“I don’t think Trump wants to shut off world trade. I think he’s a Reagan protectionist who wants fairer trade,” said Yardeni. “I think he succeeds through more bilateral agreements that will save globalization from its worst detractors.”
Yardeni also argued that monetary policy will continue to normalize, but probably not to the point where central bankers would create a financial crisis. By mid-2019, the Federal Funds Rate should approach 2.5 percent, he said, with the 10-year Treasury yielding between 3 and 3.5 percent. Deficits, while a concern, are more of a “background” issue, he added.
Inflation, on the other hand, would cause interest rates to rise and valuation multiples to decrease, he said. A return of inflation would increase the chance that the Federal Reserve will overshoot with its interest rate increases and push the economy into a recession, said Yardeni, who noted that many other factors help keep inflation in check, such as global trade, technological innovation and aging demographics.
“Technology been a source of competition. We can see the impact just on retailing,” said Yardeni. “It’s an important area of the economy where inflation can pop up … but 30 percent of retail sales are now online. With online shipping, now consumers can shop anywhere in the world and get the lowest prices. It’s a powerful force for disinflation.”
The Fed has tried to increase inflation to 2 percent since 2012, said Yardeni, but it hasn’t happened, even with accommodative monetary policy. “Something else is keeping inflation down,” he said.
One reason may be a kind of peace dividend, where entrepreneurs and businesses invest more in innovation during the calm between periods of conflict. Yardeni noted that inflation spiked during wars the U.S. participated in going back to the War of 1812, yet eased in the periods in between, with one significant exception.
“There hasn’t been deflation since the end of the Cold War,” said Yardeni. “Why not? My guess is that it’s the central banks’ perverse hatred of deflation. They have a 1930’s outlook. But the worst problem of deflation, plunging durable goods prices, is actually good for people.”
Yardeni also responded to widespread concerns that increasing the deficit while the Fed unwinds its balance sheet will cause a supply issue in the bond market and cause interest rates to rapidly rise. He noted that the growth in the global economy has continued since the commodities and energy-led “rolling recession” of 2014-16 and should continue or stay firm moving forward.
“I think we have a lot of wealth growing in the global economy that needs to be diversified,” said Yardeni. “There will be room for bonds in there, but I don’t know what the limit will be. I don’t see this as an immediate issue.”