Wall Street is making some big bets on Donald Trump. One of the biggest is that the US president can persuade Congress to unravel the Dodd-Frank Act that he believes ties the financial services industry in knots. Bank shares have carried the US stock market higher ever since Trump said it was a priority.
Another big bet is on a Trump-inspired spending spree by Congress on all manner of infrastructure projects, including the Mexican wall and on the military. This bet gets a steroid boost when traders add in the impact of huge tax cuts, albeit for the richest, trade tariffs on imports (protecting smaller US firms from competition) and a supposedly benign form of blackmail targeting major corporations that consider opening factories abroad (forcing them to locate inside the US).
All these initiatives add up to the greatest economic stimulus since Ronald Reagan blew the US federal budget in the early 1980s and sent the stock market into the stratosphere.
With what appears to be devil-may-care abandon, investors have moved their savings out of cash and into risky assets on a huge scale. The Dow Jones index of stocks soared above 20,000 a few weeks ago (it was worth 15,660 this time last year). In tandem, investors have expanded their lending to the corporate sector to embrace some of the riskiest businesses.
These are companies that are usually forced to borrow money at sky-high interest rates after analysts have looked them up and down and agreed that they are at the greatest risk of going bust. It means the bonds they issue to investors fall well below the AAA ratings given to the safest businesses. Charmingly, they are accorded junk status and their bonds are rated CCC or less.
But in the middle of a Trumpian boom, who cares about ratings? Nothing and nobody is going to go bust. There will be employment for everyone and, if there isn’t, the deregulated banks will lend struggling households and businesses some more money.
Figures this week show borrowings by CCC-rated companies have increased by two-thirds in the past year.
There will be many on Wall Street who say: what could be better than even the most conservative investors entering the $2.2tn (£1.75tn) junk bond market? Except we know that when this happens, it is a house of cards that will collapse with horrible consequences for all.
To emphasise the point, there are even early signs of junk-rated businesses using cheap lending facilities to borrow more money and use it to enrich their private equity owners, a move that evokes the worst behaviour before the 2008 crash.
Thankfully, the betting must be that only a few investors get hurt in the stampede, the reason being that Congress simply will not allow Trump to pursue his crazy spending plans and mania for deregulation.
Trump needs to win over eight Democrats in the Senate to push through his controversial agenda and that looks increasingly unlikely as he goes about his daily routine of upsetting even moderate Republicans with his attacks on the judiciary and anyone else who stands in his way.
And while he can probably secure a majority for some extra military spending and a little extra infrastructure, these things take years to result in more ships and new motorway building. So we must hope that investors rein in their search for yield and take a more sober view of the bonanza they believe lies on the horizon. It is a mirage.
Greek blame game
As protesters take to the streets of Athens, the blame game among those who have imposed debilitating austerity on Greece is hotting up. The International Monetary Fund aimed the first punch, arguing that the beleaguered nation had taken enough punishment. The IMF is reluctant to support the European Union’s stance on Greece without a huge debt-relief package in place.
In the opposite corner is the official who manages the Brussels credit card, Klaus Regling. He has ruled out debt relief, saying the solution for Greece lies in the government making further cuts in pensions and benefits.
This untenable position, which ignores 25% unemployment and endemic corruption, was then undermined further by a simple untruth. Writing in the Financial Times, he said: “The eurozone’s rescue funds have disbursed €174bn to Greece. We would not have lent this amount if we did not think we would get our money back.”
There is no way the Greeks will ever pay that money back. It will just hang over them for ever while they struggle to pay the interest and sink further into the mire.