Free and Fair Trade

“Free and Fair Trade”

Those were not the words out of Donald Trump’s mouth but were spoken by Prime Minister Abe during a joint press conference Friday after the initial meeting of the two heads of state. Abe went on to discuss the major role Japan would have in helping rebuild our infrastructure utilizing, for example, their high speed train technology, that Japanese companies would make significant capital investments in the U.S. building plants and creating jobs, and that he expects a bilateral trade agreement to be reached between our two countries that will mutually benefit each one. And you still question Trump’s tactics? Do you believe any of this would have happened under an Obama or Clinton administration?

President Trump also held a 45-minute phone call with President Xi Jinping of China on Friday. The President acknowledged “One China” and went on to discuss with the Chinese leader ways to improve relations including a new bilateral trade agreement. The two leaders agreed to meet in the not too distant future to discuss a new, stronger and fairer relationship between the two countries. The Chinese market hit multi-week highs last week and the U.S. markets hit all time highs. Maybe these countries can work together rather than against each other? Another Trump surprise!

Politics, mostly Trump related, continued to dominate the global investment landscape last week. I support Trump’s agenda to “Make America Great Again,” but not always his tactics. I understand and also support putting America’s interests first which has upset foreigners. Raising the stature of the U.S. will make the world a safer and more prosperous place for all. Recognizing the need for change is easier than implementing change such as Trump is doing which is often met with resistance, skepticism and fear to alter the status quo.

Trump has been utilizing “Executive Orders” to implement his policies to date. He still does not have his Cabinet in place and his relationship with the Democrats and media remain combative. Thankfully the Republicans control both the Senate and House; therefore Trump’s agenda will for the most part be passed into law. The question is no longer if but when. Opening the U.S. to business again has led to a surge in business and consumer confidence both here and abroad as demonstrated also by the continued rise in all stock markets.

I discussed last week that Trump is doing all that he promised during his campaign rather than normal campaign rhetoric which most candidates once elected never implement. I mentioned that taxes, infrastructure and trade were next up on his list and to look for announcements on each in the following weeks. Well, Trump went out of his way during his meeting with airline executives to announce that he would have a “phenomenal tax announcement is a few weeks” without particulars. The markets rallied big time off the announcement. We were there already!

I have mentioned over the years that you need to have core beliefs that serve as your North Star, your compass, when investing. You monitor those beliefs all the time analyzing each data point that either reinforces your belief/new trend or not.  My former partner, George Soros’ success was identifying new trends early and adding to his positions as his confidence grew that he was correct. He would rarely take chips off the table as long as his conviction was increasing based on each new data point, but he could also change on a dime if the data points no longer supported his position. Paix et Prospérité does the same thing.

Our number one core belief today is that the global economies have moved past an inflection point on to a path of global economic expansion after years of stagnation. The rise in populism has changed the political landscape for the foreseeable future and politicians’ have heard the message to adopt policies to promote growth rather than limiting it. Monetary policy saved us from going into the abyss after 2008, but it cannot alone promote economic growth and prosperity as long as fiscal policies remained restrictive. That is changing right in front of our eyes. First there was Brexit and then the Trump election. More to come.

Our second core belief is that global interest rates and inflation have bottomed. We expect that yield curves will continue to steepen, as monetary authorities remain one step behind for fear of taking away the punch bowl too early. Deflation has been the over riding concern of all the major monetary boards and they must have conviction that there has been a permanent change in the direction of growth and inflation before returning to a normal monetary policy.

Our third core belief is that corporate profits will surprise on the upside as we move through the economic upturn. Corporations have spent the last eight years reducing costs, pruning businesses, strengthening their balance sheets and generating excess cash flow by limiting capital investment to or beneath depreciation. We believe that the positive operating leverage from rising volume will even surprise managements. We expect them to maintain a conservative bias well into the up cycle, which will serve to extend it.

Our fourth core belief that Trump’s fiscal, fax and regulatory agenda to “Make America Great Again” will lead to a resurgence in our economy; large capital investments in the U.S. by both domestic and foreign companies promoting more and higher paying jobs; and that there will be a more level playing field for trade. We expect the U.S. to again be taken seriously and respected in the world limiting Chinese and Russian expansion. Energy independence is high up on Trump’s list too. America is indeed open for business serving as the engine for global growth.

The bottom line is that we remain in the early earnings of an acceleration in global growth led by the United States; stock markets will continue to do well as earnings growth will offset any increase in increase near term in interest rates; inflation has bottomed, monetary policy will remain accommodative and the yield curves will continue to steepen; sell the old winners and buy the reflation beneficiaries; own the dollar as more and more foreign capital finds its way here; and own industrial commodities including energy.

Trump is being heard and listened to here and abroad. While change is difficult, Trump’s mission to “Make America Great Again” and “America First” is being taken seriously even if it upsets the apple cart for many. “Free and Fair Trade” will not only be a tag line but also be global phenomenon.  The outlook for the U.S. is rising at the margin as it enhances its global relative position.

So remember to review all the facts; pause, reflect and consider mindset shifts; review your capital allocation and risk controls; do in-depth fundamental research and..

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

 

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