History starts tomorrow

History starts tomorrow

Written by James Weir

James specialises in the theory and best practice of portfolio construction and management. His success within national and international investment banks led him to become a Co-Founder of Steward Wealth and he is a regular columnist for the Australian Financial Review.
November 9, 2016

It’s interesting that most of the world seems to be recoiling in horror at the thought of a Trump presidency but half of U.S. voters feel otherwise. Maybe they know something we don’t, or maybe they got it wrong. There are two things for sure: first, it’s way too early to draw any concrete conclusions so we’re not going to try, but there’s lots of room for observations; and second, this is yet another example of the very clear message being sent by average people to politicians the world over about the desire for change.

We’ve been asked what the implications of a Trump presidency are for financial markets. At this stage it’s way too early to say with any confidence at all. Again we’ve all been wrong footed thinking there would be a negative overnight knee jerk reaction, partly because markets hate uncertainty and partly because there would hardly be a single Wall Streeter who doesn’t fear that President Trump will come after them.

You could look to what happened after Brexit for guidance, but this is way bigger: you’re talking potential implications for global trade, protectionism and possible trade wars, a change in military alignments, significant U.S. spending programs, tax cuts. The effects of these decisions, if they’re ever made, don’t play out in weeks and months but over years. You can probably be sure the short-term reaction will be an over reaction.

The Republicans will have control of the Presidency, the Congress and the Senate, and there are three Supreme Court positions up for grabs too. Trump has talked about initiating a massive infrastructure program, which would be good for spending and should boost economic activity, but then he’s also promised tax cuts, and the two together won’t be so good for the deficit. Nor will tax cuts be helpful in addressing the chronic inequalities that seem to lie at the heart of so many unhappy voters.

Trump has indeed talked about slapping 45% tariffs on Chinese imports to the US. Clearly if that happens and it leads to retaliatory measures it will be a huge negative for world growth, which would indeed flow through to Australia. Renegotiating everything from NAFTA, the TPP, NATO and the Iranian nuclear pact to name a few would carry similar potential issues. So there’s plenty of uncertainty to come.

However, I heard one commentator trying to draw a comparison between Trump’s election and the GFC. Seriously? The GFC happened because of a lending boom leading to excessive household debt which caused a massive housing bubble. There is nothing like that bubble going on in global markets at the moment. Before you say ‘hang on, isn’t that what’s happening in Australia’s housing market right now?’, no, it isn’t. We have far tighter prudential standards on lending and there is not a massive pool of mortgages ready to blow up because of teaser rates expiring. Property looks expensive but there is no evidence of widespread fraud.

It’s still likely interest rates will stay low for some time yet (unless a spending binge or trade war sparks inflation) and companies will continue to strive to make money. As long as there’s a reasonable gap between what you can earn from growth assets like shares and property compared with cash there will be a good medium to long-term reason to invest in them.

Some other observations if you’ll indulge me…

It’s stating the bleeding obvious but the U.S. election is simply the latest, and so far the biggest, example of the greater population declaring they’re fed up with the status quo. Brexit, the Austrian election with the lurch to the right, the Hungarian election with the success of the nationalists, and our own election with a record vote for independents and minority parties – the themes are the same, people are DESPERATE FOR CHANGE.

Last night Walid Ali referred to exit polls where apparently 70% of Trump voters support finding a compromise to allow illegal aliens to remain in the U.S. Yes, they were well aware that’s not what Trump says he’ll do, but they just want change.

It will be interesting to see how political parties the world over respond to this very clear message: do they do away with the partisan political playbook of slogans designed to maximise airplay on a 24 hour news cycle? Do they finally give up on the they-say-it’s-black-so-I-say-it’s-white reactionary rubbish that people complain is tiresomely transparent?

A candidate that according to popular commentators (whom we should remember are part of ‘the establishment’ that Trump was railing against) should have alienated every minority out there, was apparently instead lauded by the disenfranchised masses because he came across as not giving a damn for conventional politics. Again according to exit polls 27% of Latinos voted for him, as did 52% of women. Lifetime Democrat supporters were quoted as voting for him because they want change. It seems people voted for Trump precisely because he spoke his mind and burps and farts in public, so to speak. Do we see a shift toward authenticity? Could that be the silver lining?

Those who would attribute Trump’s win to angry, blue collared white guys are missing the bigger picture. White males over 35 are now only 19% of the population. Yes he won the overwhelming majority of white voters, but this election saw a record number of people register to vote and Trump got half of them so there were a lot of middle class people who voted for him.

We should also remember that what we’ve been fed of Trump’s speeches over that excruciating campaign are the most controversial 30-60 second sound bites, which he was all too happy to provide. I presume the speeches could have been anything from 20 to 45 minutes long and who knows, he may actually have said some half way reasonable things that didn’t get airplay so we just never heard. As much as his buffoonery was laughable, his comments that the media ‘establishment’ was stacked against him, while easily dismissible as paranoia, in fact had some truth to them.

The polling firms are to this election what the ratings agencies were to the GFC: they will face a massive credibility problem. But again it was the media, which was so clearly anti-Trump, that happily propagated the wrong impression this was a one-sided contest; and we all bought it.

Those blue collar manufacturing jobs are never coming back; that train has left the station. If any factories are relocated to the U.S. it’s because they will be run by robots with a handful of technicians overseeing them. It’s unlikely all those Trump voters are unaware of that. Global trade has been a great idea; it’s contributed to global poverty being slashed by 90% over the past 25 years. But like many wonderful ideas it wasn’t fully thought through. In the developed countries that exported the jobs the main beneficiaries have been the owners of the factories, or the top executives of the companies that run them whereas the workers who used to staff them have been left way behind. The only way to redress that inequality is by taxing the beneficiaries to redistribute those gains, something Bernie Sanders would have done, but that will require a truly new paradigm for a Republican administration.

In 2008 and 2012 the American public voted for hope and the promise of bi-partisan change, but evidently many feel let down, possibly because the partisan politics of the status quo was too entrenched. Trump may not have the highest IQ but he seems to have a very high EQ; he has tapped into a vein of discontent that wants to see seismic change. The last time there was massive social unrest and dislocation seven years after a major financial crisis things didn’t go so well. The winds of change are blowing hard, and it appears the majority of people want politicians who can do more than just sniff the breeze.

This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product. You should also obtain a copy of and consider the Product Disclosure Statement before making any decision on a financial product. You should seek advice from Steward Wealth who can consider if the general advice is right for you.

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