As Donald Trump meets with top tech execs across Silicon Valley on Wednesday, it’s worth noting that during his campaign the president-elect never quite addressed the impact of technology on U.S. unemployment – probably because it wouldn’t have roused a crowd in rural Pennsylvania more worried about manufacturing jobs going overseas.
Technological progress is far from a bad thing, but it does lead to structural unemployment, and we are shedding jobs faster than we can re-train workers to learn new skills. Amazon is the greatest deflationary force on earth. It regularly shrinks the “total addressable market” of industries it enters by cutting margins in half and putting their competition out of business, capturing all the value for themselves. This trend is accelerating and I believe we are still in the early innings of the Internet bringing price transparency and thus margin erosion to oligopoly industry structures. To quote Jeff Bezos himself, “your margin is my opportunity.”
This disruption is disturbing for future job growth, and it would be a missed opportunity if Trump’s plan to reboot America’s economy focuses strictly on investments in infrastructure. As the Federal Reserve FOMC meeting closes today and Fed Chair Janet Yellen prepares to hold a press conference, it’s appears the market is getting ahead of itself on the “Trump trade.” Sentiment has become extremely one sided – speculative short positions in 10-year Treasuries have hit one year highs, inflation expectations are at 12.5 year highs amongst money managers (per BAML survey) and manager exposure to commodities is at four year highs.
The market has fully priced in Trump’s $1 trillion stimulus package and then some. What this ignores is that we – meaning central banks in America, Europe, Japan and elsewhere – have been trying unsuccessfully to create inflation for eight years. For Japan, it’s been decades.
Why won’t fiscal stimulus do the trick? Obama had similar “shovel-ready” infrastructure plans that never resulted in inflation. This is because municipal projects rarely offer satisfactory rates of return. Trump’s plan is dependent on contributions from private enterprise, but who wants to fund a pothole being fixed? These projects are thus funded through tax revenue and municipal credit issuance, and many cities are already facing a looming debt crisis due to underfunded pension liabilities.
I believe less than half of the trillion dollar project gets approved under a Republican congress and imagine a chunk of that will get frittered away through government waste. Even a $300 billion project is incremental to GDP over ten years, but this is not the “shot in the arm” of inflation that the market has priced.
Why are we mired in deflation? Perhaps deflation is too strong a word – truthfully a 1 to 2% state of inflation is not the worst thing for equity returns. The elephant in the room is technology, which is deflationary by nature — something anyone who cares about U.S. job creation should hope Trump will address more in the year ahead.
Greg Blotnick is an equity analyst at a hedge fund in New York. Blotnick holds an MBA from Columbia Business School and is a CFA Charterholder.