and bank capital regulation.
As citizens, everyone should cherish competitive markets, the avoidance of bank bailouts with public funds and that companies are charged for their pollution. However, when lured by the promise of short-term benefits today at the expense of passing the burden to future generations, it is easy to be seduced by a fairy tale in which front-loading benefits overcompensates for future costs by reinvigorating growth.
A similar story can be told about ballooning fiscal deficits, a more than probable outcome of lowering tax rates, and financing infrastructure spending; understandably cheered by corporations and wealthy individuals alike, but actions that will indefectibly increase the debt burden borne by younger generations. To give a perspective of the magnitude, US Federal Gross Debt stands at $23.3 Trillion, translating into $196,000 per American household, which is roughly the median home price in the US; literally, a heavy mortgage.
President Trump has proven popular amongst investors by evoking in their minds memories from the 80’s, a time of yuppies and corporate raiders, when the mother of all bull markets began, and when Mr. Trump himself rose to prominence after erecting his eponymous tower in Manhattan. History should tell us where his approval ratings by future generations will lay.
Fernando de Frutos, MWM Chief Investment Officer
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