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Why Your Portfolio Should Prepare For Seven More Years Of Trump

INVESTING IN THE TRUMP AGENDA

I am going to make the case that you need to have a Trump Investing Plan.

To begin, I will “assume” that Trump will be a 2-term president with enormous political strength.

Second, I want to explore how his agenda will affect the stock market.

Jimmy Obama and Ronald Trump

Pop quiz: which era are we talking about?  

Following a misspent war fought in Asia that yielded only pain, the U.S. turns remorseful and elects a humanistic, sensitive member of the Democratic party to be President.  

At the top of the agenda are social issues like human rights and the environment.  

Meanwhile, the U.S. lacks an industrial policy, which allows the world’s largest Asian economy to pursue rampant mercantilist policies and outright intellectual property theft.  

At the same time, licking our wounds, the U.S. assumes a softer foreign policy which enables Russia and Iran to go on the offensive and seize territory.

If you guessed Jimmy Carter, then you are correct,  

If you guessed Barack Obama, then you are also correct.

And the déjà vu continues.

The blowback comes in the form of a populist Republican President from outside the traditional government circles. He immediately assumes an assertive stance on the world stage and drives an America-first approach to trade and foreign policy.  

He argues for lower taxes.  He gets accused of being a racist, an idiot, dangerous to world peace.

If you guessed Ronald Reagan, then you are correct.

If you guessed Donald Trump, then you are also correct.

It’s The 1980s Again

The pattern that emerges is one where the U.S. gets distracted and then re-focuses.

The distraction begins with launching and then winding down a major, all-consuming war (Vietnam, Afghanistan/Iraq).  

Winding down the war requires enormous attention to extricate from the battlefield and to cope with the inevitable economic malaise. U.S. enemies take advantage of this period when U.S. political focus is elsewhere.

Then focus returns. The American entrepreneurial spirit re-asserts itself, at which point pushback ensues.

World events need to be seen within the context of U.S. distraction and focus. Especially now that we are on a path of focus.

Other countries are aware of this pattern and move accordingly.  

About three years ago, the timeline for exiting Iraq/Afghanistan became clear.  

That is, the U.S. was determined to exit the Middle East and, once the exit was prosecuted, it would be only a matter of time until the U.S. focus would return inward.

Russia acted swiftly. It stole Crimea and established an airport in Syria to match the seaport at Latakia.  

These are hugely significant because they re-established a geopolitical means to project power and military aggression at Europe’s soft underbelly.  

This is very, very important to grasp. Russia wants to dominate Europe. It uses its natural gas and weapons to do so.  

But Russian territory is in the north and in the Black Sea. The only way to threaten Europe is via naval strength but that’s a problem: the distance between the Mediterranean and Mother Russia prevents re-fueling.  

Everything depends on maintaining a port in Syria.  And an airport adds to the ability to project power across Europe, Turkey and the Middle east.

Russia took advantage of the U.S. in retreat while knowing that their window of opportunity was limited.

Similarly, Iran negotiated an amazingly one-sided deal: $150 billion (bn) and a time-out on nuclear weapon building.

China also took the opportunity to launch major initiatives to consolidate their power, especially in Pakistan. A subservient Pakistan is critical to China’s efforts to manage India.

But now we are back to a period of focus. Under Reagan the catch-phrase was “Morning in America.” Under Trump it is “Make America Great Again.” Ultimately it means the same thing: a more focused, assertive America.

Traditionally this limits the ability of our adversaries and allies to maneuver.

The Trump Agenda

There are simple characteristics of the “Trump Agenda.”

First he is re-defining checkbook diplomacy. The U.S. tends to throw money at foreign policy problems. 

Billions to Pakistan, the Palestinians, the Israelis, NATO, etc.  Trump is re-visiting the arrangements and asking if the arrangements fit U.S. needs.

For example, on the campaign trail he correctly pointed out that NATO benefits Europe but that they don’t contribute their fair and agreed upon share.  If the U.S. is shouldering the lion’s share of the spending, then we should expect more.  

NATO is a 70 year old agreement.  What is wrong with re-visiting it to see if it meets today’s needs?  Naturally, the established order was upset and they attacked him and misrepresented his positions.

He did it again with Pakistan and with the Palestinians.  The current arrangements are mafia-like: pay money and we keep the peace, or else there will be trouble. Trump is making it clear that he is uninterested in status quo. Whoever pays the piper, calls the tune. He rewarded the Israelis for their strong alliance and support (Israel votes with U.S. at the U.N. more than any other nation.)

In other words, Trump is about reciprocity. People who get freebies don’t like to suddenly face demands and expectations. So expect a lot of pushback.

I would also argue that the world is mean reverting. Throughout history, the world functioned according to trade. The poles were Europe, Iran, India and China.  Other regions linked into the trade routes.

We diverged from this structure when the “New World” was discovered. It launched new maritime adventures and colonization. And it temporarily distorted the natural state of things.

A mean reversion means several things.

First, the concept of nation states is more exception than rule. Nations emerged when there was a combination of geographical boundaries and ethnic integration. (Egypt for example).  

But mostly the world was governed by strong city-states.  As European colonization fell apart, territories were carved up (Sykes Picot) and usually not along traditional ethnic lines.  

In the face of rampant Russian imperialism, Kissinger saw the need for united fronts and he championed the evolution of city states into nation states.

There is no clean emergence from colonialism. The Middle East has been struggling for identity. Nations did not emerge along traditional ethnic lines. Adding to the instability was the cultural shock that came from a sudden exposure to the modern world.

Other residual hotspots of instability include Kashmir and North Korea, for example.

Another follow-on of mean reversion is that some countries have a traditional strength.  There has always been a Persian empire, for example.  At the same time, some countries are punching above their weight class.  Russia has never been a global entity.  A splintering is inevitable, likely initiated by the end of oil and the collapse of their economy.

Reverting to the mean is never linear or smooth. But it is inevitable. And the implications for today are that commercial priorities – trade and economics – will take the lead.

Far from fighting history, Trump is actually consistent with historical precedents.

Why Trump Will Succeed

Let’s get away from the 30,000 foot view and get back to the street level.

Trump is applying checkbook diplomacy at home as well as abroad.  For starters, he just delivered a massive tax cut.  Putting money into the pockets of voters just months away from a midterm election – that’s basic politics. Expect even more voters to choose Republicans.

Now we are starting to hear about Trump’s follow-on fiscal stimulus: a $1 trillion infrastructure spending bill.

Naturally the knives were out to cut down any proposal, no matter how good or bad.

Trump fan or not, there are many levels of awesome going on here, including:

  1. A combined short-term and medium-term fiscal stimulus. The tax cut has 1~2 years of impact. Meanwhile, infrastructure spending has 3~5 years of impact, and more if it’s not a bridge to nowhere.  What I mean is that bridges take years to design and build.  The US economy benefits from both a multiyear spending activity AND true productive enhancements.
  2.  Expect the benefits to stay with US companies.  As an example, Trump today announced a 30% tariff on solar panels.  Expect there to be a BUY AMERICAN emphasis on the $1T.  That is a sharp contrast with spending under Pres. Obama.  For example, when San Francisco built a new Bay Bridge at a cost of $7.2B, much of that spending went to China.

The protectionist moves add a bit more juice as well.

This is very similar to Reagan’s approach.  Cut taxes, boost fiscal spending, get tough on trade.

And we’re seeing the immediate consequences of Trump’s efforts.  The Democrats tried to shut down the government and then they caved.  Trump has the power and he is using it.  I am worried – I prefer checks and balances.  I’d like Trump to have a strong challenger.

As an investor, you should prepare for 7 more years of Trump.

Defense, big builders, industrials, and more inflation.

Defense: Northrop Grumman (NOC) is my preferred selection because they are the leaders in drones.

Builders: It’s early yet.  But watch the big construction companies: Fluor (FLR), Aecom (ACM), and Chicago Bridge (CBI)

Industrials: too many to name.  I would just do an ETF like IYJ.

Inflation: The dollar is dropping hard, but that’s unnatural.  The economy is strengthening. Inflation is returning. Interest rates are rising. And liquidity is dropping – as QE unwinds.  

This means that the weak dollar is an artificial construct – it is the outcome of manipulation.  I would guess that this is another Trump-initiated bully club to beat our trading partners into submission.  For example, a cheap dollar and strong yuan makes the Chinese populace face inflation and turns them against the leadership.

 

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

P.S. January 25, 2018: Benzinga – NBA Intends To Take A 1% Cut, Or ‘Integrity Fee,’ If Sports Betting Is Legalized

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