Making sense of trends and data

Guessing Trump's Direction

Published 1.16.2017
On Friday of this week, the course of US politics and policies is going to change dramatically, for good or for ill. No one knows what a Trump administration will do, and this seems to be by design. Neither the man nor those on his team are very forthcoming regarding plans. However, that hasn't stopped analysts from making their own guesses as to what Trump will do. There is no way to make a comprehensive list of all the predictions made in the past month, but the following are a few deemed noteworthy.

Casey Research (CR) is negative on almost all things related to government, but they supported Trump over Clinton, so it’s interesting to see how fast they turned on Trump, or at least his trade policies. It may be interesting, but this is no surprise, the boys of CR (and they are all male) fancy themselves as “world citizens” landing wherever the best tax policies are currently in play. They are nihilists who care only about themselves and how much they have in their wallets.

Why read them? Not sure there is a coherent argument at this point, they have been wrong on so much for for so long, eventually (like a blind squirrel finding a nut— the first metaphor was a stopped clock, but that gives those guys too much credit) they will wind up being right. Still, they put their predictions out there for good or for ill. Clearly they are not Wilbur Ross fans. Not going to lie, Trumps trade “plans” such as they are, and they are nebulous at best, don’t engender much confidence around these parts either. Time will tell.

Ray Dalio, of the legendary Bridgewater hedge fund, offered a view on Trump. The promise of lower taxes has him rooting for Trump. Previous concerns about the national debt are cast aside. Suddenly deficits don’t matter again. Dalio is making a lot of assumptions. No one knows what Trump is going to do, because it will depend on how well and to how many he can sell his ideas— or those of the Republicans. Dalio seems to be assuming that it’s the people around Trump that will be making the choices. Dalio compares Trump to Reagan, and notes that Reagan drew support and help from his opponents. There is scant evidence to date that Trump can do that.

Jim Chanos wonders if the changes around the world are just coincidence, or the once in 50 years swing of the pendulum. Trump's election and Brexit are part of the swing. Chanos notes that Trump sold his supporters a lie. Jobs in the mines and factories aren’t coming back. Plus any that do aren’t going to be the good paying jobs of the 50’s and 60’s. Robots are (ultimately) cheaper than labor, and they will build more robots than hire people. Labor in Mexico is $3/hour. The US can’t beat that.

Chanos wonders if we’re swinging back to the 1930s, which was not only the rise of nationalism, but of government control of the economy. Chanos sees the same thing happening in China, which is not a point most others make.

To me, the rise of Xi Jinping is a big event still underestimated in the global political economy. He is more of a personality than either Deng Xiaoping or Mao Zedong, certainly higher in stature internally than his predecessors. He is not first among equals in the Politburo Standing Committee — he’s first. This goes along with the theory about the rise of nationalists such at Putin in Russia. Xi Jinping is also a nationalist. He talks about the China Dream, China getting back to past glories, and not exporting communism. What you would have heard Mao say.

China can not return to marxism, the economy could’t function as it does. However, its one party could grab back more control of the economy.

Jamie Dimon was briefly floated as a candidate for Treasury Secretary, which he declined. However, he is willing to work with Trump for patriotic reasons. Dimon states the obvious that Republicans are not anti-business as Democrats and admits he was wrong that Trump wouldn’t work with Wall Street. Trump has stuffed his team with Wall Street guys. Dimon hopes that the view of business and business people will improve.

I think it’s a reset moment for how businesses are going to be treated: 145 million people work in America; 125 million of them work for private enterprise; 20 million work for government—firemen, sanitation, police, teachers. We hold them in very high regard. But you know, if you didn’t have the 125 you couldn’t pay for the other 20. Business is a huge positive element in society. But for years it’s been beaten down as if we’re terrible people. So I think it’s a good reset.

Dimon is definitely not on board with Trump's anti-immigrant stance.

It’s not anti-immigration per se. America’s changing too much for that. The core of the frustration and anger were two things. First, middle-class incomes have really not grown for 15 years. Second, the difference between unskilled and skilled has been growing over time. The unskilled really have a hard time having what you would call a living wage.

Increases in the minimum wage should occur at the state level, not the federal level. Dimon thinks people are scared because the way of life is changing in America. Trump's election will not change that.

And look, we’re not going to kick 11 million people out. President-elect Trump is different from candidate Trump. He’s now said that if you break the law, we’re going to deport you. Of the 11 million undocumented, only 800,000 are estimated to have broken the law. By the way, that is the current policy of the United States. President Obama deported 2.8 million people for breaking the law. The BRT supports immigration. It is a pro-jobs argument.

John Mauldin says that he is skeptically optimistic, but mostly because he seems to expect Congress to lead Trump around. A tax cut is a given, but it’s not clear who gets the cut, nor is it clear if spending cuts will also occur. Mauldin think Republican unity isn't all it is being touted to be, and that divisions will soon be apparent. He also expect Trump to remain "Tweeter-in-chief," for good or ill.

Interestingly, Mauldin's prediction is that oil will be $60/barrel by mid year, but then goes on to note that upcoming technological advances in the oil patch are going to double the amount of oil produced from a given well. If true, this will further drop the oil price at which shale is profitable. This isn't good news for the Saudis or Russia. Mauldin seems to think Trump is overstating the Chinese manipulation of their currency, and that neither the Chinese nor Trump really want the yuan to decline.

Mauldin also presented the views of others on Trump. The views of Gavekal (co-founders Charles Gave, Louis-Vincent Gave, and Anatole Kaletsky) is up first. Mauldin thinks they are best at asking the right questions, and the questions that interest him most are the one related to the US dollar (USD). These projections assume the USD will continue to strengthen, which will affect the return on invested capital (ROIC). In other words, just how protectionist will Trump be?

However, they (of course) think if regulations and tax cuts are cut, then it will be all rainbows and unicorns. The market is betting on the second so far. This is an appeal to not take Trump at his words. When dealing with a can man, this is good advice. you can trust what he says, you have to wait and see what he does (or can convince the congress to do) This may be wishful thinking on the part of someone who wants the Republicans in Congress to run the show.

David Rosenberg is looking for deflation. In contrast, most analysts think that tax cuts and deregulation will result in come inflation. He thinks the recovery was well under way, and the surge at the end of 2016 has a speculative feel to it. He does not expect normal stable times.

He thinks the economy isn’t that strong, and doesn’t think Trump can reverse was is a multi-yer disinflation trend because there is still excess debt, globalization, aging demographics and technology (read: automation). Rosenberg also thinks it’s madness to invest based on government action. Here we agree.

Mauldin admits that the rust belt jobs were not lost to trade, they were lost to technological advance, they are not coming back. Con man is a loaded term, so I’ll use salesman from now on. Trump oversold what was possible while campaigning and seems to assume that his voters understood this. Time will tell.

Christopher Wood, on the other hand, expects inflation. He’s looking at the bond market. I am old enough to remember double digit bond yields, but not because I was earning interest, but because when I was starting out I had to pay absurd rates for loans. I admit that this experience colors my view of those rooting for interest rates to increase. The bond “market” is not that old. I’m also old enough to remember when bonds were a means to park money you didn’t need for a long time to earn a guaranteed interest rate. Higher yields were obviously better, but you didn’t worry about whether or not you could sell the bond to someone else for a price.

So now, if you won bonds with yields higher than what’s being offered for new bonds, you can make a buck. But as yields rise in parallel to interest rates, the price of bonds falls.

An inflection point may have been reached in world financial markets, or at least such is what market participants began to think in the final weeks of 2016. The inflection point referred to is the postulated end to the 35-year-old bull market in Treasury bonds.

Woods is an “animal spirits” guy, which in my observational experience means higher national debt. Trump’s protectionist leanings are a fly in the ointment for this “animal spirits” view.

Plenty people clearly think Trump and the Republicans are going to deliver. There is no institutional reason why they cannot, Democrats can’t stop a single piece of legislation. However, most people have set a low bar for Trump, he’s not popular, so any success will probably be enough for many. The mood here is definitely skeptical— surely no surprise to anyone still reading— but willing to proved wrong. There are simply too many signs that these "benefit of the dubt" analyses are wishful thinking.


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