The Optimists vs. the Eeyores

Rarely have both exuberance and anxiety run simultaneously at the high pitch evident these days at gatherings of investors. The exuberants are the noisiest right now. Trump tax cuts have produced a surge in business after-tax profits—which even before the tax cuts were up double digits compared with last year. Millions of workers and their pension funds have received checks from companies benefitting from the tax cuts, and millions more will see their take-home pay rise in a few weeks when the new tax schedules cut in. International corporations are repatriating earnings to benefit from a special 15.5 percent tax rate, down from 35 percent. Estimates put total cash to be brought home by tech companies alone at $400 billion, with Apple accounting for half that sum.

But the exuberance is not only about the tax cuts. Friday’s jobs report topped expectations. Unemployment remains a low 4.1 percent, the economy added 200,000 jobs last month, hourly earnings are up almost 3 percent over last year after a long period of stagnation. In addition, personal spending in the final quarter of last year rose at a rate of 3.8 percent, the fastest pace in three years. Consumer confidence is high, and small business confidence hit a record in December. The home ownership rate rose in 2017 for the first time in 13 years, driven by millennials.

Throw in the faith some have that the president’s reduction of the corporate tax rate from 35 percent to 21 percent—and his roll-back of the regulatory state—have delivered us to a new plateau of between 3 percent and 4 percent economic growth. That faster growth will enable the tax cuts to “pay for themselves” by generating higher revenues for the Treasury, the faithful contend. So what’s not to like?

Which brings us to what we might call the Eeyores, A. A. Milne’s gloomy, pessimistic, stuffed donkey who knows that the end is nigh, and if not nigh, at least inevitable. For them good news such as the jobs report is really bad news in shiny gift-wrap. Their preferred indicator is the interest rate on 10-year Treasury bonds, which broke the 2.8 percent barrier yesterday. This, they say, is the beginning of a rise in interest rates that will slow the economy and pop the bubble in share prices, which even the optimists concede are “elevated,”—and the Eeyores say are inflated.

It will also increase interest payments on the national debt, which is soaring since Congress no longer contains fiscal hawks. The Treasury Borrowing Advisory Committee estimates that the Treasury will have to borrow close to $1 trillion this year, almost twice as much as last year, and borrow still more in 2019 and 2020. That’s a lot of IOUs to dump on a market in which buyers are beginning—only beginning—to worry about inflation.