54: How Trump Did Something Yellen, Draghi Could Only Dream Of

SPEAKER_1 (0:00)

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Joe Weisenthal (0:26)

Hello, and welcome to another edition of the Odd Lots Podcast. I'm Joe Weisenthal, managing editor at Bloomberg Markets.

Tracy Alloway (0:33)

And I'm Tracy Alloway, executive editor at Bloomberg Markets.

Joe Weisenthal (0:37)

Well, Tracy, it's been quite a week.

Tracy Alloway (0:41)

You could put it that way. There was something about an election somewhere, right?

Joe Weisenthal (0:47)

Yeah, I remember that election. Quite, and not only was the election extraordinary for all kinds of sort of political and historical reasons, it's also been an extraordinary aftermath we've seen in financial markets.

And it's completely confounded basically everything anyone would have predicted going into the vote.

Tracy Alloway (1:14)

That's right. So we were told that if Donald Trump got elected, that was the ultimate sort of political tail risk. And it happened.

And we got an initial market sell off like right when the results started coming in. But at the time of us recording this, we've seen markets rebound quite strongly, right?

Joe Weisenthal (1:33)

Right. I guess we should say, you know, just in the full transparency, we're recording this on a Thursday after the election.

The podcast, people won't be listening to it till a few days from now. So if the entire market changes again, and there's some huge crash or something before you hear this.

Tracy Alloway (1:50)

Just disregard, disregard. You can stop listening.

Joe Weisenthal (1:53)

You can just disregard everything, such is the world of podcasts where we have to do this in advance. But one other thing, so we didn't get the crash that people expected. In fact, markets have been surging. Perhaps more interestingly, and far more importantly from a financial markets perspective, we've also seen a pretty big increase in long-term interest rates. Yield on the 10-year US Treasury is above 2% for the first time since January. Other market-based measures of future possible inflation have been going up.

This is also, people have been waiting for a rise in some of these measures for quite some time. And in the immediate aftermath of Trump's victory, we actually appear to be seeing some of these moves.

Tracy Alloway (2:45)

Right, so all it took for inflation expectations to come back was the complete political upheaval of the United States of America, right?

Joe Weisenthal (2:54)

Yeah, that's all it took. Just a completely stunning political outcome.

And whereas Janet Yellen and Ben Bernanke and Corota have been trying so hard to get inflation expectations up, Donald Trump seems to have accomplished that in about 48 hours.

Tracy Alloway (3:10)

And he's not even in office yet. Amazing.

Joe Weisenthal (3:12)

And he's not even in office yet. So on that note, I think we have the perfect guest for the week.

His name is David Beckworth. He's a research fellow at the Mercatus Center. He writes a fantastic blog called Macro and Other Market Musings, where he talks about monetary policy, inflation, the macro economy and all that stuff. And I think he's a perfect guest to help us break down some of these moves in financial markets that we've seen and what traders might be anticipating under a Donald Trump presidency?

David Beckworth (3:50)

Presidency.

Joe Weisenthal (4:01)

Let's bring in David. David, thank you for joining us.

David Beckworth (4:04)

Well, thank you for having me on the show.

Joe Weisenthal (4:06)

So, quite an extraordinary few days in financial markets, wouldn't you say?

David Beckworth (4:12)

Absolutely. Yes, as you mentioned in the intro, Donald Trump has done more to make treasury yields great again. Janet Yellen has tried, and Ben Bernanke tried, and years of doing couldn't accomplish. It is quite shocking, but it also speaks to, I think one of the things that's plagued this past seven, eight-year period has been kind of a swing in risk premiums to one extreme during the boom.

I think we were maybe over-optimistic, and we've been stuck in a funk, and maybe Trump was the shock that we needed to maybe change things around.

Joe Weisenthal (4:48)

So let's talk about this stuff, because people like to talk about the Fed having an inflation target, and in the US, the central bank is supposed to target stable prices and full employment. They've aimed for this 2% inflation target for years and haven't really been able to hit it, except very briefly.

They've done all kinds of stuff. They've tried QE, they've tried forward guidance, they've hinted at other sort of extraordinary policies going forward. They have all these dots and press conferences, all these new innovations designed to keep prices stable and boost inflation. It's never worked.