"If the question is when markets will recover, a first-pass answer is never."
I have to feel sorry for Paul Krugman. The Nobel prizewinning economist was clearly gutted by Donald Trump's victory.
Yet he also managed to sum up in that one impassioned line (written in The New York Times in the immediate aftermath of the vote), why people don't trust "experts".
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The Dow Jones is now trading at an all-time high. That might not last, but it's a pretty definitive rebuttal of that dangerous little word, "never".
Worse still, for Paul though, is the reason that the Dow is now trading at an all-time high.
It's because markets believe that Trump might just do exactly what Paul and his fellow left-ish economists have been crying out for for years.
People do trust "experts" they just don't trust economists
This appears to be a genuine question. So allow me to explain briefly.
Like the rest of us, experts are only human, with the usual human biases. In most cases, that makes no odds. A car mechanic is a car mechanic. Other than in extreme cases, a mechanic's temperament won't make you question her expertise.
But there are a few big differences between a car mechanic and an economist.
Firstly, a car mechanic's politics won't affect her diagnosis of what's wrong with your car's engine. If your gasket has blown, both an ardent Corbynite and a rampant Thatcherite will give you the same diagnosis. Either one of them might try to rip you off, of course, but that's a different issue.
Secondly, if your car mechanic makes a diagnosis, does the repair, and the car still doesn't work, she'll generally accept that she got it wrong, and take a look at trying something else. She won't just stand there with her arms folded and glare at you for questioning her expertise, while demanding that you turn the ignition key harder.
So, to clarify, it's not that people don't trust experts. They just don't trust economists and just about anyone linked to the financial industry. And given that they've all been wrong about (or at least blindsided by) many, many things over the past few years, you can't blame them.
Krugman's emotional comment about markets never recovering again post-Trump born of an understandable anguish at watching a political outcome from beyond his worst nightmares made reality only proves the point.
And just to hammer the point home further, Krugman was actually one of the few big-name economists to call the relatively benign Brexit reaction correctly. Maybe that's because he had less emotional investment in that issue, or maybe it's because he's quite hostile to the eurozone but whatever the reason, he was an "expert" who got it right when others were getting it wrong.
Here's why the market likes Trump
The answer is that it's because they expect Trump to be a big spender. In short, they expect him to enact exactly what many left-of-centre economists have called for a great big fiscal stimulus.
Big tax cuts. An amnesty for the repatriation of big companies' money from overseas. Higher government borrowing and spending.
Again, in another irony, this is the sort of thing that the Republicans and the Tea Party were resisting fervently at the last election. Will they resist it now? The market doesn't think so, and I must say I agree. It's harder to be a deficit hawk when the people calling for more spending are the same ones you thought were on your team the whole time.
No wonder bond yields have gone up. As Jared Dillian points out in his 10th Man email newsletter, "This is the first time in forever that the bond market has actually been afraid of supply. Possibly the first time since 1994" (1994 was the last time we had anything resembling a bond crash, although it was more of a storm in a teacup than it first appeared).
This marks a big change. As Gillian Tett in the FT puts it: "the howl of voter anger shows with cruel clarity that it was a mistake to expect central bank policy experiments alone to deliver sustainable economic growth."
At MoneyWeek, we've often said that democracy and deflation don't rub along well together, and the political reaction across the world is proving that point nicely.
We now have a big spender in the White House, and over in Japan, we have a central bank that is practically begging the government to spend, or cut taxes just do anything to get inflation higher. In fact, it has promised the government free money ten-year bond yields fixed at 0% to do so.
If inflation can't get going in this environment, you have to wonder if anything can do it.
Of course, once we get inflation, everyone might find that it's not the soothing balm that they'd hoped for. But that'll be a problem for some other group of policymakers to clear up.
Anyway we'll be keeping you abreast of Trump's plans in MoneyWeek over the coming issues, and next week we take a look at one sector that's particularly likely to benefit from his spending plans. If you're not already a subscriber, sign up now.
