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David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.

Is this really the Trump rally? Well, this is what the bulls seem to believe. Even though the one sector carrying the load, large-cap tech, is the one that actually benefits the least from the tax cuts and trade changes under way. Absent technology, the median stock is unchanged for the year and down more than 6 per cent from the highs. There are many segments of the market being hurt from the administration’s policies, such as home builders, who are reeling from the lumber duties and escalating shortage of skilled construction workers. In fact, the reason why “growth” stocks are performing so well is because economic growth remains a scarce resource – notwithstanding the odd quarterly blip that incites a whole lot of excitement from the typical cheerleaders. Add to that the action in the Treasury market, where real yields are starting to decline. The bond market is having nothing to do with the bullish macro narrative. And rightfully so.

That narrative hinges on deficit-financed tax cuts, deregulation and the general America First policy thrust. Tax cuts on borrowed money only go so far – generally they are met by rising interest rates, which has been the case this year. Deregulation is a positive and alone likely added a half percentage point to real GDP growth last year, but the effects have largely played out. The problem is, then, with the America First policy. It plays well in Peoria but in such a globally interconnected world, the United States’ move toward isolationism is probably going to hinder, not help, growth. Changing trade incentives and imposing tariffs creates losers in aggregate, not winners. The impact of trade uncertainty is already being felt in terms of global direct investment flows, which plunged 23 per cent in 2017 to US$1.43-trillion from US$1.87-trillion.

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At the same time, China, the European Union, Canada and Mexico are already responding to the U.S. levy threats with import tariffs of their own. This is a zero sum game – a fact, not an opinion – that is even supported by U.S. Federal Reserve research. Sometimes, a politician doesn’t have to play to the base and fulfill every campaign pledge, but this President seems to firmly believe he was elected to shake things up. The question that remains to be seen is at what cost. Don’t be fooled by the stock market – it is only being held up by a tech sector that is widely viewed as immune fro‎m Trumponomics (at least until those high flyers are broken up!) and with an array of structural tailwinds.

From my lens, we had asset inflation first this cycle. Followed by commodity inflation. And traditionally, wage inflation is next – and it has arrived and is likely to intensify. This is where we will see the Fed move from being behind the curve and become a lot less relaxed. Same old cycle … inflation now, recession later.

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