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How will a Trump presidency impact financial markets after Jan 20?


Viking
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I think most people are underestimating the impact Trump is going to have on financial markets when he becomes president January 20. He has stated very clearly that he is going to renegotiate trade deals (TPP, NAFTA) so they are much more favourable to the US. This puts the US on a collision course with other economies (Canada, Mexico, China, Germany etc). For Trump to get concessions he is going to have to show a very strong hand so I expect him to hammer frequently and hard. Speed: Trump will want to move fast given these sorts of things can take a long time to get done. Social Media: Trump will be looking for maximum coverage using twitter to demonstrate his awesomeness. I just do not see how this ends well for financial markets. Thoughts? Please post any articles you come across that cover this topic.

 

Here is an example. If I was Trump and I wanted to get Apple to move iPhone production back to the US I would poke China in the eye. China likely retaliates by poking Apple in the eye. I would be surprised if Apple Has not given this a lot of thought.

 

Here is an interesting article from Michael Pettis: http://carnegieendowment.org/chinafinancialmarkets/66485

 

 

LEADERSHIP HAS A COST: And there is no longer any question for some Americans that mercantilism has indeed been a policy response by many of its trade partners to slow growth. While China is usually singled out for its policies, other countries have behaved more irresponsibly, most notably rich Germany, whose surpluses, the largest in history, were built primarily on an undervalued currency, after the creation of the euro, and on weak wage growth, after the 2003–05 labor reforms.

 

Growing opposition to trade, particularly among Americans most vulnerable to unemployment and consumer debt, was probably inevitable, and for the reasons listed in the Guardian article referred to above. But if an American retreat really is about to take place, rather than reorganize under Beijing’s leadership and around the surpluses China requires, it is far more likely that the world’s economies would be forced into domestic adjustments of various levels of difficulty, and respond with a mélange of industrial and trade policies aimed at easing the adjustment. To the extent that these policies force adjustment costs abroad, other economies will be forced to respond, and over time global trade will become unstable and increasingly contentious—and especially difficult for today’s surplus countries—in a way that is in fact closer to the historical norm than the anomalous stability of the four decades before 1914 and the six decades after 1945.

 

A U.S. retreat from trade, in other words, will be damaging to global prospects. Many economists argue that it will also necessarily damage U.S. prospects, but they are almost certainly wrong. While there is no doubt that clumsily designed and implemented policy interventions can be disruptive for the U.S. economy, there is historical evidence that intervention can easily benefit diversified economies with large, persistent trade deficits, especially when these deficits are driven at least partly by distortions abroad. The case that most resembles that of the United States today is probably Britain in the 1920s, when its trade account was adversely affected by large foreign purchases of sterling for reserve and investment purposes. The British economy significantly underperformed that of both the United States and its continental rivals, with nearly a decade of unemployment in excess of 1 million insured workers.

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The issue I have with taking Trump at face value is that is what the pundits got wrong in the election & will continue to be off until they realize that Trumps words are the beginning negotiating position not his goal.  This is what Reagan did with the old Soviet Union.  This will be good as this will reset the trade rules post Cold War.  Remember that during the Cold War the deal was join our alliance and you can have access to the US market.  When the US no longer needed allies against the Communists, this concession was kept in place.  Now it will be re-negotiated on a market by market basis by Wilbur Ross. 

 

I hope folks buy into your narrative as it provide us an opportunity to buy some cheap stocks based upon a misunderstanding of Trump.  However after the election, I think some folks are getting smarter but we will see.

 

Packer

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I dont think Trump, Wilbur Ross, or anyone else is going to be able to do anything to boost the US economy.  We are so far along in a bull market, with high employment, low oil prices (until now), excessive government spending everywhere, and excessive corporate debt, and a worldwide demographic drag.  It gets very bad before it gets better. 

 

Within two years Trump is sidelined, or completely out, and the Republican party gets back to its traditional squabbling while Rome burns.  Sometime in the next two years a third party gets formed by Bloomberg and his pals, and gets some seats in the Senate and House.

 

And, if someone pulls up this post to prove me wrong, I will deny writing it, even though its in writing. 

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I think the assumption of non boost the economy is in stock prices given the current interest rates.  The idea of a boost IMO is a variant perception especially with the media's built-in skepticism. We will see.

 

Packer

 

On interest rates.  I think they have probably peaked. 

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Packer, I agree with what you say. My point is more for the US to win there will be an offsetting loser. And because the US is so big a small benefit for the US will be a massive loss for the other smaller country. Countries and certain industries and companies will lose benefits they have had for 50-60 years. This process will not be easy and i think the most likely outcome is that it results in a trade war, a rise in nationalism and conflict (hello 1930's?). I do not think global markets have priced in how difficult this adjustment process likely will be. Global markets are mostly all rallying after the Trump win indicating there are no losers.

 

I have learned managing people for many years that change is VERY hard. If something they are used to gets taken away they get very cranky (even if it is small). Telling people in Canada or Mexico that they have had an unfair trade advantage versus the US and that they need to make concessions so the US can put more people back to work will not be an easy sell for politicians in either country.

 

I just don't think this is the Disney type movie that financial markets are currently reflecting. It will really come down to just how serious Trump is about renegotiating deals. If it is all show then we will muddle through; if he is serious and wants meaningful changes and concessions then I think things get ugly fast.

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The main issue with article is the facts are not given in context.  The 2 other times (2000 & 2007) interest rates (10-yr treasury) were 5.8% and 4.4% respectively and the ERP (the expected return of stocks over bonds were) was 2.5% and 4.4%, respectively.  Today interest rates are 2.4% and the ERP is 6.0%.  These numbers are from Damodaran's website.  So while stocks are expensive compared to history, the relative value of stocks to bonds is quite good (ERP/interest rate), 2.5 versus 0.43 in 2000 and 1.0 in 2007.  The average for this ratio is 0.88 since 1960.

 

Packer

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The loser may be the multinationals' profits who are playing labor arbitrage and giving away IP without considering the benefits they have from access to the US market without paying for them.  They take IP developed in the US and give it to others to use to generate short term profits for themselves.  I do not see much loss other than the short term profits of the multi-nationals.  In the long term it may prevent a race to the bottom so there may be more longer term profits.

 

Packer

 

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I dont think Trump, Wilbur Ross, or anyone else is going to be able to do anything to boost the US economy.  We are so far along in a bull market, with high employment, low oil prices (until now), excessive government spending everywhere, and excessive corporate debt, and a worldwide demographic drag.  It gets very bad before it gets better. 

 

Within two years Trump is sidelined, or completely out, and the Republican party gets back to its traditional squabbling while Rome burns.  Sometime in the next two years a third party gets formed by Bloomberg and his pals, and gets some seats in the Senate and House.

 

And, if someone pulls up this post to prove me wrong, I will deny writing it, even though its in writing.

 

I hold to nearly the opposite opinion.  While Presidents rarely can boost the economy I think reducing excessive regulations, repatriating funds stuck overseas, eliminating inversions by lowering taxes will definitely be helpful.  Trump will actively use the bully pulpit against corporations moving jobs out of the country.  He will shame them.  We are far along in a weak bull market but valuations are not excessive (closer to full value I admit).  We do not have high employment.  We have a low reported unemployment percentage which is not the same.  If wages rose the work force would grow.  Oil prices are relatively low.  Government spending is not high versus historical numbers in terms of % of GDP. 

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I can never resist a macro discussion on a value investing message board. This article by Carmen Reinhardt implies that rates should remain subdued for a while: https://www.project-syndicate.org/commentary/dollar-strength-and-currency-market-intervention-by-carmen-reinhart-2016-12

 

In his last presentation, Gundlach pointed out that the US is now over 100% debt/GDP. That could limit plans for fiscal stimulus.

https://event.webcasts.com/viewer/event.jsp?ei=1085786

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Hi, Packer: could you kindly give an example on this IP thing? what kind of IP are you talking about?

 

The loser may be the multinationals' profits who are playing labor arbitrage and giving away IP without considering the benefits they have from access to the US market without paying for them.  They take IP developed in the US and give it to others to use to generate short term profits for themselves.  I do not see much loss other than the short term profits of the multi-nationals.  In the long term it may prevent a race to the bottom so there may be more longer term profits.

 

Packer

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Hi, Packer: could you kindly give an example on this IP thing? what kind of IP are you talking about?

 

The loser may be the multinationals' profits who are playing labor arbitrage and giving away IP without considering the benefits they have from access to the US market without paying for them.  They take IP developed in the US and give it to others to use to generate short term profits for themselves.  I do not see much loss other than the short term profits of the multi-nationals.  In the long term it may prevent a race to the bottom so there may be more longer term profits.

 

Packer

 

I was going to ask the same thing. 

 

It has always been my contention that the US benefits disproportionately in this world.  When/if Trump starts trade wars an awful lot of Americans are going to be put out of work.  This disproportionate benefit accruing to the US has allowed the standard of living in the US to be higher for many than it should be.  If you want a race to the bottom Packer, then protectionism, and trying to rip off Canada, and Mexico in trade wars should accomplish it.  All those great automotive jobs in Michigan may disappear.  All those great jobs in silicon valley may go away, when other countries start to tax Netflix, Amazon, Apple, Microsoft at huge rates. 

 

 

 

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An example is Xerox.  Here you have a company that has alot of IP, primarily developed in the US using US infrastructure (trained employees & political stability paid for with US tax dollars) that is outsourcing high paid engineering jobs to India.  They even have the US engineers train their Indian replacements.  What do you think is going to happen in India?  Eventually some of the trained Indians will compete with Xerox and margins will spiral downward.  Who is the winner/loser here?  The ST winner is Xerox.  Both the ST & LT losers are US employees & society in general.  Xerox made the wrong decision to maximize ST profit.  What can be done about this?  You have 2 options.  Number 1 the status quo, which is accept it and pay more unemployment & benefits to displaced workers.  The main issue with this is that takes the corporation off the hook for their responsibility to workers and the US in general for access to its markets and investment it has made in its infrastructure.  Option 2 is the right thing to do, outsource lower level tasks to India and re-deploy the engineers to higher return projects.  If management's don't have the insight to do this they should be fired.  Trump has put corporations on notice that this type of behavior (outsourcing) will be taxed out of existence with his Carrier example.  This example will have firms think creatively to maximize US jobs in addition to maximizing profits.  The current set of incentives is only to maximize profits and pay for the roadkill via taxation which is tilted towards taxation of US firms who employ US workers.  So the multinationals get the benefits of lower cost overseas workers & lower taxes by shifting income overseas but pay nothing for access to the US market & infrastructure. 

 

Trump has leap frogged Obama et al. who was not even thinking on this level because they are so removed from how business works.  So the multinationals benefit from the status quo & Trump is going to take from them (in terms of expecting more higher cost US workers & higher taxes for those who hide profits overseas) and give to the US firms (in terms of lower taxes) and US employees (in terms of more jobs from multinationals).  IMO what Trump is starting from the perspective of what would the system look like if there was no Cold War and we did not have to provide incentives to join Team USA.

 

If you listen to Wilbur Ross' comments he said tariffs will be used as incentives and prevent dumping, like we are doing today.  This concept of a trade war is touted by those who do not understand what Trump is doing and are stuck in the current status quo scenario.  This view is magnified in the press who dislike him because he has removed some there access benefits and most have not even tried to understand him.  Just a contrary view.

 

Packer

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Jobs getting outsourced to India doesn't necessarily involves high IP. It typically involves menial work which companies see as their non-core activity. Most of these skills can be learned from books and process know-how from people who have worked in the field. I think it is wrong notion that IP was developed because of trained employees and US infrastructure. Lot of IP was also developed outside US and some by people migrated from less developed parts of the world to more developed economies including immigration to US.

 

It is also wrong notion that Xerox is maximizing ST profit without ST or LT benefits to US society. Doesn't society benefit from more efficiency and lower cost? Either Xerox passes on benefits of this cost advantage to its customer which results in lower costs for them or it increases Xerox's margin which encourages more competition in their product line.

 

It is difficult to stop spread of information and knowledge and process now-how. It has been happening for centuries and only getting faster with spread of technology and internet in particular. Edwards Deming and others helped Japan improve manufacturing quality which enabled Japan to grow faster. Model was later emulated by Singapore and Hong Kong on a smaller scale and finally by China on a larger scale.

 

Trump understanding and execution of business resembles more like crony capitalist of Asia.

 

I doubt Trump has fundamental understanding of creating best possible environment for business to thrive but he is supporting populist policies which are at odds with creating economic prosperity. For this reason many people in Republican establishment and from Business world were wary of showing support for him. It is easy to paint that Obama doesn't understand basic business principals but of lot of other business leader definitely do. There has been lot of thought leaders including business publications, political and business leaders who have rejected Trump's ideas.

 

I believe financial market went up with the hope that it is not just Trump presidency but also Republican Senate and Congress which will lead to more business friendly environment. But we can already see clashes emerging with president-elect such as going on Russian Hacking saga.

 

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An example is Xerox.  Here you have a company that has alot of IP, primarily developed in the US using US infrastructure (trained employees & political stability paid for with US tax dollars) that is outsourcing high paid engineering jobs to India.  They even have the US engineers train their Indian replacements.  What do you think is going to happen in India?  Eventually some of the trained Indians will compete with Xerox and margins will spiral downward.  Who is the winner/loser here?  The ST winner is Xerox.  Both the ST & LT losers are US employees & society in general.  Xerox made the wrong decision to maximize ST profit.  What can be done about this?  You have 2 options.  Number 1 the status quo, which is accept it and pay more unemployment & benefits to displaced workers.  The main issue with this is that takes the corporation off the hook for their responsibility to workers and the US in general for access to its markets and investment it has made in its infrastructure.  Option 2 is the right thing to do, outsource lower level tasks to India and re-deploy the engineers to higher return projects.  If management's don't have the insight to do this they should be fired.  Trump has put corporations on notice that this type of behavior (outsourcing) will be taxed out of existence with his Carrier example.  This example will have firms think creatively to maximize US jobs in addition to maximizing profits.  The current set of incentives is only to maximize profits and pay for the roadkill via taxation which is tilted towards taxation of US firms who employ US workers.  So the multinationals get the benefits of lower cost overseas workers & lower taxes by shifting income overseas but pay nothing for access to the US market & infrastructure. 

 

Trump has leap frogged Obama et al. who was not even thinking on this level because they are so removed from how business works.  So the multinationals benefit from the status quo & Trump is going to take from them (in terms of expecting more higher cost US workers & higher taxes for those who hide profits overseas) and give to the US firms (in terms of lower taxes) and US employees (in terms of more jobs from multinationals).  IMO what Trump is starting from the perspective of what would the system look like if there was no Cold War and we did not have to provide incentives to join Team USA.

 

If you listen to Wilbur Ross' comments he said tariffs will be used as incentives and prevent dumping, like we are doing today.  This concept of a trade war is touted by those who do not understand what Trump is doing and are stuck in the current status quo scenario.  This view is magnified in the press who dislike him because he has removed some there access benefits and most have not even tried to understand him.  Just a contrary view.

 

Packer

 

+1. That's a great explanation of negative effects of unbridled globalism and outsourcing. Trump is spot on immigration and foreign policy. His social policy is another matter and a distraction for this thread.

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Happy New Year!

Nothing like a little macro to kick the year off.

 

None of us has any idea as to what Trump will, or will not do. What we know is that the man plays a disruptive game, he is very smart, and he has surrounded himself with very smart industry knuckle-draggers. There is going to be a muscular trade ‘adjustment’; it doesn’t mean ‘no trade’, it just means trade on different terms; and a very ‘impolite’ two-fingered take it, or leave it.

 

In a closed economy; business collectively hires workers and then pays them enough to be able to buy the goods the business produces. Make those workers productive and their excess production grows the closed economy to the benefit of all. No leveraging, just plain old fashioned work. Economics 101.

 

In the open economy; you hire the other guy’s cheaper workers, pay them little, & discover that they in turn buy the goods of someone else - because yours are too expensive. In the short term, to compensate, you fire your remaining domestic workers, hire more of the other guys, & borrow to pay the bills. In the long term, you go out of business. In the meantime you get your goods at the lowest possible price, but it’s not sustainable. The US today?

 

You can’t make the other guys workers buy your goods. You can fire them instead, replace with your own workers, & pay them enough so that they can now afford to buy your expensive goods. To make your goods appear ‘cheaper’ you put up tariffs, & replace machinery to raise productivity enough to pay the additional wage cost.  Goods cost more, but people are working again, making enough to afford the higher cost, & you get re-elected - repeatedly. The masses share in the benefit.

 

A China gets severely hurt, as the exports don’t sell & it means material unemployment. To stay in power it’s also suppression at home, do whatever you can to promote domestic consumption, & watch many of your best flood out of the country - to escape persecution. It’s also hard to sell counterfeits against a tariff wall & ‘buy America’ campaigns.

 

Many a NA entrepreneurial worker without job prospects, is forced to set up their own business as a means to raising an income. To ensure there is an income, it often means hiring illegals under the table & abusing them in some fashion (through long hours, low pay, no benefits, etc.). The other name for this is ‘institutionalized slavery’, & in the US it is often Hispanic speakers & the very poor who pay the price – Trump supporters. Give the entrepreneurial worker job prospects, & much of the need for this disappears.   

   

It adds up to significant, material, and disruptive change.

We live in interesting times.

 

SD

 

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To clarify, I think there will be continued outsourcing but economic incentives to do so will be changed dramatically.  I would not be surprised to see some of outsourcing tax that would be imposed if employment is down.  I do not see this as bad for the US just catching up to what others do for access to their markets.  This will hurt the ST profits of multinational firms who are not utilizing employees correctly.

 

Packer

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