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What is the Trump Reflation Trade and Should I Care?

By in Advanced Investing, Economics, Inflation, Investing | 4 comments

I’ve enjoyed economics ever since I majored in the field at University. During the last century, I’ve seen rampant inflation – too much money chasing too few goods – leading to exploding prices. I’ve also lived through the recent low inflation rates and the brush with stagflation and deflation.

So, what’s up with reflation, the reflation trade and the Trump reflation trade?

It’s all over the news, but reflation isn’t as clear cut as the inflation, stagflation or deflation themes.

What is the Trump Reflation Trade and Should You Invest in it?

What is Reflation?

Reflation has a technical definition, just like inflation.

The meaning of reflation describes a governmental fiscal or monetary policy. The reflation policies are rolled out to expand a country’s GDP and reduce the effects of deflation. Sample reflation policies include:

  • Cutting taxes
  • Changing the money supply
  • Lowering interest rates

But wait, there’s another definition for reflation. Reflation also describes the initial phase of an economic recovery after a period of contraction.

Reflation policy has long historical roots. Since the early 1600s, American governments have tried to restart failed business expansions or attempted to halt an economic collapse after a recent boom period.

Yet, despite all the good intentions, it’s difficult, if not impossible to short circuit the contraction phase of the business cycle. In fact, some academics think that government intervention hurts the recovery and might delay its progress.

The business cycle waxes and wanes and it’s unlikely that the dance will ever end.

But this reflation definition still doesn’t explain the Trump or other reflation trade.

What is the Reflation Trade?

A lot has been written about the reflation trade in Bloomberg.com, the Financial Times and other periodicals. Yet, despite the press, it’s unclear to many exactly what the reflation trade means for you and your money. Additionally, you might wonder if there’s a smart investment trade, by understanding the reflation trade.

This article will attempt to clarify the reflation trade and whether you should make any investment moves to capitalize on the reflation trade.

What is Trump’s Reflation Trade?

A recent visit to the Financial Times explained this concept in an article by the same name. FT.com states “Investors are betting Trump’s policies will lift U.S. inflation and growth, hurting bonds.”

Trump’s reflation trade is based upon promises made by President Trump:

  • More money will be spent on infrastructure and increased government spending.
  • More money will flow into the economy as taxes are reduced.
  • Economic growth will expand.

In summary, the U.S. is expecting economic stimulus under Trump’s proposed policies.

So, that’s the reflation part of the Trump plan. Next, is the Trump reflation trade. The idea is to invest in order to capitalize on these expected reflationary policies.

The Trump Reflation Trade

  1. Sell bonds and buy equities, which will benefit from increased growth. As interest rates increase, the value of bonds will decline.
  2. If you want to maintain a bond exposure, consider investing in government Treasury Inflation Protected Bonds or TIPs. TIPs principal value increases along with the inflation rate. This will protect your capital as inflation trends upwards.

Read about; TIPs – An Investment Guaranteed to Keep up With Inflation >>>

Should Investors Jump on the Trump Reflation Trade?

“We’re definitely seeing more sustained caution about the new president’s ability to turn his rhetoric into legislative and regulatory action,” said Cameron Brandt, director of research at EPFR Global, which analyzes flows in more than $17 trillion of mutual funds. “There are plenty of signals that people want to see something tangible.” ~Bloomberg.com

In the above Bloomberg.com article, Brian Chappatta implies that the economic future is murky. Questions remain regarding Trump’s ability to slash taxes, create massive infrastructure projects and goose economic growth.

There are signs that the reflation trade is dead. Bloomberg.com’s Luke Kawa just reported that the reflation trade is falling away and that consumer prices may have reached their peak. Inflation is already over 2% this year. Does this mean you missed out on the Trump reflation trade already?

So, if President Trump’s ambitious plans don’t come to fruition, how should investors react?

Unless you are an active trader or speculator, you shouldn’t worry about making the reflation trade or any short-term investing strategy. You’ll be competing against complex computerized algorithms and professional traders who are adept at capturing micro movements in investment markets.

Bonus; What is Multifactor ETF Investing? And Is it Worth a Try? >>>

The Reflation Trade Takeaway

So, now that you understand the meaning of reflation, doesn’t mean you should invest on that knowledge.

Actually, I’d advise against any short-term investment trading strategies.

Create a sensible investment strategy, based on your risk tolerance, age and future goals. Then stick with the approach. Or, if you must, adjust it minimally to reflect any changes in your life. Trying to outsmart the economy is difficult, even for the most seasoned investors. In most cases, you’ll end up losing more than you gain. Thus, leave the reflation trade to the professionals.  

 

    4 Comments

  1. Hi Barb – With the stock market trading at record levels, and real estate prices back to where they were before the meltdown, it’s hard to see how reflation will benefit the economy. When valuations get too high they hurt the real economy, and that’s what really needs to be stimulated. I think we have to seriously doubt if any of these efforts will actually improve the economy in the long-run.

    While many would say it’s a pessimistic view, we need periodic recessions to purge out both dead wood businesses and high price levels. Only then can we get real, sustained economic growth. But since it’s now federal policy to mitigate any sign of weakness, that isn’t being allowed to happen. Don’t you think it’s ironic to even be talking about reflation given the high levels of the financial markets? It often feels as if we’re living in an alternate reality. As you said, it’s been happening since the 1600s, but now the government is just better at it, having digital money and the conduit of the federal reserve.

    Kevin Mercadante

    May 1, 2017

  2. Hi Kevin, Your sensible and well-reasoned approach underscores the importance of grasping the business and economic cycles. There is an important ebb and flow to the business and economic cycles. The excessive monetary policy machinations may not avoid or circumvent this cycles nor should it. The important economic contractions wring out the economic excesses such as lofty housing and stock prices! Certainly, we don’t need any reflation monetary policies today.

    Barbara Friedberg

    May 1, 2017

  3. Thanks for sharing Barbara. It is always helpful to read someone else’s view and understanding of something such as the Reflation Trade.

    David Chen

    May 8, 2017

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