December 2017
In To The Mist
In November of 2016 the following were some of the observations of this author after the election results, in terms of a Trump administration. As the reader may recall the market favored a Clinton presidency over a Trump administration in the months leading up to the elections.
- The first term may actually be good for domestic financial markets if the Republican Congress approves an infrastructure bill which would stimulate the economy two or three years from now. The time-frame suggested assumes it will take several months for the House and Senate to pass a bill that Trump would sign, and the time needed for the initiatives to percolate their way through the economy. Inflation would also rise along with nominal interest rates, with banks and other lending institutions being more profitable.
- Given that tax rate reductions are in the cards for the incoming administration and a Republican Congress will likely go along with tax cuts, one can expect the deficit to rise. Add to that:
1) A protectionist government,
2) Trade wars – China will now likely “eat our lunch”,
3) Unstable political conditions exacerbated by our policies.
The first year has been good judging by financial markets, not due to infrastructure spending, but in large part from anticipation of lower tax rates. And if we are impartial, acknowledge the fact that the US economy has been on the mend for the last several years. Not just the last one. To the extent that a significant portion of the market's rise is due to expected lower tax rates and a freer regulatory environment, that may be cause for concern. The price of a bitcoin has soared, but what is it's intrinsic value?
What now for 2018 and beyond? The pro business, deregulation euphoria of 2017 will likely spill over into 2018 as the adverse concerns listed above take time to have an impact. After 2018 the loss of the Trans Pacific Partnership benefits including ceding leadership to China will start to bite. And the best we may eventually get from NAFTA is the deal we had before if we are lucky.
However, a change in leadership in Congress in November may lead to the perception among our trading partners that rational and predictable policies are not too far off. Long term investors should look for genuine bargains.