Trump Makes Moves: The Ultimate Negotiator
Besides North Korea, the other major issue holding back the financial markets is Trump himself. Will he go to war with North Korea? Will he be impeached? Will he pass any of his pro-growth, pro-business agenda: tax reform, infrastructure and trade? Will he overturn and replace Obamacare? Will he build a wall and restrict immigration including DACA? Will he leave NAFTA and the Iran nuclear deal? Will he be a one-term President? And finally, will the Republican Party lose control over the Senate and House?
Trump has been President for ten months although it may seem like a lifetime to many. We are getting a clear view of Trump’s negotiating tactics as President. He takes an extreme position on virtually everything (except tax reform), threatens to or actually uses executive orders, like Obama did, to ram them through while offering a bone for those willing to negotiate a more moderate deal. He is using the proverbial carrot and stick.
How all of this will end is hard to predict; but one thing is sure: elections are in the Fall of 2018. Unless Congress negotiates and acts on many of the major issues facing this country, politicians from both sides of the aisle run the risk of losing office. Hence the Republicans could lose control of Congress. So will Republicans defect and vote against Trump? Will the Democrats continue to be the minority being considered obstructionists? Herein lies the dilemma as well as the opportunity for something to finally happen in DC. The status quo is no longer acceptable. Change is a-coming.
Trump rally? Not yet as the glass is half empty. Most investors remain on the sidelines as evidenced by the trillions stashed in money market funds earnings next to nothing and most active managers are under-invested by a mile. So I again say “What if?” as the odds of passing parts of Trump’s pro-growth, pro-business policies are rising. Especially tax reform and an infrastructure program. And don’t forget that regulatory relief is a fact happening every day. Trump’s choice to lead the Federal Reserve will be a tip for the next major stage in financial reform. Will it be Jerome Powell or Kevin Warsh? We should know in a month or so.
The backdrop for the financial markets continues to be excellent as global growth is clearly accelerating without inflationary pressures; the monetary authorities remain one step behind until they see inflation begin to lift towards 2%; interest rates remain incredibly low for this stage in global economic recovery although the yield curve has finally begun to steepen and finally corporate earnings are finally accelerating for the right reasons: growth over cost cuts.
Paix et Prospérité has continued to outperform all indices by sticking to our disciplines and as Soros, my former partner would say, “the trend is your friend.” Broadly speaking, we see nothing on the near-term horizon to change our investment view but that does not mean we don’t challenge ourselves every day looking for that inflection point. One of the main keys to our success over four decades of managing money has been the proper asset allocation as well as knowing when to be invested and when not. The path of least resistance today for the markets remains up but that does not mean that there won’t be hiccups along the way. So, maintain excess liquidity to take advantage of short-term market fluctuations.
Let’s review the financial and economic data that came out last week to see if it supports or detracts from our current view:
- The U.S. continues to do surprisingly well despite the turmoil in DC and the negative impact from the hurricanes: retail sales rebounded in September with a 1.6% gain despite the hurricanes, the largest one month gain in over 2 years; consumer prices rose 0.5% in September but core prices rose only 0.1% and year over year by only 1.7%; the producer price index increased 0.4% penalized by the hurricanes; manufactures’ inventory to sales ratio fell in August which bodes well for production gains ahead and finally consumer sentiment and future expectations surged to 13-year highs in early October.Also Fed minutes from the September 19 and 20 meetings came out last week, which discussed Fed member thoughts over surprisingly low inflation with an economy doing better and unemployment declining. The bottom line is the odds of a December rate hike have improved but future rate hikes may be fewer than earlier anticipated. In addition, it appears that the administration might be willing to keep some partial state and local tax deductions for the middle class in order to secure the votes needed to pass tax reform. You need to pay special attention to Mnuchin’s comment that parts of the tax plan may be temporary such as a 5-year write off on capital investment while most of the program will be permanent.
- The Eurozone has surprised me the most of any region this year as growth has been much stronger than anticipated: industrial output increased 1.4% in August from July and is up an amazing 3.8% from a year ago; wages and inflation are rising much slower than anticipated however which poses a dilemma for the ECB which really would like to remove some of its monetary stimulation but won’t as the euro has been so strong which puts further downward pressure on inflation. Draghi commented over the weekend that commercial real estate valuations might be stretched but not stocks or bonds. He did say bonds, but we disagree here. He concluded that negative rates have been a success.
- China’s central party concluded a four-day meetings last week just prior to China’s Congress convening this week to re-elect President Xi Jimping for a second five-year term. I tip my hat to this country as they really do plan ahead. In fact, in anticipation to Trump’s visit next month, the country is finally cutting its steel and aluminum capacity to alleviate global overcapacity/tensions and will end dumping both to the States and Europe, a thorn in trade talks. Pollution is being finally addressed too as the country is importing only high grade iron ore, as one example, boosting prices benefiting BHP and RIO, two names that we have mentioned and owned for 18 months now. China is a place to invest in long term but be selective. Growth should continue to exceed 6% for the foreseeable future.
- Japan’s Nikkei closed at a two-decade high last week says it all. President Abe has done a stellar job and the future is bright for the first time in many decades.
Let’s wrap this up.
The IMF said it best this week when it hiked, once again, its forecasts for global economic growth for this year and next to 3.6% and 3.7% respectively while lowering its global inflation forecast to 1.7% both years which remains below the inflation target for all of the major monetary bodies. The major risks cited are geopolitical and protectionism. No surprises here! The monetary authorities would like to remove some of its stimulation but won’t until inflation begins to meaningfully pick up which means that they all will remain one step behind as we predicted months ago. Christine Lagarde, head of the IMF, correctly points to the need for more reforms to make the recovery sustainable. Fortunately she understands the impact of the disruptors on putting a lid on inflation.
The bottom line is to stay the course, as the trend is your friend. Maybe Trump’s bullying tactics will bring both parties to the bargaining table and resolve some of the major issues facing our country. Clearly we need change in DC and Trump appears to be the disruptor that no one likes which is fine as long as he brings about real change with his antics.
Paix et Prospérité continues to emphasize money-centered banks who will benefit from a growing economy, stronger loan demand and a steepening yield curve; the global multinational industrials; the lowest cost, strongest industrial commodity stocks including domestic steel and aluminum; technology at a fair price to growth and several special situations which we have mentioned before.
So remember to review all the facts; pause, reflect and consider mindset shifts; look at you capital allocation and risk controls to make sure that they are consistent with your objectives; do independent fundamental research and…
Paix et Prospérité LLC