Your Investments in a Trump Administration.
Since the ballots were counted last week, the stock market had a short and sharp panic attack and quickly recovered with its best week in a long time, the bond market it’s worst week in a long time. Many of you communicated to me your anxiety about your investments, So I dove into analysts reports of all sorts to try to bring you some clarity, and here it is.
There is some clarity, not crystal clarity, but some, for the next say 18 months. Things are a lot foggier in the longer term.
The near term is most likely to bring us a classic fiscal pump, a combination of tax reform/cuts and infrastructure spending. A fiscal pump is a strong stock market push, both the effect and the correlation are strong. It’s as close as you get to a sure thing in the stock market world. The fact that the White House, the House and the Senate are now all red increases the probability of that pump happening and most likely will also speed up its implementation. Yes, there remains disagreements about the exact shape of the tax reform between Mr Trump and his Congress but they will likely be ironed out quickly. Everyone (even Hillary Clinton) seems to agree that the corporate tax rate is too high and needs to be lowered. That rate used to be about average compared to other nations, then rates were dropped everywhere but in the US. We are now a high tax hood. Lowering that rate will bring very large amounts of capital stashed abroad by US corporations back in the US, the tax on that money coming back will pay for roads, airport, bridges and hopefully the California rapid train. Providential money in a sense.
With this systematic increase in demand, jobs get created, the new president gets to look good, Congress looks like they are doing things that help, and inflation fears rise. So the Fed is likely to increase rates faster than previously planned. Good thing, the Fed needs higher rates so they can provide monetary support later when the need will arise. Higher rates mean a stronger dollar, lower bonds, way lower (the thirty year treasury lost about 10% in a week, a shock in anticipation). To visualize the dramatic rate rise go there, and increase the trail length a bit.
The longer term is not as clear. How will the tax reform and infrastructure spending affect the deficit? Will the Heritage foundation folks dominate the cabinet and dig a deficit hole? Will the Republicans be okay with a debt ceiling increase after threatening to shut down the government so many times in opposition to it? Will this all red government keep a relative unity or will there be infighting between the Trump core and the party establishment? Will Mr Trump want to replace Mrs Yellen who he said “should be ashamed”? Other long term clouds are related to possible trade disruptions. Trade negotiations take a long time. Open trade tends to be a GDP stimulant. Will Mr Trump barricade the country like he promised during his campaign? Will the nation grow ever more divided and restless? How will our next president’s ego respond to social unrest? Yes, that is a lot of uncertainty, it is early and it will all have to be watched closely.
I have to say that it has been a little difficult for me to separate economic analysis from social policy implications and emotions. I am an immigrant, I have been exposed to rejection, discrimination, to that adaptive struggle. It has shaped me. When I face an outsider of any sort, it is impossible for me to discriminate, it resonates too much with my personal experiences. I am more inclined to empathize, to see the good in the other beyond the differences and to initiate cooperation and closer ties.
Here are my favorite lines from Tim Cook:
”Being gay has given me a deeper understanding of what it means to be in the minority and provided a window into the challenges that people in other minority groups deal with every day. It’s made me more empathetic, which has led to a richer life. It’s been tough and uncomfortable at times, but it has given me the confidence to be myself, to follow my own path, and to rise above adversity and bigotry. It’s also given me the skin of a rhinoceros, which comes in handy when you’re the CEO of Apple.”
Not only do I love this, but I think Mr Cook puts his finger on the very essence of our national character. So many of us are different, our adaptation to the challenges of our differences has become the number one strength of this nation. Other countries simply do not have that advantage, not France, not Germany, not England, not Japan, not Russia, not China, it is our very own exclusive asset and it does make this nation more adaptive, more entrepreneurial which is absolutely key when facing rapid evolution. A very diverse nation who can cooperate well is a much better way to harness human potential, human capital, of any kind, much better than any ethnic dominance, segregation, much more efficient than anything else. I have total confidence that this very American “diverse togetherness” will prevail in the long run. It makes a better, stronger, richer, happier life.
Cheers
Marc Anselme
