As the story goes: “Lord Keynes, why does consumption sometimes rise unexpectedly?”
Keynes: “Who knows, Animal Spirits.”
“But Lord Keynes, what about the long run?”
“In the long run. We are all dead.”
The above discourse with the famed and acerbic economist allegedly occurred at a dinner party. Keynes was known for being quick witted and caustic (his final words were “I wished I drank more champagne”). But what are Animal Spirits? In his 1936 book that revolutionized economics, The General Theory of Employment, Interest and Money, the term "animal spirits" is used to describe human emotion which is measured today by consumer confidence.
Keynes: “Who knows, Animal Spirits.”
“But Lord Keynes, what about the long run?”
“In the long run. We are all dead.”
The above discourse with the famed and acerbic economist allegedly occurred at a dinner party. Keynes was known for being quick witted and caustic (his final words were “I wished I drank more champagne”). But what are Animal Spirits? In his 1936 book that revolutionized economics, The General Theory of Employment, Interest and Money, the term "animal spirits" is used to describe human emotion which is measured today by consumer confidence.
In turn, Consumer confidence is an economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. The consumer confidence index was started in 1967 and is benchmarked to 1985=100. This year was chosen because it was neither a peak nor a trough. The Index is calculated each month on the basis of a household survey of consumers' opinions on current conditions and future expectations of the economy. As you can see from the accompanying chart, consumer confidence tends to be high during growth phases of GDP and dips during recessions. It is calculated by the Conference Board which is a highly regarded non-profit by both investors and economists (including the FED). Enter president elect Donald Trump; the Consumer Confidence Index hit 107.1 (102 was expected) in November, up from 98.6 in October, according to data from The Conference Board, this is the highest reading since July of 2007. After Clinton conceded the election at 2:30 AM, the Dow, in pre-market trading, plummeted 800 points. But then, investors thought about a Trump presidency and his policies. Specifically, lower taxes, less regulation and a Reagan type (supply side) stimulus, and it was off to the races. After blowing thru 19,000, the Dow (at the time of this writing) is now flirting with 20,000, nearly a 10% increase in 2 months. Why? Animal spirits which, in this case, represent expectations about the economy. All the aforementioned, lower taxes and regulation coupled with a supply side stimulus, generally lead to higher profits.
The expectation of Dodd-Frank being gutted has spurred the big banks to over 25% gains. The only harbinger of doom is his protectionist trade policies, but many investors realize that Trump is a negotiator and this is his starting position. I am a proponent of free trade with the caveat of a level playing field. Our biggest trade deficits are with Japan and China (Canada is our largest trading partner) where there is clearly not a level field and Trumps policies in this area may actually benefit the economy. In totality, a Trump presidency is being viewed as a plus for the economy, particularly the appointments that he is making to key positions, and it will reverse the stagnation (not one year of 3% GDP) of the anti-business Obama administration.
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