Tuesday, April 25, 2017

Nobody Knows Anything ver. 2.0

Q3 2016 Commentary

“Nobody knows anything...... Not one person in the entire motion picture field knows for a certainty what's going to work. Every time out it's a guess and, if you're lucky, an educated one.”
-      William Goldman, novelist, screenwriter

Here we are post-election, with many Americans and much of the rest of the world wondering what just happened.  “You mean to tell me that Donald Trump – DONALD TRUMP! – is our next president?  Whoo – I’m getting the vapors!”

How did this happen?  I’m here to tell ya – the “how” really doesn’t matter much, like “facts” and “issues” didn’t seem to matter to many voters.  If one can construct one’s own version of reality and defend it against any nay-sayer with a simple “I don’t care what you think about my opinion”, then any position taken can be defended with a clear conscience.  Like beauty, reality is found in the eye of the beholder.

“But what about the polls?” you might ask.  Simple: they were wrong.  When someone is looking (wishing?) for a specific outcome, confirmation bias creeps in and people – polls are run by people – sometimes find what they are looking for.  It’s clear they didn’t find the voters who made the difference!
Let’s leave the politics behind and see if we gain some insight into the economic ramifications.

As some people I follow have said: “Mr. Trump is very comfortable with debt.”

Expect to see a massive expansion of the federal budget deficit with much of the new spending targeted to infrastructure spending – even the infamous Wall across our southern border could be labelled as “infrastructure”.  This will be stimulative – but as Mr. Obama learned, don’t call it “stimulus”!

The increased deficit will contribute to corporate profits which will tend to drive stock prices up.

Income tax rates are likely to go down.

President Trump will be corporate friendly and cut income taxes for corporations as well as individuals.  There will likely be some kind of tax holiday for overseas corporate money – this could be a source of funds for infrastructure spending – give corporations a tax break in return for buying infrastructure-related bonds, for example.

Mr. Trump’s stated trade policies are anti-free trade and protectionist.

A lot of people were convinced that he would bring back jobs via trade. Unfortunately, those jobs we lost in manufacturing are largely gone and for those that do return, most of the work will be automated e.g., performed by robots and will require far fewer people than in the past.

If imported goods are taxed at higher rates than now in an attempt to reduce imports, prices for imported goods will rise and prices for American-made goods are likely to rise too as corporations raise prices on goods they increasingly make (with higher-wage labor) here in the U.S.  As a result, a possible increase in jobs would likely be offset by higher prices for a net effect of near zero.

The Federal Reserve rate hike rumored for December likely won’t happen.

The Fed will want to wait for more clarity on the policy direction before they take any action.  Markets have suffered whiplash this year in part due to the Fed’s waffling for much of 2016 so this will be viewed positively.  Keep in mind – a large-scale increase in the federal deficit will – more than likely - drive interest rates up.   Rates are already rising in the bond market.

Bottom line:

Increased federal spending likely means we see higher profits, higher interest rates and higher growth.  It will be good for the overall economy.

Since we’re travelling into unknown territory (uncertainty), it will take time for the markets to digest any new policies assuming they become reality.  Capital markets tend to overreact to uncertainty in the short-term because markets don’t like uncertainty and Mr. Trump – as we have seen - provides plenty of uncertainty.

So the next time you are presented with a “can’t happen here scenario” remember: nobody knows anything.

Credit to Cullen Roche of Pragmatic Capitalism for some of the analysis used here.

© 2016 Kim Miller, Certified Financial Planner™

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