Trump Is Just Being Trump

Trump ran a populist campaign pledging to “Make America Great Again” with his pro-growth, pro-business, America First agenda including tax reform, regulatory reform, trade reform, an infrastructure program and a new healthcare system replacing Obamacare.

So far, he has:

  1. Successfully passed tax reform making our system competitive with the rest of the industrialized world
  2. Reduced red tape and regulations including financial reform
  3. Removed our country from the TPP agreement but left an opening this week to come back in on better terms
  4. Appears closer to successfully renegotiating NAFTA on better terms
  5. Announced steel and aluminum tariffs to block dumping from China. Japan and Russia while excluding our closest allies, who pledged to end trans-shipping from China to the states
  6. Announced pending tariffs against China responding to intellectual theft but leaving a path open for negotiation over the next 45 days including possibly going to the WTO to bring in our closest allies broadening the complaint
  7. Proposed a $1.5 trillion infrastructure program that needs additional work to fly
  8. Made changes around the fringes to Obamacare as he is unable to pass major healthcare overhaul as it is next to impossible in Congress

In addition, Trump appointed a new head of the Federal Reserve Board, Jerome Powell, who chaired his first meeting this past week and addressed the media right after their decision to hike rates a quarter of a point, as widely anticipated. We will come back to the Fed announcement later, but we were clearly impressed by Powell.

The financial markets fell dramatically this week as confidence in Trump and his ever-changing inner circle has declined due to his apparent, so-called off-the-cuff actions. Many believe they are leading us down a path to a trade war with China, our biggest trading partner. The Trump glass quickly drained to half empty from half full despite doing exactly what he pledged to do when running for office over a year ago. Yes, he may be a bull in a china shop, but someone finally had to stand up for open, free and fair trade. All he and his administration want is RECIPROCAL AGREEMENTS.

What’s wrong with that?

Could he do it with a carrot rather that a stick? Maybe, but it has not worked for any past President. They have all kicked the can down the road until now. It is hard for many to accept that Trump is doing exactly what he said that he would do when running for President. He won the election as the country voted for change. Change is not easy, but isn’t it better to walk the walk rather than just talk the talk?

Granted, Trump is a tough boss; but if he makes a decision after hearing all sides, shouldn’t his inner circle, and we, support him and help him get it done? We can disagree, but in the end we must come together. We all like a bargain but if it is illegally subsidized one-sided trade, let’s do the right thing. He wants fair, free and reciprocal agreements where there is a level playing field. Is that wrong?

If we get fairer trade agreements, our economy and investment landscape improves for years to come. Be patient. Let this play out. Don’t expect his opening salvo to be the final deal. He will accept less than a full loaf in the end, but it will be a major improvement from the current situation. And we must protect our IP as it is the key to our long-term competitive advantage over our global competition.

The bottom line is that you may be pleasantly surprised on NAFTA, the TPP and China trade. The glass may again turn to half full. Right now market psychology and confidence can’t get much worse despite strong global fundamentals. Think as an investor, not as a trader and play the long ball. Buffett does, so why not you?

Beside the focus on trade last week, the pundits were focused on the Fed meeting and Powell’s first news conference looking for any possible gaffs. Au contraire, as Powell was great! His answers were concise and direct. He left no doubt as to what he meant by what he said.

The most important takeaway from the Fed meetings was that their economic growth forecast rose slightly for 2018 and 2019. Their unemployment rate declined further than initially forecasted, but there was virtually no change in their inflation forecast. Powell admitted that the Phillips curve just is not working, as one would have projected in earlier years.

As anticipated the Fed is looking to hike rates two more times this year and three times next but that decision is open to change as each move will be data dependent. While most pundits focused on a projected funds rate of over 3% in 2020, Powell was quick to point out that the Fed is not too good making forecasts out a few years so he warned not to put too much weight to any 2020 numbers. He also pointed out that he hoped that tax reform would lead to acceleration in capital spending and productivity gains. By the way, the Fed has decelerating growth after this year, which, if right, means that future tightening moves, may be fewer than currently anticipated. Bond prices initially moved down but ended up for the week as fears of a trade war penalizing growth and technical problems in the labor market moved 10-year treasury yields down.

A major drag on the market last week was the precipitous decline in the internet companies, led by Facebook, who offers you free services in return for a trove of personal information that they can monetize for a host of uses which in many cases violate privacy rules. Even the use of artificial intelligence came into question last week, which pushed the FANG stocks down which have led the financial markets for years. Personally we felt that Facebook’s apology that they violated public trust fell woefully short as they knew exactly what they were doing while making tons of money. It is clear that change is in the air as some regulation is coming which won’t be favorable for Facebook and the space at the margin. These stocks will find an equilibrium point soon, but future prospects will be less than anticipated even one week ago as their model to monetize all this information changes. AI is a great tool and must be used expeditiously.

We want to point out that computer systematic trading continues to dominate market moves in the short term to the exclusion of fundamental analysis and valuation. Have you noticed that the precipitous decline in the financial markets occurred around the same times each day especially into the close when computer sell programs kicked in?

An investor must pause to take advantage of these opportunities’ as the selling is indiscriminate. Paix et Prospérité uses these opportunities to upgrade our portfolio buying some new names that got hit particularly hard and selling others that we like less even though we see upside in them, too. We maintain excess liquidity at all times.

Let’s closed this by returning to and reviewing some of our core beliefs:

  1. The global economy remains on sound footing and growth will accelerate from the normally slower winter period as we enter the spring.
  2. Monetary authorities will remain one step behind until they are convinced that inflation will rise to and stay at the 2% level. Each Fed decision will be data dependent so don’t hang your hats on their dots.
  3. The global yield curve will steepen in concert with an acceleration in global growth.
  4. Corporate profits will rise by over 15% this year benefitting from organic growth and tax reform.
  5. Capital spending will enter a multi-year up cycle with the U.S as the destination of choice.
  6. M & A activity will accelerate as corporations are flush with cash and have significant room to add debt for non-dilutive acquisitions.
  7. Trump will moderate his positions and negotiate trade deals beneficial to the U.S.. Come on, do you really believe that he won’t protect the steel and aluminum industries from dumping in the end?
  8. Trump will continue to reduce regulations.
  9. The stock market is undervalued even with a 3.25% 10-year treasury and $155 in S & P profits in 2018 and $170 in 2019.
  10. Emphasize financials, global capital goods and industrial companies, U.S. defense companies, low cost industrial commodity companies including the strongest domestic steel and aluminum, technology companies at a fair multiple to growth and special situations where internal change will lead to revaluation over time.

We recognize how difficult it is to stay the course when the markets are so volatile, but the best opportunities to profitably invest comes when others are panicking. Buffett was adding to his portfolio last week for sure!

It is time to recognize that Trump is just being Trump doing exactly what he said that he would do when/if elected. And he won. So why are we surprised? We believe in his economic agenda to “Make America Great Again ” but unfortunately change does not come easy. Be patient, look through the windshield and invest in the future.

Review all the facts; step back, pause, reflect and consider mindset shifts; analyze your asset allocation with risk controls; do independent research and …

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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