Do elections really matter to financial markets? Pt3

white-house Today is the first day after the election of Donald Trump. My earlier posts on this topic focused upon how a Hillary Clinton administration would affect the economy and the financial markets. I did not address how a Trump administration would affect them largely because I did not believe he had much chance of being elected. Now that he has been elected, I want to address this. Here is the editorial posted by the New York Times today: “Trump’s Revolt”.

Donald Trump opened his campaign with an attack on new immigrants to America; particularly Mexican immigrants. He claimed, without references that recent Mexican immigrants were “sent” by Mexico to this country and that Mexico was sending us “their worst”. Trump pledged that, as a remedy he would build a high wall the length of the US/Mexican border ostensibly to prevent more undocumented Mexicans and others from entering the USA without visas. This wall would be paid for by the Mexican government he said; threatening Mexico with adverse currency exchange rates if they did not. He stated that, if elected, he would mount an effort to identify and uproot the estimated 11 million undocumented immigrants and deport them to their country of origin. Trump has blamed these immigrants for displacing native and properly documented American workers. Donald Trump expressed alarm about the resettlement of war refugees; particularly those from war torn Syria and Iraq. Trump expressed much suspicion about Muslims living in this country.

On foreign policy, Trump claimed he knows more about the situation in Iraq and Syria than the US military commanders there. He stated he would “tear up” the multinational treaty to end the nuclear program in Iran. Regarding the war in Syria, he stated he would simply “bomb the s**t out of them”. During national security briefings he reportedly wanted to know why the USA did not use nuclear weapons more frequently. Trump depicted the current trade policy of the USA as being very unfavorable to the USA; citing the NAFTA for being “the worst trade deal in US history” and cited the US trade deficit as an example of government officials who “didn’t know what they were doing”. A regular theme of Trumps was to declare that Washington DC is a “swamp” of corruption and incompetence that he and he alone could fix.

Trump’s own business practices reveal a practice of lying and cheating his competitors, government regulators, his own employees, and those contracted to do work for him. His justification for these practices was that ethics really knows no place in business dealings; that the “art of the deal” is to win at any cost. He has displayed wanton disregard for the privacy and dignity of women and used his ownership of beauty pageants as a means to satisfy his sexual fantasies; bragging to other men about how he was free to intrude upon dressing rooms and even to take liberties with women without their consent; a practice many consider sexual assault. During the campaign more than 11 women came forward to assert he had sexually assaulted them; one of them a 13 year old at the time.

Trump is currently under investigation for fraud perpetrated upon thousands of students who enrolled in Trump University; saddling many of these students with massive debt with little to show for their money. There is evidence that he defrauded an insurance company of $17M claiming damages upon his Mar a Lago resort in Florida that was largely unscathed by a hurricane.  The US Dept. of Labor has issued three complaints against Trump for failure to bargain in good faith with a union representing workers at his Las Vegas casino.

President Elect Donald Trump will have Republican majorities in both the US House and Senate. Speaker Paul Ryan has already stated that his cohorts in the Senate are ready to scrap the Affordable Healthcare Act that has brought health insurance to more than 20 million uninsured Americans. They have no proposal to replace this program. This prospect suggests that those 20 million people will now have to return to waiting in emergency rooms when their ailments have reached extreme conditions. Hospitals; required to provide this care will now return to massive costs of uncompensated care. Here in Arizona, acceptance of the Medicaid portion of the Act brought an estimated $11B in insurance to hospitals and healthcare institutions saving many rural clinics from closing.

His suspicion of Muslim immigrants; particularly those war refugees led him to declare that he would no longer allow them to come to the USA.  I believe this suspicion could lead to a requirement that current residents from war torn countries in the Middle East would need to register with the Federal government and face an extended vetting process. The prospect of locating 11 million undocumented immigrants living in the USA would require massive investigations pitting community members against each other. Hillary Clinton depicted this process as likely to be “busloads and trainloads” of people forcibly removed from the country. I assert that it is likely that if Trump keeps this promise internment camps will have to be constructed as these people are processed for deportation.

Trump’s trade policy could cause the USA to attempt to renegotiate trade agreements decades old; causing constriction in trade between countries and possibly trade wars. The policies he has pledged to implement are likely to cause extreme uncertainty for investors in financial markets. I assert that the severe Market contraction of 2001 was more likely caused by investor uncertainty after the election of George W. Bush than it was from the so-called “tech bubble” or as some assert a “market bubble”. This contraction began a 10 year period in which the Dow produced no gain. The Trump policies are much more extreme than those of George W. Bush.

What vexes advisors in this extreme situation is that although we may believe there is a contraction coming due to this change in US leadership, there is no way to predict with accuracy when it will commence and there is especially no way to predict when the market hits the bottom. Systematically buying more shares of stock holdings as they decline in value will result in more shares ready to increase in value once the market turns up again. This “portfolio rebalancing” will produce better investment results over the long run but for those investors who are currently depending on their portfolios for income they face difficult times ahead. Election night saw S&P 500 futures slide 800 points until trading mechanisms closed the trading. Today’s 295 point Dow rally will be short lived, in my opinion.

 

Fed Vice Chairman sees “hailing range”

Dean Baker correctly alerts us to the ominous statements made by the Federal Reserve Board Vice-Chairman, Stanley

Stanley Fisher VP FRB
FRB Vice Chairman Stanley Fischer

Fischer. Baker points out that 2% is a inflation target average; not a ceiling. It would be economically counterproductive to raise the Fed Funds Rate when the US economy is in the 8th year of recovery from the worst recession in US history since the Great Depression. Wall St. banks have resisted easing credit since they were unable to establish values for themselves and their cohorts in October of 2008. Yes, students of the economy remember the meeting Treasury Secretary Paulson had with 9 of the biggest banks in the USA. At that meeting the values of each of the banks was assigned to them via a dollar amount he had written on a slip of paper. Each received a portion of $125B of Treasury funds in the form of purchase of preferred stock.

 

The Federal Reserve’s control of the money big banks can access is used to encourage economic expansion or cool off an economy that is expanding too rapidly. If it hikes the rates, banks can charge higher loan interest rates such as mortgages and they can pay depositors higher rates.

The Fed’s monetary actions have not had much effect on the lending of big banks. Several years of 0% to .25% failed to produce the loans necessary to cause business expansion. Failing this, the Fed resorted to “quantitative easing”…twice also with little effect. The QE, as it is called forces banks to sell government bonds to the Federal Reserve thereby reducing the securities on their books and increasing their cash. The theory of QE is that without interest producing securities, banks are forced to find a market for this cash; hopefully retail borrowers.

A big part of the problem of bank lending is the domination of Wall St. banks in the banking industry. Wall St. banks have centralized credit policies that limit the lending of local bank managers. Businesses without hard collateral cannot meet the risk avoidance criteria of their local Wall St. bank branches. With slack lending through their thousands of retail branches, the Wall St. banks must look to businesses with a national presence. Here, they may be finding slack demand for credit. This slack demand is due to the fact that these businesses have excess productive capacity. That is, they are capable of producing more product but have no market for it. Currently, producers in the aggregate have almost 25% excess capacity; a full 5% below the average capacity utilization between 1972 and 2015. If you can produce more with what you already have, you have no need to expand, nor to borrow to finance that expansion.

This dilemma; having too much capital concentrated within centralized lending institutions while too little capital is in the hands of consumers is driving bizarre proposals such as Vice Chairman Fischer’s. The Federal Reserve cannot force the banks to lend and the banks can’t force these national corporations to borrow. If he has his way, this tepid economic recovery will slip into another recession a concern expressed by Baker and his colleagues at the Center for Economic and Policy Research.

Brexit and investment strategy

Brexit Cameron and MerkelAs I write this the Dow 30 is down almost 500 points due to the shock to world financial markets of the vote by the British to leave the European Union. Here is the transcript of Dean Baker’s analysis given on PBS’s News Hour.  Baker believes that this is, in part due to strong anti-immigrant sentiment. Among the (perhaps) unintended consequences is the ease with which young Brits were able to seek and take jobs anywhere within the EU. It will also adversely affect the 2.5M British expats living on the continent.

What I expect to see is what I predicted to my client this morning where we see each other poolside mornings. I told him the Dow could plunge as low as 500 points today. If you are an investor with a well diversified portfolio of stocks, bonds (both domestic and international) and other asset classes is that your holdings’ values will dip as their underlying prices dip but you will not lose the number of shares you own. If you sell during this downturn perhaps speculating that the slide will continue, you will lose your shares, as well as their value.

Smart investors (and their smart advisors) will not sell holdings during this downturn but will examine their asset allocation to see which of them have been affected. This will be evident in the change in their proportion to the entire portfolio. If you, as other smart investors do, hold cash as a distinct asset class, you will have the liquidity to buy more shares to bring those holdings back to their target allocation. In this process you will be buying shares that have a (hopefully temporary) market discount. Please consult your advisor for confirmation of this general outlook. If you have any questions, please don’t hesitate to call. (520) 623-3646. Thank you!