A top economist said Wall Street stocks are rising as hopes for tax cuts and deregulation are rising with an expected Republican victory in the election, making U.S. financial markets more attractive to the rest of the world. He said it makes it even more appealing.
Mohamed El-Erian, Allianz’s chief economic adviser, was asked in a Bloomberg TV interview on Friday whether investors should expect a positive growth shock with further inflation.
“The direction is clear: more growth, slightly higher inflation, increased public sector borrowing requirements, and a huge sucker punch of lots of foreign capital eventually coming into the United States,” he said.
The magnitude of these trends will become clearer as the incoming Trump administration’s policies become clearer and the people who will implement them become clearer, El-Erian added.
Just days after the presidential election, talk is already growing about possible cabinet reshuffles. On Friday, the Financial Times reported that Robert Lighthizer, who served as U.S. trade representative during Trump’s first term, has been asked to return to the post.
Meanwhile, the post of Treasury secretary is likely to go to a financier, with hedge fund managers Scott Bessent and John Paulson among the favorites, the FT added.
Meanwhile, other countries around the world may have more difficulty coping with a period of faster growth and higher inflation, which will further strengthen the U.S.’s relative advantage, El-Erian said. .
“This is a period of increasing U.S. control over the world system, both for positive and negative reasons in the short term,” he explained. “Other countries can’t build enough pipes around the United States. They try and do it, but these pipes are very small compared to the size of the United States.”
Indeed, bond yields are falling again after spiking immediately after the election, despite concerns that President Trump’s tax cuts, tariffs and immigration crackdowns will raise inflation and worsen the budget deficit.
El-Erian argued that this was because U.S. bonds had become more attractive compared to bonds from other developed countries.
Continued demand for U.S. Treasuries could help finance the federal government, which is expected to explode under President Trump’s second term.
Ahead of the election, the bipartisan Committee for a Responsible Federal Budget estimated that his policies could increase the debt by $7.5 trillion, or as much as $15.2 trillion.
But if investors, especially “bond vigilantes”, balk at the huge Treasury bond auctions, yields could rise and borrowing costs across key sectors of the economy, including mortgage rates, could rise. .
But BlackRock Chairman and CEO Larry Fink said in a Wall Street Journal op-ed Tuesday that faster economic growth will help make U.S. debt more manageable. .
“If GDP increases by an average of 3% in real terms over the next five years, the country’s debt-to-GDP ratio will remain largely stable at a high but reasonable level,” he said.
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