Trump’s trade wars, his ego, and access to Twitter.
The triangle of doom.
What is an investor to do?
Well that very much depends if you think he is in charge, or knows what he is doing. A reality TV star and six times bankrupt was apparently lecturing the chairman of the Federal Reserve on a yield curve! Really?
I’d bet he would know as much about a yield curve as putting on his speedos over his belly.
The impact however, is significant in the short term, but is it warranted in the long term?
Trump understands his market. Short sharp messages aimed at a polarized and confirmation-bias-infested electorate. Don’t get into debate, short dramatic, ‘they are the enemy’ and let confirmation bias do the rest. It’s unethical but works.
So what is the strategy and should you be disinvesting as he seemingly picks a fight with everyone?
Let’s remember he is supposed to be the President of the USA. Each decision will have a team behind it that analyses the impact of any decision, yet somehow this guy can let loose with his new phone and clumsy fingers and wipe $500bn off your pension/investment funds in minutes. Strange. Who wins?
Remember, he also quotes how well markets are doing with him in charge to gain more votes, so damaging them is very peculiar indeed. How much do you read into his real intent when he moves from hatred of North Korea to virtual hand holding?
As I write, another tweet aimed at the Fed doing its job to loosen fiscal policy (drop interest rates) arrives – ‘our economy will rocket if the Fed do the right thing’.
So is it all a chance to be re-elected?
Well, if the economy (and so stock markets) is appearing to struggle in the next few months, the Fed will loosen rates which will all appear in the numbers over the run up to the next election.
Hence, a market dip from a punch up with China would work wonders to trigger a rate cut.
The significant impact of trade tariffs will, however not make their way into consumer prices and the economy until 2020, so they are an excellent strategy to simply win an election. However, as much as he borrows and pumps into the balloon, you are simply creating a balloon.
When that arrives, his supporters’ confirmation bias will believe the excuse.
Do I think he is serious about them? Not at all. The USA needs China from a geo political standpoint but many Americans are living hand to mouth. Hundreds of billions of dollars of goods are produced by China that simply cannot be moved so quickly to other countries. He’s bluffing.
He hoodwinks his followers by mixing up trade deficits with economic losses. They are not the same. Just because you sell less to China than you buy isn’t a loss. If you didn’t have their cheaper products and prices you would have inflation or no products at all, and in turn, no economy.
He talks about them having lost trillions to China.
To the ‘believer’ who doesn’t read beyond a Facebook meme or a tweet, possibly. But it’s the US citizen who buys the Chinese goods and nothing will change that other than price.
If all the tariffs are implemented you will have inflation and in turn a total of a $110 billion hit to the economy.
Will the Fed reduce rates now? Yes probably, but not as much as Trump would like, and most commentators believe a 0.25% reduction is on the way (Sept 18th), but Trump will ask for more.
The Fed is supposed to be apolitical, and have been reminded of that countless times this week, so any movement more than the 0.25% would be deemed to being supportive of Trump and of course, markets would rally again.
His bluff on the yield curve (an inverted yield curve signals a recession) is equally as bad. I’ve covered it before, but Fama and French support this with a study going back to 1975 which found no evidence that inverted yield curves predict lower returns, and indeed the curve is more accurate when rates start at a higher level which they are not.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
If you have a query on investments please call 01872 222422 or visit WWFP.net.