“I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy,” the president said after walking off Air Force One in Erie, Pennsylvania for a rally.

Mr. Trump called the Federal Reserve his biggest threat last week, as the Fed continues its path toward interest rate normalization.  Once again, Mr. Trump says the politically incorrect thing, since, as you know, the Fed is an independent organization.  Criticizing them is certainly in bad form in polite Washington circles.  Unless of course, you are on a congressional committee with oversight.  Now I have to agree and disagree with Mr. Trump (isn’t that what economists do after all?).  I agree that the Fed is a big threat to the stock market and therefore Mr. Trump’s political prospects, but we’ve always known that the unwinding of the Fed’s balance sheet post the crisis was going to be potentially problematic.  Yet it took a Trump presidency to usher in the kind of economic strength that would give the Fed the confidence to normalize.  And its true that interest rates are high relative to the last decade, with the Fed Funds Rate now @ 2.25%.  Yet with CPI inflation of 2.3%, and strong economic growth and historically low unemployment, we should not have an inflation adjusted interest rate of zero.  The Fed does not want to get behind the power curve here, and historically, they have good reason to fear.  The problem for Mr. Trump is that the market valuations are at extraordinary highs (and have traded at high valuations for the last decade), directly a function of the low interest rate regime.  With interest rates rising, the only hope is that earnings can rise even faster, since future earnings are worth progressively less as interest rates increase.  By historical standards, a common S&P 500 stock valuation might be 15-16.  Yet we currently have the S&P 500 index trading at 22+, an ~50% premium over the mean valuation for the last 100+ years.  So how does Mr. Trump look if stocks lose 30-40% of their value–if stock market valuations normalize along with interest rates?  And what if in a steep correction stocks don’t just stop at the historical valuation, but rather go below during a panic sell off?  Rate normalization may be the hard thing to do.  But isn’t it about time that savers at least had a positive return, after a decade of financial repression?  But then the massive government debt bubble will become increasingly difficult to service.  As I’ve said all along, this is not going to end well.  But maybe it can go on yet a bit longer. Jim Grant presciently called this Trump approach about the Fed right after the election; its Mr. Trump’s bubble now.  It’s worth a quick listen.