And to think that just yesterday I was scouting for an investment that would let me go long the Mexican peso and thinking of cutting back my exposure to biotechs.
Not today. My thinking on both those potential investments has been turned upside down by Donald’s Trump’s surprising victory over Hillary Clinton. It’s early for a complete assessment–hey, the champagne is barely dry on the rugs at the New York Hilton–but here are my initial thoughts on new investing landscape. I’ve arranged them in alphabetical order. (Updated on November 10 with six additional points: China, Rudy Guiliani, Oil,Russia, Tax Repatriation, and War.)
Affordable Care Act (ACA or Obama Care.) Dead. During his campaign Trump pledged to repeal it and that meshes neatly with the opinion of the majority of Congressional Republicans. This was a key campaign issue and I think a Trump administration will want to deliver this to its voters as quickly as possible. I think the most likely replacement is some kind of block grant program to the states along the lines that House Speaker Paul Ryan has sketched out. How you move to block grants and still preserve some of the popular features of Obama Care–like no denial of coverage for pre-existing conditions–is going to be tricky. Block grants to the states will probably wind up replicating the extremely uneven coverage and benefits that we see now with some states, either in the South or with Republican-controlled state governments (or both), providing relatively meagre benefits and other states with traditions of more generous safety nets, setting benefits at higher levels. Most of those who can expect to see lower levels of benefits are Trump voters, I’d note. But that’s certainly not the last irony resulting from this election.
Banks. Bank stocks have rallied today on two beliefs: First, that a Trump administration will back off on regulation, and second, that Republican fiscal policy will be inflationary resulting in higher interest rates.
Biotechs. These stocks rallied today on a belief that a Trump presidency means less likelihood of any vigorous effort to pressure drug prices. The iShares NASDAQ Biotech ETF (IBB) climbed 8.93% on Wednesday, November 9. (I’ll have my first Trump presidency pick in this sector tomorrow, November 11.)
Budget. The budget plan announced by Trump during the campaign was short on details but it clearly did include a big tax cut, especially for upper income taxpayers and corporations, and big increases in spending on defense and infrastructure. Candidate Trump claimed that the tax cut would be be paid for through big reductions in spending on regulation and by the increase in revenue that would result from faster growth after those tax cuts. Dynamic scoring–the assumption that lower tax rates will produce extra growth–isn’t itself a controversial idea, but we’re getting onto dangerous turf when the assumptions about extra growth go to extremes. In its scoring of the Trump tax plan, the Tax Foundation assumed that cutting the corporate tax rate from 35% to 15% would boost longterm growth of GDPo by 4.3%. Growth, according to the foundation, would generate enough extra revenue to pay for 54% of the cost of the tax cut. If you don’t use extreme dynamic scoring, the Trump tax plan adds somewhere between $5.3 and $11.5 trillion to the deficit over the next 10 years. This issue isn’t going to be decided by debates among experts or think tanks. If the bond market says the added deficit is threatening to U.S. financial health, it will settle the issue by asking for higher yields (and by paying lower prices) for U.S. Treasuries. I think a tax cut during the early years of a Trump presidency is just about certain. But I wouldn’t count on global bond markets saying another $5 trillion (or more) in debt is OK.
China. Candidate Trump promised that he would fix our trade deficit with China by negotiating a better deal. As with so many of the better deals that Candidate Trump promised, President Trump is going to have to actually figure out how. Trump has accused China of manipulating its currency to lower the prices of its products so one route would be to have Treasury brand China a currency manipulator. The Obama Administration has shied away from applying that designation, despite considerable pressure from some Congressional Republicans, figuring that such a confrontation wouldn’t do anything positive for U.S.-China relations. A Trump administration could go ahead and see where the chips fell with the owner of the world’s largest portfolio of U.S. Treasuries. Candidate Trump also promised to bring back jobs from China. His negotiating leverage, he said, was the huge volume of trade that China does with the United States. The threat of slapping a huge tariff on China (I heard Trump mention a figure as high as 40% in one speech) would be enough to do the job. Exactly how and why these jobs would come back to the U.S. from China (as opposed to going to Vietnam, for instance) remains a puzzle. But financial markets are taking the possibility of a trade war with China and others as a real danger. It’s one explanation for the big drop in technology stocks on November 10. Facebook (FB) was down as much as 6.4% and Amazon (AMZN) declined as much as 7%.
Congress. Republicans now control both the House of Representatives (Democrats had picked up five seats as of Wednesday results) and the Senate along with the presidency. In the Senate the Democrats will have 48 seats (or maybe even 49 if the unlikely happens and a Democrat takes Republican Senator David Vitter’s seat in Louisiana) which is not enough to win anything if Republicans vote in a block but is enough to mount a filibuster. Expect two years (until the 2018 mid-term) of maneuvers in the Senate as Democrats struggle to use the only lever of power they have after this election. One key test will be whether new Senate Minority Leader Chuck Schumer (N.Y.) has the partisan cojones of his predecessor Harry Reid (NV.)
Consumer Financial Protection Bureau. The only question is whether Republicans will kill this new agency outright or just let it starve to death for lack of funding. The political optics might be better to leave it in place but gutted. Expect lots of speeches by Democratic Senator Elizabeth Warren (MA) in an attempt to save her creation but I think the best she might be able to do is preserve a shell of the agency.
Defense budget. Candidate Trump ran on making the U.S. military strong again. The easiest and most visible way to do this is by increasing the defense budget. Look for increases in weapon programs whether the Pentagon wants this gear or not. (My second President Trump stock pick tomorrow, November 10, will be in this sector.)
Dollar. A higher budget deficit would normally mean a lower dollar. If the Fed raises interest rates, that pushes the dollar higher. If growth in the U.S. economy picks up on an increase in government spending that would push the dollar higher. Big uncertainties about how these opposing trends net out.
Drug stocks. Same logic as with biotechs –less government pressure on drug prices–but in a less volatile group. The Health Care Sector Select SPDR (XLV) climbed 3.52% on November 9.
Environmental regulation. Less. Much less. Candidate Trump proposed eliminating $100 billion in spending on environmental regulation. You can only get to that total by eliminating the Environmental Protection Agency and many/all of the programs run by the Department of Energy. Will a Republican Congress go that far and leave themselves open to blame if we get another Flint disaster? My sense of the politics is that the proposal will be for big budget cuts but not elimination and the roll back of all of President Obama’s executive orders on pollution and climate control. Oil refiners and miners soared today, November 9. For example, Marathon Petroleum (MPC) climbed 4.18% and Valero Energy (VLO) soared 6.69%
Federal Reserve. What now for the Fed? The U.S. central bank came in for strong criticism from Trump during the campaign charging that Fed chair Janet Yellen was manipulating interest rates to benefit the Obama administration’s economic record and to help Clinton’s campaign. Yellen’s term at the head of the Fed runs until January 2018 and I think there’s very little chance she will step down before that–in order to give Trump more control over monetary policy? Which doesn’t mean that the time until 2018 is going to be a cakewalk for Yellen. The Fed, which looked on track to raise interest rates at its December meeting now has to decide if a Trump administration’s likely emphasis upon big tax cuts and a big increase in infrastructure and defense spending will unsettle the bond market enough to send interest rates higher even without Federal Reserve action. Action in the Fed Funds Futures market showed a huge drop in odds for a December 14 rate increase to less than 50/50 from more than 75% before the election.
Global warming. During the campaign Trump called global warming a conspiracy by the Chinese. I’d expect at a minimum a roll back of all the Obama Administration’s effort to limit increases in carbon dioxide and other greenhouse gases. The big questions are what Congress will do on funding for alternative energy solutions such as wind (Trump is not a wind power fan) and whether the U.S. actually goes so far as to try to pull out of the Paris agreement on combating increases in global temperatures. (Consensus expert opinion right now says that it wouldn’t be possible for the United States to pull out during a first Trump term.) t think on this one the extreme positions will win out because doing nothing costs nothing (Candidate Trump promised to cut all U.S.government funding for U.N. climate change programs.) and because the Trump administration looks inclined, going in, to emphasize domestic U.S. production of conventional carbon fuels–oil, natural gas, and coal–because they can produce jobs. This is likely even though the planet doesn’t have four years to waste on this issue. I hope you know how to swim.
Gold. A Trump presidency is likely to have more than its share of surprising twists and turns–that produce volatility in the short run and that have the potential to throw the economy and markets off track. The market logic the day after Trump’s victory was that adding gold to a portfolio was a sensible reaction to the unpredictable and possibly erratic nature of policy in a Trump administration. Gold mining stocks outperformed gold itself today, November 9, because these companies are more leveraged to the price of gold than any ETF that invests in gold itself. Randgold Resources (GOLD), for example, was up 3%, and Newmont Mining (NEM) was ahead 2.72% on November 9.
Rudy Guiliani. Financial markets always look to key presidential appointments in order to judge the likely character and direction of an administration. That’s even more important this time around since President-elect Trump has no record in public office to use to evaluate his likely path and because during the campaign his positions have been contradictory and extreme. If Trump appoints seasoned hands to key post, his supporters may be disappointed since that won’t look like the revolution many voted for. It will be, however, remarkably reassuring to financial markets. If on the other hand, he appoints partisan spokespeople from the campaign, markets will find this scary because it increases the unpredictability of policy in a Trump administration. Names to watch to see if Trump is headed the partisan route include Rudy Guiliani (former New York mayor who has been mentioned for Attorney General) and Newt Gingrich (who has been mentioned, perhaps only by Newt Gingrich, as Secretary of State.)
Inflation. The consensus today is that big tax cuts and greater government spending in a Trump administration would lead to higher inflation. (Which would, of course, push the Federal Reserve toward action.)
Infrastructure. One of the few things that Trump and Clinton agreed upon was the need to big spending on rebuilding the country’s infrastructure. Clinton proposed spending $300 billion.Trump raised her with his $1 trillion plan over 10 years. A major difference besides amount, however, was that Clinton plan called for government spending where as Trump’s plan was built around private spending with incentives in the form of government tax credits. The actual government commitment to that $1 trillion plan is estimated at $170 billion. One way or the other, however, we’re going to see a big infrastructure package in the early days of the 2017. Whether it passes over conservative Republican opposition to infrastructure spending by the Federal government, though, may depend on Democratic votes in the House.
Interest rates. Medium and long-term interest rates, the ones the Fed doesn’t directly control and the bond market does, are almost certain to climb during a Trump administration. First, they’re very low now so the default direction is upwards. Second, the likely fiscal policies of the Trump administrant and the Republican majority in Congress are likely to influence international bond buyers to ask for a better yield on the bonds they buy.
Jobs. How can I be so sure that we’ll see a big infrastructure package quickly introduced in Congress? Jobs. Candidate Trump promised that he was going to create millions and millions of new jobs. The art of job creation by government action, however, is rather poorly understood. Exactly what did President Bill Clinton do to lead to the incredible job creation record during his administration? What does seem like a guarantee of job creation, however, is infrastructure spending. With President Trump on the hook with his promise to create millions of new jobs, an infrastructure effort makes profound political sense.
Kill the Brexit analogy. Enough already. Yes, the polls in the U.S. got it wrong on this election just like the polls in the U.K. did on the Brexit vote. But the unfolding of market reaction to Brexit and to a Trump administration are going to be totally different. Brexit is a relatively contained event with specific timelines–2 years to negotiate an exit once the clock starts ticking. A Trump presidency is much more open ended with lots of at the moment unpredictable events that will drive the markets. A day or two after the election everybody is just guessing at what a Trump administration will be like. Who is going to head Treasury, for example? Everyone announcement filling in the details will drive volatility in the markets for that day.
Marine Le Pen. Every extreme right wing politician in Europe has rushed to drape him or herself in Donald Trump’s victory in an effort to win support for stricter anti-immigrant policies (Le Pen in France and Nigel Farage in the U.K.) and to advance their own nationalist agendas, such as a potential exit by the Netherlands for the European Union (Geert Wilders.) At a time when the entire European project was feeling rather tentative, this boost to right-wing anti-European Union politicians just makes the job of keeping the community together and figuring out how to fix its very real problems much, much harder.
Mexico. Exactly how hard will a Trump presidency hit Mexico? On the first news of a Trump victory overnight, the Mexican peso fell 13% to a new historic low before it recovered to a mere 8.7% loss. Will Trump actually attempt to cancel NAFTA, the trade agreement that has so closely integrated these two economies? It’s going to be an interesting balancing act between the demands by Trump’s core voters for an end to illegal immigration from Mexico and the return of all those jobs from Mexico that Trump promised, and lobbying by companies that have built plants in Mexico that are now an integral part of their production process. Can General Motors (GM) and Ford (F) compete in the global car market without the ability to use cheaper Mexican labor to make their smaller, lower margin cars? Is Trump willing to risk a recession by slapping huge tariffs on goods coming across the U.S.-Mexican border? Even the prospects of a trade war between the United States and Mexico will further hurt the peso and financial assets on Mexican markets.
Mid-term elections. Even while they’re celebrating their capture of the White House and the successful defense of their Senate majority, Republicans are busy calculating the mid-term election prospects in 2018. They know that the party in the White House typically loses seats in Congress during mid-term elections. But they also know that 2018 gives them a chance to clobber Democrats in the Senate and to send them further into the minority. Democrats will be defending seats in five very red states in 2018: Indiana, Missouri, Montana, North Dakota, and West Virginia. If they can produce a record in 2017 and 2018 that says to Trump voters, Hey, we’ve started to keep our promises, they know they have a chance to expand their Congressional margins. This is one reason that in many of the points in my A-W run down, I’ve suggested that the Republicans will be galvanized into action.
Oil. Candidate Trump promised to get the government out of the way so that U.S. oil and natural gas producers could lead a revolution that would make the U.S. the world’s leading producer of those fossil fuels. This always struck me as an odd promise since the “heavy-handed regulations” of the Obama administration haven’t seemed to slow down the domestic oil and gas industry to any significant measure on a path to #1 in production. Getting rid of existing regulations or killing prospective regulations might indeed save the industry a few bucks (by eliminating new rules on methane emissions from natural gas drilling operations and pipelines, for example) but the real determinant of how much oil and natural gas U.S.companies produce will continue to be world supply and demand and their effect on global oil and natural gas prices.
Recession. Before the vote, I was hearing a lot of talk about how a Trump victory would bring on a U.S. (and therefore probably a global) recession. After the Trump victory, not so much. But I’m sure that this talk will be revived if Trump’s trade policies start to pinch U.S.businesses and if the Trump budget pushes interest rates and inflation more than gently upwards. Recessions have a very strong psychological component and before the election it was easy to find voices saying that the current economic expansion was long in the tooth. It wouldn’t take much in the way of real world events to push that prophecy into the ranks of the self-fulfilled.
Russia. Russian stocks rallied after Trump’s victory on the assumption that a Trump administration would end the sanctions imposed on Russia as a result of its intervention/invasion of Ukraine. No doubt about it but Trump is more likely to end those sanctions than a President Clinton would have been. And without U.S. jawboning in favor of keeping the sanctions in place, it’s likely that the European Union would abandon its efforts too. But Russia’s economic problems are much bigger than these sanctions. Russia’s economy is severely unbalanced and depends on the price of oil for its health. If you think OPEC will succeed in producing a plan with significant reductions in production on November 30, then Russia is a good investment–at least in the short run and as long as you can overlook the endemic corruption in the Russian economy.
Paul Ryan. The one thing that could sink (or at least damage) Trump’s ability to move an agenda is a decision by the extreme conservatives in Congress, the members of the Freedom Caucus and their allies, to go for control of House leadership. Encouraged by the Trump victory, they could decide to seek revenge by purging all the leaders of the party that were not sufficiently loyal, in their minds, to Trump. Civil war is never good for achieving legislative goals. And Ryan and Trump are in strong disagreement on key points in the Trump/Ryan agenda. Ryan espouses many traditional Republican positions: protrude, pro-entitlement reform, pro-Nato for example. During the campaign Trump repeatedly vowed to never reduce Medicare, Medicaid or Social Security benefits ,but Ryan has been on a career-long quest to “reform” entitlements. If there is significant legislative opposition to Trump, it may come from Ryan Republicans. It will be interesting to see if Democratic House minority leader Nancy Pelosi can exploit this rift. She’s certainly determined and experienced enough to have a shot.
Tax repatriation. Before the election pretty much everyone in Washington agreed that creating a tax holiday that would let U.S. companies bring back some of the $1.3 billion in profits they have trapped overseas would be a good idea. It failed to advance, in large part, because no one wanted to give the political opposition a chance to tout a legislative victory on the issue. Candidate Trump has promised to bring this money back home and said that its repatriation would create thousands of jobs. Studies of the 2004 Bush administration tax holiday, which brought back $312 billion, however, show that most of the money went to acquisitions, stock buy backs, and CEO pay. The 15 companies that brought back the most cash, a Congressional investigation found, cut jobs and reduced spending on research and development.
Trans-Pacific Partnership. Dead as a door nail. A Trump administration that’s busy renegotiating NAFTA and the Paris climate accords and the terms of NATO budgets and other international agreements, all at one point of the other characterized by candidate Trump as the worst deal ever, isn’t going to push ahead with a trade agreement that quite probably cost Clinton Ohio, Michigan, Iowa, and Wisconsin.
The Wall. It will get built. Or at least it will get started. The details are likely to prove daunting once somebody starts to pay attention to the actual engineering problem. But The Wall is too iconic to the Trump Presidency for it not to get a major effort. If the Trump administrant wants to know what a beautiful wall might look like I’d suggest taking a look at the designs proposed by Mexico’s Estudio 3.14 in homage to the great Mexican architect Luis Barragan. (You can find those designs here http://remezcla.com/lists/culture/luis-barragan-border-wall/) Paying for it will be a major problem, however, since the Wall would be very expensive at a time with lots of other calls on the U.S. budget and I doubt that Trump will be able to get Mexico to pay whatever the rhetoric during the campaign.
War. Ads by the Clinton campaign that stressed Candidate Trump’s more bellicose rants didn’t win the election, but I do think they created worries in the minds of voters (even if they voted for Trump) and investors about whether a President Trump could be trusted not to start World War III or at least lead the United States into more regional wars against countries such as Iran. I think those established doubts are likely to make any signs of a bellicose President Trump immediately worrying to financial markets. Think of those Clinton ads as living on as an irritant that will increase financial market volatility anytime Trump faces a potential military test. The only way to end these doubts is for a Trump administration to demonstrate a more disciplined “temperament” (to use the Clinton campaign’s favorite word.) Until then, more volatility on less evidence.
And this ends my truncated tour through the alphabet of a Trump presidency. I know that I haven’t dealt with every important issue on the landscape of a Trump administration–immigration policy, reproductive rights and attacks on the First Amendment are three issues that come leaping to mind. But I’ve tried to focus on those points that have, in my opinion, a relatively direct impact on the financial markets. Look for my first two President Trump stock picks on November 11.