Trump Adapts Foreign Policy Agenda

While it was an eventful week with everything from the Fed notes on Wednesday to the Senate confirmation of Judge Gorsuch to the employment data and finally to the meeting between the leaders of the United States and China on Friday, Trump’s decision to send cruise missiles into Syria in response to their use of chemical warfare was by far the most important one.

It sent a message to both friend and foe that America was back. One of my biggest issues with the Obama administration was that America lost respect in that it was no longer seen as a partner to be counted on to confront acts of aggression and terrorism. While Obama talked the talk, he never walked the walk. Remember the red line in Syria in 2013? And then there was Ukraine.

Trump ran on an isolationist agenda with “America First” that concerned many here and most all our friends abroad too. It appeared that he would cozy himself with the Russians and distance himself from the Chinese. Well, that view seems to have done a 180-degree turn in just one week.

Did you see President Trump and Xi Jinping walking together in the gardens of Mar-a-Lago with mutual comments about getting along “great” personally as well as working well together? Did you hear the Russians distancing themselves from us at the U.N. and in the press after the bombing in Syria? Did you hear the comments of Secretary of State Rex Tillerson criticize relations with Russia? Lastly, how about the positive feedback, including the NY Times, that Trump did the right thing by sending missiles into Syria and that this could be a game changer?

While I am not a Pollyanna so as to believe our problems with China are over, I do believe that the tone of the discussions between the two countries has changed such that there will be a clear attempt over the next 100 days to improve trade relations amongst other matters. The Chinese Communist media also had positive comments Saturday about the meetings and future between the two nations. Quite a turnabout from what all the naysayers had been saying.  Not bad!

I still anticipate that China will commit to purchase more goods from the U.S., open itself for more imports from the U.S., recycle its trade surplus with the U.S. back into the U.S. to build plants and create jobs and there will be agreements over intellectual property and patents. Naturally, there will be some agreement about steel, aluminum and other tariffs to keep a level playing field while China will further commit to closing zombie plants. And finally I expect China to work with us to reduce tensions with North Korea once a trade deal is approved, as it is now a bargaining chip for the Chinese.

Bottom line is that Trump’s action in Syria and his open and friendly discussions with President Xi Jinping of China should help alleviate investors’ fearful perception of the Trump presidency. I also believe that the demotion/loss of influence from isolationists Steve Bannon and Reince Preibus and the increased influence of globalists like Gary Cohn and Jared Kushner is a positive when considering future policy moves by the Trump administration. We should give Trump some kudos for recognizing the need to shift his views on foreign activities and act decisively.

Other key domestic events of this week included:

1.) The Fed notes highlighted the Fed Governors’ intention to reduce the size of the balance sheet gradually beginning year-end. It was widely understood that this would be a form of tightening and may displace the need to raise the Fed Funds rate, too. Personally I consider this a good move as the Fed returns to some degree of normalization as the economy improves further. It was again emphasized that there won’t be a another real change in Fed policy until the impact of Trump’s agenda is actually seen in economic activity which is now estimated to occur in 2018. I dismissed any of the Fed comments about the stock market, as there is certainly no excessive exuberance out there. Quite the contrary as the experts are calling for a top every day.

2.) The Senate finally approved Trump appointee Neil Gorsuch to the Supreme Court after the Republicans’ changed the 60-vote rule. Judge Gorsuch will hopefully act in a manner similar to Judge Antonin Scalia maintaining a conservative bias on the court. It is so disappointing that Congress is dysfunctional and cannot come together for the best interests of the country.

3.) The employment data reported Friday morning was clearly disappointing but the shortfall was in large part weather related. Still the average gain per month is still around 180,000 workers. The weekly wage gain and participation rate have remained consistent at 2.7% annualized and 63%. There have been over 2.2 million jobs created over the last year supporting consumer income and spending.

4.) Trump finally announced that Kevin Hasset would round out his economic team as Chairman of the Council of Economic Advisors. He is a proponent of free trade, globalization, immigration, and, most of all, the benefits of tax cuts on economic growth.

While it is apparent the domestic growth slowed in the first quarter to less than 1.5%, growth overseas has accelerated. The Purchases Managers Index rose in March to 56.1 in the Eurozone, a six-year high; increased to 51.8 in China; and economic activity accelerated in India, Japan and in the Emerging Markets.

While the 10-year Treasury bonds has fallen beneath 2.40% once again, corporate earnings are still improving and will most likely surprise on the upside to be reported in the coming weeks much like fourth-quarter gains. Corporations have spent the last several years pruning costs, changing their business mix, restructuring their debt lowering interest costs and lengthening terms, and generating free cash flow after higher dividends and stock buybacks. All of this has occurred against a backdrop of poor or nonexistent volume growth. We are finally seeing positive operating leverage as volume and pricing have both improved. And all of this has occurred even before Trump’s agenda “To Make America Great Again” has been enacted. That is why I said last week that Trump’s agenda is icing on the cake to an already improving global macro picture. Just be patient and let it all play out.

I remain confident that Trump’s agenda for an overhaul of the tax code cutting taxes for businesses and individuals and his trillion-dollar infrastructure program will be passed by the end of this year. It really doesn’t matter much to me if any of it is retroactive to all of 2017. Clearly the delay in passage and implementation will be a major factor in Fed policy. I expect to see acceleration in growth throughout 2018 and well into 2019 with the Fed remaining one step behind. At the same time the ECB and BOJ both announced that aggressive easy monetary policies would remain in force for at least another year. I now expect that the 10-year Treasury bond won’t hit 3% until next year. Notwithstanding, our rates will remain well above rates abroad sucking capital into our country supporting a strong dollar.

The investment implications are clear-cut. The global economies have entered a reflationary cycle that will accelerate well into 2019. Interestingly inflation and interest rates will stay low by historical standards over the next few years while earnings accelerate far more than currently projected. All of this is good for global stock markets.

Paix et Prospérité continues to emphasize U.S. based multinationals with a cyclical bent; companies that will benefit from fair trade and a huge infrastructure program, technology companies and financials. We invest for the next year, two or three rather than the next three or six months. Stay with the strongest companies with the best managements and great balance sheets. Anticipate that both a corporate tax cut and repatriation of foreign retained earnings will favorably impact 2018 results. And expect energy prices to stay capped at $55-$60 dollars/barrel as shale production is ramped up offsetting OPEC cuts.

Remember to review all the facts; pause, reflect and consider mindset shifts; make sure you have the proper asset allocation with risk controls do independent fundamental research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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