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Is There A Trump Bubble?

Summary:
Everyone knows that stocks and interest rates have soared since the election; at the same time, if you aren’t worried about erratic policies from the Tweeter-in-chief, you’re really not paying attention. So are markets getting it all wrong? I’ve been wondering about that — and yes, in the first few hours after the election I thought, briefly and wrongly, that a crash was coming quickly. But anyway, I decided to crunch a few numbers — and surprised myself. I still think markets are underrating the risk of catastrophe. But I’m not as sure as I was that there’s a huge Trump bubble buoying markets — because when you actually look at the data, the market action has been much smaller than the hype. Look first at stocks. Yes, they’re up since the election. But how does this rise compare with past fluctuations? Not very big, actually: What about real interest rates? I’ve been arguing that the widespread belief in serious fiscal stimulus is wrong, which means that a really big rise in real interest rates wouldn’t be warranted. But it turns out that the movement isn’t that big: There was an overshoot early one, but at this point it’s only about 30 basis points, consistent with fiscal stimulus of maybe 1 percent of GDP. Still high, I think, but not yuge.

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Everyone knows that stocks and interest rates have soared since the election; at the same time, if you aren’t worried about erratic policies from the Tweeter-in-chief, you’re really not paying attention. So are markets getting it all wrong?

I’ve been wondering about that — and yes, in the first few hours after the election I thought, briefly and wrongly, that a crash was coming quickly. But anyway, I decided to crunch a few numbers — and surprised myself. I still think markets are underrating the risk of catastrophe. But I’m not as sure as I was that there’s a huge Trump bubble buoying markets — because when you actually look at the data, the market action has been much smaller than the hype.

Look first at stocks. Yes, they’re up since the election. But how does this rise compare with past fluctuations? Not very big, actually:

Is There A Trump Bubble?

What about real interest rates? I’ve been arguing that the widespread belief in serious fiscal stimulus is wrong, which means that a really big rise in real interest rates wouldn’t be warranted. But it turns out that the movement isn’t that big:

Is There A Trump Bubble?

There was an overshoot early one, but at this point it’s only about 30 basis points, consistent with fiscal stimulus of maybe 1 percent of GDP. Still high, I think, but not yuge.

Inflation expectations are also up, but that may reflect various non-Trump things like growing evidence that we really are close to full employment.

I still think that markets are too sanguine. But the truth is that they haven’t moved nearly as much as the hype suggests, so the case for either a huge Trump effect or a huge Trump bubble is a lot weaker than you might think.

Paul Krugman
Paul Robin Krugman (born February 28, 1953) is an American economist, Distinguished Professor of Economics at the Graduate Center of the City University of New York, and an op-ed columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economic Sciences for his contributions to New Trade Theory and New Economic Geography.

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