What is it that you are making of the globe, getting closer now to Trump’s official transition? What are we hoping to hear?
ED Yardeni: Well, what we are likely to see from the inauguration of the new administration, everybody calls it Trump 2.0, we are going to certainly get a lot of executive orders right away focusing on deregulation, on immigration, possibly anticipating some changes in the tax laws and, of course, all that is going to have some impact on the deficit.So, it is going to be a lot of policy initiatives. We are going to have to wait a while to see what gets through and once it gets through, we will all be trying to assess the economic impact. On balance, it will be okay for the economy, but for right now it creates a lot of uncertainty.
Uncertainty is something which is really that Street does not like and is that something what we are seeing in the 10-year yields right now, closer to 4.7 thereabouts, where do you think they are headed?
ED Yardeni: Well, there is a few things going on in the financial markets, particularly the bond market as you are asking. We have seen the bond yield go up 100 basis points since the middle of September. At the same time, we have seen the Federal Reserve lower the federal funds rate by 100 basis points, so the bond yields up 100 and the Fed funds rate is down 100.
So, the bond vigilantes, as I like to call them, are disagreeing with the Fed and basically arguing that the Fed might be stimulating an economy that does not need stimulating. And you know what? It looks like they are right because Fed officials have started to indicate that they may be going on pause here. They may not be lowering interest rates any time soon. They would not be raising them any time soon either. But it looks like rates are going to go flat. But look, 4.5% bond yield plus-minus 25 basis points is the right level. It is kind of a normalising of where rates should be.
And that is exactly what I wanted to talk about the rate cut trajectory because many believe whether or not at this disjuncture the pace of rate cuts are even warranted.
ED Yardeni: Well, exactly, and I did not believe back in August of last year that the economy needed rate cuts. I thought the economy demonstrated over the past three years how resilient it was in the face of tightening of monetary policy.
But the Fed went ahead, they did not listen to me, and they went ahead with a 100 basis point cut. But now they are coming around to the idea that the economy is doing fine.
Inflation is not quite at 2%. And meanwhile, they are starting to worry about the potential inflationary impact of the incoming administration with regards to tariffs and, of course, with regards to deportation.
What do you think is the problem area with India right now? I mean, is it just the dollar index strength which is making the FIIs pull out the money or do you see some structural issue as well with the Indian markets?
ED Yardeni: There is a lot of uncertainty related, of course, to Trump, but there is also a lot of uncertainty on a global basis. We see political instability in France, in Germany, in South Korea. There is a lot of jitteriness around and that has actually favoured the dollar.
Commodity prices have remained weak. China’s economy remains very weak. There is sort of a flight to quality and where people are flying to is to the United States, which is why the dollar has been strong and why our stock market has been also quite strong.
So, as long as the dollar is strengthening like this, it means that emerging markets generally are going to underperform, especially underperform the US and India is still viewed as an emerging economy, but I think of all the emerging economies, its prospects are probably the best.
So, I do not really think that the jitteriness in the global financial markets is going to be as problematic in India as it might be in some other places.
