Loss of Confidence in Trump Roils Financial Markets

How could one not be appalled by what occurred in Charlottesville, Virginia, with the failure of our President to take a firm stand against the bigotry and hatred from the white supremacists, Neo Nazis and Klansmen?

His lack of a firm response led to corporate executives leaving his economic councils, which he subsequently disbanded, and outcry from all factions against him and his administration.

His ability to govern is in question including his ability to pass his pro-growth, pro-business economic agenda as we wondered if instrumental members of his cabinet would resign. Thankfully, the week ended with Trump firing Stephen Bannon who fought for the ultra conservatives and was the architect of America First at the exclusion of our long-term relationships with countries abroad. He was the bull in the china shop and fought with the more moderate in the White House inner circle including Gary Cohn, Steve Mnuchin, Trump’s daughter and son-in-law.

Will Bannon’s firing lead to a reset in the administration? I wrote weeks ago that the President had to fire both Priebus and Bannon who were obstructionists and hurt Trump’s administration ability to pass his agenda. Clearly White House Chief of Staff John Kelly is in firm control and real change is occurring within the Trump inner circle and administration. Both Carl Icahn and Ken Langone, close friends and business confidants of Trump, said on Friday that Trump would regroup and come back from this setback stronger and with purpose. Let’s hope so!

While the financial markets rallied in the beginning of the week relieved that the Northern Korean crisis had eased, Trump’s ill-placed and absurd comments about the riots in Charlottesville led to a total lack of confidence in Trump and his administration’s ability to govern. Is the Trump agenda dead? I mentioned a few weeks ago that the Trump rally was totally out of the market. Could Trump now actually be a negative for the financial markets going forward or can he come back as he has done so many times before? While the jury is out, I have to believe that the dismissal of Priebus and Bannon; the elevation of Kelly as Chief of Staff; and the increased influence of Cohn will stabilize the administration and put it back on track in the fall. Success or failure now rests in Trump’s hands, as he has no one to blame now but himself.

On another note, I want to say how upset I was to see two terrorist attacks in Spain last week. Our sympathies go out to the families and people of Spain. We just can’t let the terrorists alter our way of life.

Global economic data continued on the strong side last week without any inflationary pressures:

1.) The U.S. economic landscape for the foreseeable future will be bolstered by strong consumer demand which still accounts for over 60% of GNP: consumer sentiment increased to 97.6 in August, a six-month high; consumer expectations rose to 89.0 from 80.5 the previous month; and retail sales rose 0.6% in July, the biggest monthly gain since December. A weak dollar is also boosting our domestic economy. The dollar index is down about 8% since the beginning of the year with larger declines against the euro, 11%, and the Mexican peso,14%. Exports rose 7% in June from a year ago compared with a 9% decline from 2014-1016. A weak dollar is not only benefiting domestic manufacturers but it is also boosting multinational earnings as reported in dollars. Don’t forget the benefit to our economy from so many foreign companies building new plants here too.

The Fed minutes came out last week, which reinforced our belief that the Fed will be slow raising rates until inflation begins to move back to their 2% target. The truth remains that the Fed has been wrong that low inflation and low energy prices were only “transitory.” We continue to believe that the Fed will begin to reduce its portfolio in the fall but very slowly; future rate hikes are on hold until inflation picks up despite falling unemployment and the Fed will stay one step behind permitting the economy to pick up some real momentum before starting to take the punchbowl away later next year. Not a bad picture for financial assets.

2.) The flip side of a weak dollar has been a strong Euro. The ECB minutes came out last week and indicated their concern that if they began to reduce their stimulus then the Euro could appreciate even further which could impede economic growth and reduce inflationary pressures even more than is happening even now. Inflation rose at only a 1.3% annualized rate in July, which is well below their forecast of 1.5% for the year. It is clear that the ECB will maintain its entire monetary stimulus for the foreseeable future despite economic growth exceeding prior forecasts. Here again, the ECB will stay one step behind. Germany has the most to lose from a strengthening Euro. It was no surprise to us that their June economic performance came in below forecasts.

3.) Japan reported a surprisingly strong second quarter: GDP increased by 4% annualized as consumer spending advanced by 3.7%; business investment rose by nearly 10% and public investment grew at a 22% clip. It is important to mention that trade was a net impediment to growth as imports rose faster than exports in the quarter. Even though economic growth accelerated, inflation did not so the BOJ remains on hold here too.

4.) The big news out of China was the sharp slowdown in debt creation as the government cracks down on speculation and rising leverage ratios. The impact was a minor slowdown in growth in industrial output, retail and housing sales and fixed capital investment. Remember that this was a minor slowdown from near double digit rates. For instance retail sales rose 10.4% from a year earlier; fixed capital investment increased 8.3% while property investment slowed to only 7.9% gain. What country would not want this performance? China is well on its way to exceed its 6.5% growth targets for the year.

Let’s wrap up. The bottom line is that global economic growth remains much stronger than earlier forecasted; inflationary pressures are muted; interest rates will remain much lower than one would expect at this stage in the economic cycle; and S & P earnings remains stellar for the year, as the U.S.-based multinationals will get a boost from a weaker dollar. Not a bad recipe for higher stock prices.

So how do we factor in the political mess in DC into our view of the financial markets? I have to believe that sentiment is near a low point, which is ironic as the markets are so near all time highs. I got amused last week hearing the pundits taking credit for predicting the market decline when it was not caused at all for the reason that they feared which was North Korea. There is nothing in the market for the Trump agenda any longer which is a big positive as I feel that passing even some of his agenda, hopefully tax reform and an infrastructure program, is his only way to regain his own self image and stature. The worse thing that could happen to him is failure and embarrassment so he will do everything in his power to right the ship back to the center right from the far right. He may even reach out to the Democrats along the way to show that he is receptive to other points of views. Most people won’t believe he is capable of change, but let’s see. There is nothing in the market for it anyway so there is only upside.

In the interim, we will continue to hold only the best in breed. We continue to own the financials; the multinational industrials; the best industrial commodity stocks; technology at a fair price to growth and several special situations including Dow merging with DuPont and Huntsman merging with Clariant. We have not altered our net exposure and continue to match purchases with sales.

Investing is a marathon and not a sprint. Some of the best entry points come as others panic.

So remember to review all the facts; step back, pause, reflect and consider mindset changes; constantly analyze your asset composition and risk controls; do independent in-depth research on each investable idea and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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