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Tuesday, 22nd November 2016

Why Trump Can’t Be Reagan  

The market wants to imagine that Trump is a new Reagan who will preside over the same sort of economic revival and stock bull market that emerged in 1982. There are NO similarities in these two presidencies. As Hegel famously noted: "We learn from history that we do not learn from history."

We are now into the third decade of monumental debt creation. Since 1980, U.S. credit market debt has increased more than three times faster than the economy. It's way too late for another Reagan renewal.

When President Reagan came into office, the Fed's balance sheet was at $174 billion; today it's $4.524 Trillion (T).

Total Debt Securities issued were $2.0 T; now they are $40.581 T.

Outstanding Treasury Securities have grown from $736 billion to $15.385 T.

Agency Securities (guaranteed by the U.S. Treasury) have mushroomed from $191 billion to $8.324 T.

Total Mortgages have soared from $1.458 T to $13.974 T.

Corporate Bonds have expanded from $511 billion to $12.030 T.

Reagan inherited a 14 year bear market in stocks and a 34 year bear market in bonds. He came to power at the beginning of a new credit cycle. There was nowhere to go but up. Government debt/GDP had continually fallen since WWII to just 30%. The baby boomers were moving into their productive years. The IBM PC was launched and a technological revolution had begun. The Soviet empire was on the verge of collapsing. It was the perfect time for Reagan's 'morning in America'.

Trump is inheriting asset bubbles in stocks, bonds and commercial real estate. Total debt/GDP is at record highs exceeding 100%, at the end of an historic debt cycle with interest rates moving just above all-time lows. Boomers are moving into retirement which will swamp the entitlement system as the ratio of workers to retirees shrinks. Bonds appear to be on the verge of a multi-decade bear market. The government's interest expense is likely to explode because politicians cleverly structured federal debt on the short end of the curve to reduce the deficit, assuming rates would stay low forever.

The world has changed. There is no going back. The excesses must be dealt with. In our opinion, the Trump rally is not real. It is also interesting to note that Reagan's post-election rally in 1980 was completely over by the end of November.