Spitznagel - Stock Surge Presents Risks for the Trump Administration

by Mark Spitznagel
December 15, 2016
New York Times

The “big, fat, ugly bubble” in the stock market that President-elect Donald J. Trump so astutely identified during his campaign now becomes one of the greatest potential liabilities of his presidency.

If that bubble bursts soon, the pain will correctly be understood to be the result of monetary manipulations during the Obama years. But if it persists and the United States economy manages to further postpone its long-overdue recession (following an expansion that was barely that), Mr. Trump’s ostensibly “free-market” policies will unfairly bear the blame when the markets finally do return to reality — perhaps a year or two down the road.

The postelection Trump rally in the stock market is evidence of euphoric optimism about the fiscal stimulus, reduced regulations and lower taxes that are hoped for. And yet we mustn’t forget where we are today, with distorted pricing in virtually all markets and extremely levered public and private balance sheets, all driven by monetary interventionism on a scale never seen before: By most measures, the stock market is as expensive as it has been for a century, save only the giddy late 1990s.

We must also remember what got us to this spot: namely, extreme, collectivist interventionism by the heavy hand of the state. Perhaps never before have we had such a clear case of a controlled experiment in the effects of economic (and especially monetary) interventionism. Problem is, the election of Mr. Trump is adding noise to this otherwise transparent experiment, and is extremely risky for supporters of his policies because he is poised to take office near such a peak in economic distortion.

The challenge, therefore, is for the incoming administration to let the authorities own the initial pain that is sure to come, such as the pain of pulling off the bandages, while letting the later recovery be his — as it should be. Though the Obama administration was able to blame a previous administration’s presumed free-market policies for eight years of lackluster recovery, it will be much harder for Mr. Trump to transfer blame for any economic crisis that occurs on his watch.

There’s something about a government that steps back to let free markets fix themselves that invariably renders it a ripe target for blame. “Couldn’t you have done something?”

After all, if the rally following his surprise election bears Mr. Trump’s name, the danger is that so, too, will the inevitable correction that neither he nor the Fed can stop. What could result — and what we should all fear, specifically — is the political pendulum swinging violently back toward big government and even greater market interventionism.

If Mr. Trump can focus on the long term and encourage asset prices and investments to correct themselves early (to the extent that he even holds such sway over them), perhaps this controlled experiment can remain obvious to everyone. Worthy or not, as the current general for advocates of the free market, he should hope to lose the short-term battle to win the bigger war, to gain positional advantage for the looming contest ahead.