There’s a new sheriff in town.
The new sheriff and his posse are generating a feeling of optimism across the land. But the question on everyone’s mind is, exactly what will the Trump administration mean for the U.S. economy and investments?
It doesn’t take deep investment insight to say that the economy will improve, as the policies that the President-elect has spoken of are extraordinarily business-friendly. And he is, after all, a businessman, not a politician.
But what does this mean exactly? What are the specifics that should open the door to economic prosperity?
There are many.
The purpose here is not to wax political, but this story cannot be told without addressing policies of the Obama Administration, which has been the most anti-business administration in the history of the American Republic.
No one else even comes close.
The business strangling environment of the last 8 years is driven by the communistic mindset that it is government that should control all – that one’s life and production belong to the state.
“The most important principle of communism is that no private ownership of property should be allowed. Marx believed that private ownership encouraged greed and motivated people to knock out the competition, no matter what the consequences…. The government should exercise the control (of the economy) in the name of the people, at least in the transition between capitalism and communism. The goals are to eliminate the gap between the rich and poor and bring about economic equality.
Economic equality: the person who works and produces and creates wealth is the same as the person who produces nothing of value – the wealth of the producer must be shared with the non-producer (and the state) in order to achieve economic equality.
The perspective that the state is supreme – should control all – is evidenced today by the 20,642 new regulations added to government rule books by the Obama Presidency – costing taxpayers a mind-numbing $743 billion. (The figure is estimated to by $813 billion by the time Obama leaves office.)
Businesses and individuals are literally drowning in a tsunami of regulations and red tape that choke production, distribution, and innovation for business and whip the American middle class with the economic lash of new taxes… taxes that Obama promised would not occur.
One of the “regulations”, the deceitfully named, Affordable Care Act, passed based on lies – lies repeated so often, the public came to believe them: “If you like your doctor, you can keep your doctor. If you like your plan, you can keep your plan.”
And, “The average family will save $2,500 a year in health insurance premiums.”
The President made those promises again and again and again.
Millions of Americans were unceremoniously thrown out of their health care plans when the legislation passed and the average health insurance premium didn’t fall by $2,500, it increased by $4865.
Moreover, while Obamacare resulted in a reduction in the number of practicing physicians and cutting the work week to 29 hours for many (to escape the Obamacare health mandates), it did result increasing the employment elsewhere – Big Brother got new vassals. “The law calls for hiring 16,500 additional IRS agents and as many as 40,000 additional federal employees to manage the mountains of Obamacare-related paperwork.”
Obamacare, which sought control of the nation’s healthcare – 1/6 of the American economy – wasn’t just one regulation, it was 107, which incurred costs of $48.5 billion in costs.
But as Arizona Senator, John McCain covered in a report he released in September 2016, there were many other costly and destructive regulations:
- Numerous regulations from the EPA, including the Waters of the United States rule that would place more than 60 percent of all surface water in the country under the control of the federal government. The rule will cost $462.9 Million.
Remember, the state owns all.
- The EPA’s Clean Power Plan to regulate power plants, which could lead to double-digit increases in utility bills, will cost $8.4 billion.
This regulatory plan, which worships at the altar of Our Lady of the Holy Global Warming will kill hundreds of thousands of jobs and do zip for the environment.
- The Dodd-Frank financial reform legislation has over 2,200 pages of feckless regulations that will cost taxpayers $36.2 billion.
According to the Wall Street Journal:
“After Five Years, Dodd-Frank is a Failure.
The law has crushed small banks, restricted access to credit, and planted the seeds of financial instability.”
- The Department of Energy’s rules include new conservation standards and testing procedures for appliances ranging from air conditioners, small electric motors, ceiling fans, lamps, and pool pumps just to name a few.
Exactly what I need from the federal government – regulation of the speed of my ceiling fan.
The list is almost endless. But the point here is that the toxic effect these regulations have had on the American economy and citizenry is about to change.
WHAT CHANGE MAY COME
It is no secret that both Congress and the President-elect are going to repeal Obamacare. This, in itself, will be a huge relief. The details of the replacement legislation must be worked through Congress and signed by the President, but the broad strokes of what is being proposed are based on free market principles. The new healthcare legislation should give individuals and businesses a choice of the kind of coverage they want to purchase – not force them under penalty from the IRS -to buy coverage for things like family planning and mental health care that they do not need or want.
Promising to slash job killing regulations on the campaign trail is one thing, but even after elected Trump pledged that “for every one new regulation, two old regulations must be eliminated.”
Which sets the tone.
Some points from Trump’s website include:
- “Ask all Department heads to submit a list of every wasteful and unnecessary regulation which kills jobs, and which does not improve public safety, and eliminate them.
- Reform the entire regulatory code to ensure that we keep jobs and wealth in America.
- End the radical regulations that force jobs out of our communities and inner cities. We will stop punishing Americans for working and doing business in the United States.
- Issue a temporary moratorium on new agency regulations that are not compelled by Congress or public safety in order to give our American companies the certainty they need to reinvest in our community, get cash off of the sidelines, start hiring again and expanding businesses. We will no longer regulate our companies and our jobs out of existence.
- Cancel immediately all illegal and overreaching executive orders.”
And if the change in viewpoint isn’t obvious, consider Trump’s appointment of Carl Icahn as a “special advisor” on regulatory reform on December 21st.
In appointing the 80-year old self-made billionaire, Trump said, “His help on the strangling regulations that our country is faced with will be invaluable.”
For his part, Icahn said, “Under President Obama, America’s business owners have been crippled by over $1 trillion in new regulations and over 750 billion hours dealing with paperwork. It’s time to break free of excessive regulation and let our entrepreneurs do what they do best: create jobs and support communities.”
Carl knows his way around corporate America. Worth about $30 billion, Icahn has spent the last 30+ years engaged in corporate battles and deals with everyone from Netflix, to Xerox, Dell, U.S. Steel and Apple.
There is yet one more policy agenda of the new administration which should also foster prosperity: tax reduction. Both houses of Congress and the President-elect have all stated their intention to reduce tax rates and simplify the tax code. Tax rates would be reduced for both individuals and businesses, and tax brackets would be reduced from 7 to 3.
If regulatory reform and tax reduction will remove the shackles from production and innovation, what will this mean for investment?
Interestingly, many of the strategic investment moves that are currently in progress began before the election. Were the markets anticipating The Donald? I doubt it, but regardless, many of the moves that are now clearly on track started a few months ago.
The Dow Jones Industrial Average
In issue 12 of The Hard Truth newsletter published in September, I wrote:
“It doesn’t make any economic sense for the Dow Jones
Industrial Average to go higher, but the chart says it will. How
much higher, I have no idea, but it looks like a strong move to the
upside is coming despite all of the reasons it should not…. as I write this the DJIA is 18,529.”
Today the DJIA is 19,833, an increase of 7% in a little less than 4 months – an annual rate of return in excess of 20%. To be clear, I am not a fan of the equity markets, but also know that there are individual stocks can and will do handsomely. Moreover, if you are one to play the Dow Jones as a whole, the indicators are for continued appreciation for the foreseeable future.
The advancing stock market has been paralleled by sharply escalating interest rates. Below is the chart of the yield on the 10-year Treasury note. Rates bottomed in July. They screamed up after the election, but the advance started in July.
As interest rates on Treasury debt increase, so too, of course, do rates on mortgages. Here’s a graph of the rate of 30-year fixed mortgage. While the rate has spiked dramatically in the last few months, it is still in the 4% range and historically low. So, if you are looking to buy a piece of property or to refinance, now would be the time.
The price of bonds move in the opposite direction of interest rates. If, for instance, you have a bond that has a 5% interest rate and interest rates go to 7%, the principal value of your bond will drop. Why? Because if the prospective buyer can get 7% on a bond elsewhere, the only way he’ll buy your 5% bond is to buy it at a discount from the face value so he can make the 7%.
So as rates have spiked, the bond market has crashed. See the following graph.
It appeared that bear market in precious metals had bottomed and the gold and silver graphs had started up nicely. However, the trend reversed in July and has walked back much of gain as this graph on the price of silver shows.
Personally, I view this as a shakeout – an effort to scare those who hold silver to sell out to those who are buying at these lower prices. Long term, the precious metals are an important part of any reserves. Hold for the long term. Sooner or later this will revert.
At the heart of much this is the value of the dollar in the multi-trillion foreign exchange markets. I have often recommended a very modest diversification into foreign currencies. And I still so recommend as a long-term strategy– a bit of Swiss Francs would be in order.
But I would not make any major bets against the greenback in the near term. As you can see, the dollar has broken out of a rather erratic consolidation and is heading North again. This rally will run some more.
This means foreign travel and foreign goods are cheaper. So if you are thinking of traveling abroad, now would be a good time☺
Reading this issue, one could easily get the idea that I am all in for The Donald. This is not entirely the case. Assuming he carries through on the above – and there is no reason to think otherwise – the economy should get a well-deserved lift.
This will be a huge plus.
In addition, assuming he carries through on other promises such as:
- Cancelling the TPP (Trans Pacific Partnership) “At the heart of the TPP were new rights for thousands of corporations to sue the U.S. government before a panel of three corporate lawyers that could award unlimited sums, including for loss of future expected profits, to be paid by American taxpayers when the corporations claim U.S. policies violate the new entitlements the TPP would provide them.”
- Renegotiating the John Kerry’s servile homage to Iran.
- Appointing originalists judges to the U.S. Supreme Court
All of these things are quite doable with a Republican Congress and they will go far in reversing the damage that has been occasioned on America over the last 8 years – both economically and socially.
It remains to be seen, however, how the President-elect will conduct himself regarding individual liberty. Take, for instance, the 4th Amendment’s guarantee of personal privacy. Trump nominated a CIA director who thinks Edward Snowden is a traitor who should be tried for treason. Really? Because he exposed a massive illegal government surveillance program of American Citizens?
A Banking Crisis
More to the point of this newsletter is the fact that despite the powerfully positive actions set forth above, the question remains, what will happen should there be another global financial crisis a la 2007-2008?
Even with a reversal of fortune that a Trump administration is likely to bring to the U.S. economy, a banking crisis would overwhelm it. This is because our economy – as all industrial nations on the planet – functions on credit. If banks close, shutting off access to credit, bank accounts and credit cards and stock brokerage houses close, cutting off access to your stocks, bonds and money market funds, the economy will come to a grinding halt.
The U.S. banking system is awash in hundreds of trillions of dollars of smoke and mirror investment instruments called derivatives. And many of the banks in Europe are dead men walking. Banca Monte dei Paschi di Siena, the oldest surviving bank in the world founded 20 years before Columbus sailed for America and the third largest in Italy is currently hanging by its financial finger tips as it slowly collapses into a cesspool of its own non-performing loans.
The rest of the Italian banking system isn’t much better.
Eurozone banks outside of Italy own bonds from Italian banks, which puts them at risk.
“…the total exposure of French banks to Italian debt exceeds €250 billion.That’s triple the amount of exposure of the second most exposed European nation, Germany, whose banks hold €83.2 billion worth of Italian bonds. Deutsche bank alone has over €11.76 billion worth of Italian bonds on its books. The other banking sectors most at risk of contagion are Spain (€44.6 billion), the U.S. (€42.3 billion) the UK (€29.77 billion) and Japan (€27.6 billion).”
This is but one scenario. At some point, the debt bubble will detonate. Whether that comes from a European banking crisis that spreads to the U.S., the collapse of the derivatives market here or some other flash point, it will come. (The Bank for International Settlements has mandated new rules that will result in tighter credit standards for bank lending to be implemented in 2019. And the international accounting organization, the Financial Accounting Standard’s Board, has issued new rules that will cut into bank profits beginning in 2019/2020).
Donald and company should have made good progress on turning the ship of state – the USS America – around by that time, but one must confront the strong possibility of a new global financial crisis.
I know, it’s not a pleasant prospect to confront, but one should take some rudimentary steps to prepare for the possibility. Don’t leave yourself at the mercy of the digital universe (which is how your assets in banks and brokerage accounts are denominated).
Get your hands on some hard assets. Take some cash out of the bank and put it in a safe at home (build it to at least a month’s income). Do the same with some gold and silver (10%-25% of reserve assets). This helps to ensure you won’t be the effect a bank holiday. And do your banking in small to medium sized banks or credit unions. It’s safer.
Meanwhile, we will keep our eye on these things as they develop.
Keep Your Powder Dry.
John Truman Wolfe
First week of January, 2017