What Trump might mean for the marketsPosted on February 2, 2017
Section 1: Understanding President Trump
Appearances Matter Most
The first week of the Trump Presidency saw many gestures to various groups of his political base.
- Rejecting the TPP negotiations. Despite the fact they wouldn’t have passed congress.
- Stop cooperation with Obamacare. A real replacement is long way from ready.
- Avoid funding Non-Government Organizations that promote abortion.
- Start construction of a wall with Mexico. The specifics were vague.
- Approve some oil pipelines and suggest US components that were likely to be anyway.
- The 90 day ban on people from 7 mainly Muslim countries. What happens after 90 days?
None of this excuses Trump’s approach, but if you look closely, all of these, even the last one with its rapidly expanding number of exceptions is designed to be a high profile play to the political base that elected him. Further, the huge surge in condemnation, correct as it is, will desensitize the wider population to protests over future moves that will take longer to execute.
A Bully in the Bully Pulpit
The Election campaign certainly revealed Donald Trump to be different and since taking the Presidency there has been no change in his approach. He is who he said he would be. Therefore it makes sense to understand the background to his unique style. The answer goes back to Donald Trump’s lawyer in the 1970s and early 80s, Roy Cohn. The essence of his counsel, a man who served Senator McCarthy for 13 years, was a simple formula: attack, counterattack and never apologize. M Stanton Evan’s book on Joseph McCarthy might help understand the present.
Change the Playing field before negotiations
When entering a negotiation Trump likes to change the perception of where the edge of negotiations are and this changes idea of where the “middle ground” actually is. Witness the mooted idea of a 20% tariff on Mexican goods. Suddenly a 2% tariff seems like not a big deal and would calm rather than agitate the market. A 2% tariff would in fact be enough to fund by a VAT style “border adjustment” tax within just a few years. Donald Trump may seem insane at times, but it is important to remember that he isn’t stupid. How Mexico and others respond however may yet determine whether America, and the world gets a good deal.
America First Protectionism
Although Donald Trump is famous for his contradictions in public statements, his statements around protectionism and nationalism date back more than a decade. They seem a real belief. Expect a Trump Presidency to involve trade spats with his normal bullying approach.
Market Confidence Matters to Trump
An overlooked factor of the uproar over the travel ban was Donald Trump’s reaction when it became clear that the financial markets were reacting poorly. He immediately tried to change the focus and promote his deregulation of the banking and finance sector as well as making a new announcement in removing red tape for business. In a sense, it was as close as Trump will get to a position walk-back. He was seeking to calm the markets.
Section 2: Investment Ideas
We aren’t just talking about the Mexican wall, but also about infrastructure. Donald Trump is a builder and developer after all, and if there is one part of the government he can be expected to understand fully and attract investment, it is in infrastructure. Although the received wisdom is that government spending would be hard to come by (and probably is), the actual plan relies heavily on private sector funding. More toll roads appear to be in America’s future.
Banking and Finance
One of the best performers since Donald Trump was elected has been the banking industry. This is due to two reasons. Firstly increasing inflation expectations which will help give banks a better net interest margin and thus profit. Secondly there are growing expectations of deregulation of the banking and finance industry which has crimped profit and lending.
Business with overseas assets
The trillions of dollars stashed abroad by American multinationals may indeed be allowed to be brought back to the US at a discounted rate. Although this may take more congressional support, the Republican majority may be enough to get this across the line and support a change.
Although a difficult segment to target with any precision given the global nature of most significant operators, Donald Trump is clearly a vocal fan of US manufacturing.
Protectionism in the form of tariffs combined with a rapidly warming economy that is approaching its limits on lifting employment further leads inevitably to inflation. Higher inflation with a stronger economy means higher interest rates and that means the great bull run in bonds might be coming to an end. It might be lumpy and require patience, but shorting bonds is the type of trade that goes no-where and then suddenly turns strongly profitable unexpectedly when pension funds, as a herd, start to reduce their bond holding exposure. Look to 1994 for what happened during the last bond sell-off.
India and Russia
Both India and Russia have obvious strengths and weakness. Both have suffered in recent times due to their own weaknesses. Both however can claim to be recipients of Donald Trump’s affection on the campaign trail and since then. Of the two, Russia has the most obvious chance to gain ground with a reduction in sanctions being relatively straight-forward.
Words of Caution
Instability from negative positions and policy outcomes in President Trump’s approach are easy to see given his rather unique approach and negotiating style. Here is a list of the more obvious examples.
- Chinese exporters were frequently targeted by Donald Trump on the campaign trail.
- American companies dependent on their China business, because every action will likely have a reaction. American farmers can’t just sell their China business like Yum just did.
- South China Sea is a potential flashpoint if Rex Tillerson’s idea of a blockade is a guide.
- United States tourism industry is nervous. Mexico which provided 18.4 million visitors is just one example of a country likely to send fewer tourists.
- Middle East is likely to continue being unstable now that the US is close to energy independence and the Trump administration is keen to reduce involvement.
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