“Get On Board Or Get Run Over”

“Get On Board Or Get Run Over”

Spoken like a true diplomat, NOT, but those were the words spoken from our President this past Thursday at his first press conference. Clearly he possesses no emotional intelligence sending a message to the media and his major antagonists in that way.

He does not understand how to disarm his naysayers and enroll them into his agenda and worldview. Someone, who I know and trust, agrees with my thinking and in the next breath said “but I’m glad that he said it.”  This is analogous to the election where most citizens would not admit out loud that they supported him; yet they voted for him once in the ballot booth.  I get up every morning only to read/hear negative press about Trump, his team and his agenda in the media fully expecting the markets to decline; but low and behold, they go up both here and abroad. What gives? Is the investing public so foolish or do they see that Trump’s reflationary agenda is not only good for the United States but for them as well? A strong America is good for most everyone excluding maybe Russia and China; although they, too, will benefit economically from an expanding U.S. economy.

Trump remains true to his word and continues to go down his list of campaign promises checking them off day by day. If you simply listen and accept what he says, profitable investing is not that hard. I keep questioning whether the markets, especially the reflation beneficiaries, are ahead of themselves despite only being in the early days of a Trump Presidency. But then I go back to my days when I was CIO of the Quantum Fund and remember how George Soros would stay invested in a trend until he felt that it was over. He would never get off in the early innings and would add on any weakness. Investing, not trading, was his way to create real wealth. Same with Paix et Prospérité.

Trump, at the Boeing facility on Friday, said that his mantra is “Hire America, Buy America” which sums up his campaign slogan “Make America Great Again” in a nutshell.  He went on to repeat that his administration would:

  1. Cut taxes for individuals and businesses including a deal to repatriate foreign retained earnings currently over $2.3 trillion dollars
  2. Reduce the regulatory burdens including Dodd-Frank that have held back businesses of all sizes
  3. Change trade policies to create a level playing field for U.S. corporations
  4. Repeal and replace Obamacare with a better alternative for all Americans
  5. Reduce/eliminate waste and abuse in government while using its purchasing power to lower costs
  6. Make America energy sufficient
  7. Improve our National Defense/Intelligence while adding support to local police forces
  8. Rebuild the infrastructure of America
  9. Protect our borders with a new and stronger immigration policy
  10. Appoint justices to the Supreme Court who view the Constitution like former Justice Antonin Scalia
  11. Raise the status/respect/reliability of America as a leader/partner on the world scene

Quite a mouthful! Do you believe that the media and the Democrat establishment can stop him because they don’t like him or his tactics or that he does not have the people in place or a majority in Congress to implement his agenda? How do you explain the rise in stock markets everywhere since his election, the increase in the slope of the global yield curve, the rise in commodity prices, and the huge increase in both consumer and business optimism? Trump is not running a popularity contest but is leading a call to action as we were stuck in the mud long enough under the Democratic administration. Don’t be fooled by the rise in the stock market under Obama’s watch. It was all fueled by monetary policy pushing rates near 0 here and negative abroad. Economic growth was anemic at best while corporate profits declined.

So what is the road map to Peace and Prospérité?  First. one needs a global perspective with an understanding of the relationships between and amongst all nations as it pertains to economic, monetary, political and social issues, as there will be winners and losers. Invest at the margin looking to own those nations/industries/companies that will be improving and sell or short those whose incremental returns are in the process of peaking.

Trump’s agenda to “Make America Great Again” along with “America First” clearly means that the U.S. will be on the rise as its global position improves at the margin. Then drill down further and analyze what industries will benefit most from his policies, both domestic and foreign, and which industries won’t. It is equally clear that the reflation beneficiaries include industrials, financials, technology, industrial commodities like steel, aluminum, copper, chemicals, and energy, capital goods and stay long the dollar while those that won’t include retail, large pharma, consumer durable and non-durable companies, utilities, REITSs and bonds of all durations. Owning foreign multinational reflation beneficiaries that have a large component of their U.S. businesses manufactured here will benefit too. The U.S. will become the engine for global growth once again and most of the benefit will accrue to those industries/companies located here.

I want to digress for a moment and comment on active vs. passive management and fees. I re-entered the hedge fund arena in 2013 to prove that investing rather than trading was the only way to create real wealth utilizing a global macro-economic perspective and in-depth fundamental independent research. Hedge funds as an asset class was under attack as it had under-performed for several years. What investors fail to realize is that hedge funds/active managers really achieve most of their out-performance when markets decline and rarely stay ahead in up markets as they always hedge to a degree. Passive or index funds are always fully invested which means that they go up with the market and down with the market rarely outperforming over time. We have had a straight up market for 8 years now so you can guess the consequences on relative performance.

Secondly there has been a proliferation of hedge funds after 2008, which is akin to a cyclical company expanding its capacity at the top of a cycle, which exacerbates its next downturn. There continues to be shakeout in the hedge fund industry just like in many industries over the last several years with the weak falling by the wayside.

Finally I want to say that not all hedge managers are alike. Why did Apple become an innovator again and a huge success once Steve Jobs returned; why has Nucor in the steel industry been able to increase its dividends each year over the last 38; and so on and so forth.  It comes down to management. When I invest in a company, I look first, second and third at management as I know that great management can succeed in virtually any industry in any environment and will create real value for its investors over time. Same for the hedge fund industry. Do you really mind if great management teams earn big bonuses if they create huge returns for their investors? Management fee is another story, as I believe that it should not be a big profit center for large hedge funds that earn incentive fees too. Finally I believe that hedge funds should provide hurdle rates equal to the 10-year risk-free return with high-water marks and no gates.

I am very proud of my accomplishments and success at Paix et Prospérité over the last three years and want to personally thank our investors and all of you who have read my blogs week after week. I hope that it has created real value for you as it does for me. Keep the comments and questions coming.

Finally I want to suggest that all of you listen to or read the transcripts of year-end results for all the companies that you are interested in investing in. Managements are discussing their goals for the following year along with their strategies for the future. It is clear that business has improved since Trump’s election, as there is a sound of optimism that I have not heard for years. The order books show it too.  Even if you don’t approve of Trump’s tactics, his strategy to “Make America Great Again” is being heard everywhere and spirits are rising.

Remember to review all the facts; pause, reflect, be patient and consider mindset shifts; adjust your capital allocation and risk controls; do in-depth independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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