Quotidian Investments Monthly Commentary – January 2017
2016 was an investment year when political considerations rather than economics dominated global markets. Whilst the main indexes in both the USA and Great Britain ended the year in positive territory, those indexes do not act as a proxy for the wider market. Both the Dow Jones Index and the FTSE100 are weighted indexes and are biased in such a way as to largely reflect Oilers, Miners, Financials and Telecoms as opposed to the middle and smaller sized companies which better indicate the overall economic health of a country.
With the induction of a new President in the USA, the imminent initiation of Brexit negotiations and forthcoming elections in the three largest economies of the Eurozone (Germany, France and Italy; and which seem likely to further diminish the waning power of the EU), we expect 2017 from an investment viewpoint to be in thrall to politics too.
However, we also believe that there are some notably positive economic influences and improvements that will help to propel the US economy forward and, by osmosis, the UK and selective parts of the global market too.
We draw support for that assertion not from the bombast but from the initial actions of the newly installed President Trump. In his pre-election rhetoric the new President committed to making a number of fundamental economic changes and in his early days in office he has begun to make good on those promises. Beneficial modifications already include:
Less regulation: Obama, in his two relentlessly un-achieving terms in office, imposed countless new regulations on US business that only had the effect of stunting corporate growth. In the early days of January the Republican-controlled Congress moved aggressively to repeal a series of Obama regulations and in the immediate aftermath of his inauguration Trump has lifted many more simply through a series of executive orders. This process of freeing the US economy from stifling bureaucracy will no doubt continue.
Lower taxes: The eight years of Obama’s administration saw the imposition (and continuation) of some of the biggest tax burdens in the history of the USA both on US citizens and on businesses.
Not only federal and local income tax rates that extracted as much as halfof an individual’s annual income but also sales taxes, capital gains taxes and death duties. On top of all that were ‘stealth’ taxes in the form of increasingly high health insurance premiums. So much for Obamacare.
According to the non-partisan Tax Foundation, US workers had already had to suffer a 31% tax burden even before they came to pay income tax. Trump will be the first American president since Reagan to introduce tax cuts. He will also replace Obamacare and so greatly reduce health insurance costs.
More jobs: Trump has committed to creating many more new jobs in those parts of America that have suffered most from chronic lack of investment and outdated industries. We have little doubt that he will fulfil that pledge.
The benefits of Trump’s actions (rather than his oft and easily criticised ‘media personality’) can already be seen. According to a recent University of Michigan survey just the prospectof these tax changes has boosted US consumer confidence to a 13-year high. Thus, even before the real impact is felt on corporate profits, the positive psychological impact is already sweeping through the US economy and its financial markets.
It all points to radical change in the US landscape; a seismic shift of epic proportions in the economy and in the investment markets. Unshackled from onerous government interference and freed from the suppressive effects of high taxation the US economy should now improve substantially.
“What a man thinks and what a man says is of no particular note. The only thing of importance is what a man does”. An old aphorism that we keep in mind when sizing up Donald Trump.
He is a man who, on superficial judgement, is easy to deride and underestimate. A long-term associate of his believes that Trump has succeeded because his opponents miss his message when they take him literally but not seriously. His supporters do just the opposite and so have shared in his success.
Time may prove otherwise but until then we believe in ignoring most of President Trump’s controversial actions and ‘tweets’ and focusing simply on what he actually does. From his actions thus far we are persuaded that the promise of strong economic growth in the USA will be fulfilled (and, by extension, that will benefit the global economy too).
At the end of January Trump went on record with theWall Street Journalsaying that the dollar is too strong. He went on to assert that the value of the dollar is too high (partly) because China manipulates the value of its currency lower. That situation has been rather obvious for quite some time.
But currency manipulation does not only apply to China; the Bank of Japan has for years been manipulating the yen lower against the US dollar and every other nation on the planet does exactly the same thing by periodically marking down the value of their currencies too in order to secure a competitive advantage for trade.
The European Central Bank is also doing everything in its power to water down the value of the euro. Of more economic relevance, the eurozone’s growth rate in 2016 rose to the dizzy heights of 1.6%. The depressing fact is that this paltry number is actually still double the average EU growth rate over the previous ten years. Will they ever admit that the ‘federal Europe’ experiment has been a dismal failure?
Perhaps Trump will shortly amend the notice famously kept on the President’s desk in the Oval Office so that it will quite simply read “The buck drops here.”!! We are sure that ideally he would like to weaken the dollar partly in order to make US exports more competitive and partly so that the US can repay with a weakened currency the enormous debt mountain built up under Obama’s spendthrift stewardship.
However, Trump’s plan to lower corporate tax rates is very likely to trigger massive capital inflows into the dollar as US multinational companies seek to take advantage of lower tax rates to repatriate profits earned and held overseas. Whilst that may hobble any desire to weaken the dollar, history shows that such incoming money invariably moves into and boosts the stockmarket.