Monday 23 May 2016

Trumponomics - what might it look like?

With Americans likely facing a Trump/ Hillary election and Americans having an almost perfect track record of electing the personable, charismatic candidate over the awkward, DC insider, Ivy leaguers, looks to me like Trump will be in the White House in January.

What might the economic/ market impact of his presidency be?

These are just my musings.

The US is in a debt trap with debt growing ~3x faster than GDP. To effect even greater negative real rates Trump needs inflation. For inflation you need labour demand. Ipso facto Trump will monetise a 'people's QE' focused on infrastructure. This could be as simple as directing the Fed to exchange Treasuries for new infrastructure loans without increasing the size of the Fed's balance sheet.

With negative real rates rising due to wages outpacing GDP growth, corporate profit margins will be squeezed to below long run averages, which means maybe a 40% fall in economy wide margins from here. This will see domestic stocks which lack pricing power trading near book value while within the indices the money will go into real assets and growth names.

The US 10yr Treasury has got to have a chance to seeing over a 3% yield by year end and higher later assuming this tightening doesn't trigger a recession.

The Dow went sideways for 16 years from the late '60s to the early '80s, when Volker killed inflation. Over this time span inflation eroded 90% of the USD's purchasing power. I think we are in the process of entering a 10-20 year inflation cycle after a three decade credit expansion.

Gold was pushed up by commodity index demand into 2011 and pushed down on the subsequent unwind, despite not being an industrial commodity. Gold also had a 45% price correction in the middle of the 1970's bull market. I think $2000 plus gold is a near term target and $10k medium term.

Emerging markets are going through a rebalancing process with weaker FX, terms of trade shock, commodities bottoming and political changes in many countries as reformists are elected. Emerging Markets should begin a new investment and reform-led credit cycle this year. But not all EM's are equal and there is no long run direct connection between equity returns and GDP growth.

Like with any new cycle the winners of the new cycle are unlikely to be the same winners as from the last cycle. As such; smart phones, FANG's, biotech etc look stretched and anything related to EM, commodity, real assets might end up looking cheap at these levels.

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