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 Trump, no stranger to bankruptcy court, first indicated last week
that "I would borrow knowing that if the economy crashed, you could
make a deal” and then moved on Monday to reassure that, after all,
the U.S. can’t default because it can “print the money.” Treasury
markets, where investors trade what are supposed to be the world’s
safest securities, were singularly unmoved.
Do investors not believe Trump, not believe in Trump or simply don’t
believe he’ll make much difference to current policy even if
successful in his bid for the presidency?
The answer is probably a mixture of all three, with a bit of the
perverse incentives through which investment advisors are paid
thrown in just for good measure.
For his part, Trump swears up and down his comments about “a deal”
weren’t indicating a partial or soft default, though his explanation
fails to make clear the economic benefit of a deal to swap older
debt for new, especially one that was voluntary on both sides.
I cannot recall any modern major party presumptive nominee who ever
said anything that might possibly be construed as meaning the U.S.
wouldn’t honor debts in full or keep the dollar strong. In the world
I thought I lived in, investors in U.S. government debt trade the
prospect of higher returns elsewhere for unrivaled liquidity and
security. Donald Trump on the other side of the table when things
turn bad is not what these investors sign on for.
Mind you, Donald Trump in the White House is very likely not what
they will get, at least if the very preliminary polls are to be
believed. So perhaps they don’t believe in Trump’s chances and are
dismissing his debt management expertise along with his many other
plans few believe will come to pass.
He may, after all, not mean what he says. Who could possibly know?
Would you like to bet?
“Trump’s stated economic policies are at times conflicting and often
changing, which also makes it difficult for investors to interpret
the possible consequences,” Libby Cantrell of bond investment giant
PIMCO wrote in a note to clients.
“What are investors supposed to do with a candidate whose economic
ideology is divergent from that of his party’s, not to mention often
inconsistent and fluid?”
Perhaps the most optimistic explanation is that investors have faith
that U.S. institutions are strong enough to withstand a President
Trump, or take comfort in the constraints the law puts on the power
of the president.
NOT PAID TO BE RIGHT
As usual, to understand how financial markets react to events we
should recall how participants are paid and under what terms of
engagement they operate. The vast majority of investment managers,
the people who make the decisions about buying and selling
Treasuries and other assets, aren’t paid to be “right” but paid to
beat the market or their peers.
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The risk for them isn’t, strictly speaking, the risk of loss but the
risk of underperformance. Losses come and go, but underperformers
lose assets under management and sometimes get fired. So taking a
big bet on your ability to anticipate not only the American
electorate but one Donald Trump is perhaps not a great idea for you
personally or for your clients.
None of which is to say that markets won’t begin to react to Trump
as we get closer to the election and get more information about his
prospects and plans.
Remember too that during the debt-ceiling crisis of 2011 prices of
Treasuries rose, partly due to the fear a government shutdown or
default would be bad for the economy and partly because, in a world
of imperfect credits, the U.S. remained, and remains, the best.
Stock markets, by the way, won’t like it so much.
Jeffrey Gundlach, CEO of DoubleLine, and as such a power in the bond
markets, has said, variously, that Donald Trump will win the
election and that his policies on trade would actually benefit
Treasuries, which will rally in price on expectations that economic
growth would be hit.
Still it is hard to under-sell exactly how strange this whole
situation is, which is perhaps another reason for how calm things
remain.
Extrapolating from economic policies is one thing, no longer
trusting the good faith of the heretofore most creditworthy borrower
in the world is quite another.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be an
owner indirectly as an investor in a fund. You can email him at
jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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