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Trumphoria Fades

By David Scott | Tuesday 2 May 2017


Over the last 100 days the “Trump” administration has run into difficulties in taking action on campaign promises. Rising tensions with Canada and Mexico have led to a reconsideration of withdrawing from NAFTA, global pressures have led to a reconsideration of withdrawing from TPP and the Paris Climate Accord. The “Affordable Care Act, “which was to be repealed, has now shifted into a “replacement” and leaves a bulk of the ACA intact along with the very aspects that continues to inflate health care costs. Tax reform remains a distant promise, along with infrastructure spending and the boarder wall, as the debt ceiling looms and opposition pressure mounts.

The wise approach forecasting the future with a profound humility while the foolish charge in believing the bubble will never end and the current hubris has changed nothing. This isn’t the 1980’s, the last time US tax reform was passed, there were low valuations, high inflation and interest rates and much stronger economic growth. So the impact of tax cuts will be far less than expected. In addition, tax reform is likely to be the single most difficult challenge of this Administration as partisan politics comes into play.

In the end tax reform will probably be very different, and much less robust, than currently anticipated. So, at the end of the first 100-days, there has been little progress made toward the things that count the most with investors. With asset prices currently priced for perfection, the real risk is that of “disappointment.” there is a strong belief that this time is different but the optimism for continued growth in asset prices is based upon the forward estimates of rising earnings based on tax cuts which should directly boost earnings per share.

The United States has a President that made his fortune on the back of debt, but somehow the market thinks Trump will govern in a tea-party-hard-money fashion. Nothing could be further from the truth. All investors would be wise to forget anything (and everything) Trump has said, and instead just ask themselves what his most likely course of action will be once he gets to that inevitable fork in the road. There is little doubt in my mind that given the choice between cutting spending, raising taxes, instituting tighter monetary policy, and the alternative of just inflating all the pain away, he will want to choose the easy money option but Yellen as Chair of the FED is not the person to let him do this. Because Yellen has done nothing but tighten during her whole tenure as Fed Chairperson.

The market has badly misinterpreted Trump’s monetary drivel, but so far it has not panicked because they believe The US Federal Reserve have their back. Next year’s FOMC board will look dramatically different so betting on their continued unwavering underpinning is dangerous. In an environment of over-indebtedness, an economy will naturally try to correct through the paying down or forced write off of debt. But over the past thirty years, we have been manipulating regular business cycle declines through overly easy monetary policies. This has encouraged too much borrowing and we have piled more and more debt on the problem. The trouble is that we have done this for so long, that it feels the norm but the consequences of not allowing the cycle to play out means when it eventually does the price discovery will be more ruthless than it need have been.

It's a market truism that rising tides lift all boats. But that's not the really important effect; what really matters for many investors is rising tides turns them into an investment genius--at least in their own minds.Those of us who have not been seduced by the Sirens' songs of hubris know from experience how easy it is to confuse a rising tide with long term fundamentals. Trump has so far achieved virtually nothing and if a new President cannot get anything done in his first 100 days, when theoretically at the apex of his power, it is reasonable to question whether he ever can.

Currently the risk is clearly tilted against reward for now as, the great unwinding is now starting to build.

David Scott is an Investment Manager & Market Commentator at Andrews Gwynne

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