As I sit on a cross-country flight from San Francisco to Charlotte one week after the elections, I have an enforced five hours to both reflect on the past and hypothesize as to the future. Wichita, the heart of the 1930s dust bowl, is down below. Ongoing trade debates cast reminders of the depression-era Smoot Hawley legislation. And while not likely the direct cause of the Great Depression, this legislation most certainly amplified its depth. So, looking forward and no longer back, how can I parse the potential election result impacts, including what may change next on the economic front?
The Economic Here and Now
Recent statistical releases point to an economy that continues to sputter along. Growth, but not too much, shall likely continue, while many projects will be tabled, for now, in anticipation of policy proposals and shifts. The markets and commentators generally believe that the Federal Reserve will raise the target Fed Funds rate again in December. Meanwhile, the 10 Year U.S. Treasury Note is approaching last year's levels. In fact, many prices are in the same range as this time last year.
Looking back through 2016 shows a disastrous first month. By January 21, prices and values for most assets had fallen radically. Thereafter, a reset occurred with stocks, commodities, and other prices gaining though mid-year before generally leveling off.
Back to square one then? Maybe let's say 2016 didn't exist on the economic front and move on.
New Administration, New Unknowns
Like all campaigns, the incoming administration will bring with it an entire host of election-trail promises. I'll take a quick look at how these might turn out, with the overwhelming disclaimer that by the time you read this many things may have already changed.
I. Revenue and Expense
President-elect Trump appears to be standing by his pledge to generate over $1 trillion in infrastructure spending via roads, bridges, walls, and sidewalks. To this latter category, our little hamlet just completed a sidewalk project authorized by the 2009 spending supplement bill; a reminder that things might not happen overnight. He has also suggested increased military spending and a reduction in some business and personal tax rates.
All of this should provide for entertaining congressional battles:
- First up will be the representatives concerned with the vector of the current deficit. Too high now in their opinion, and higher still based on the proposals. The likely outcome: not so much of either.
- Next will be the pork barrel fight. Or the “it needs to be in my neighborhood” verse of the song. Congress and the Senate will fight long and hard to be sure that their own areas or states receive more than the folks next door.
- Everyone loves a tax reduction, and it especially makes sense for corporations. Ideally, another year of repatriation should be included. Smart bettors would look for the riders in the bill opening and closing all sorts of Pandora's boxes along the way.
Trade, of course, falls largely—though not exclusively—to the executive branch. President-elect Trump's stance against free trade is well known. I mentioned Smoot-Hawley earlier as a cautionary note. Pure and simple, the math of free trade works. Protectionism, however, shifts the significant pain of some, heavily onto the shoulders of all, through higher prices and less choice. Smart bettors might look for more inflation here and a lot of global disruptions.
The most interesting fallout is far from clear. Implementing significant barriers globally may, on the one hand, allow China to dominate global trade for years to come. With the US dropping out of trade on a reciprocal basis, the door may open in a way that the central planners could only have dreamed of before. The economist's other hand thinks that this may be the string of events that collectively pops the Chinese bubble. I am not convinced I like either outcome.
We have mentioned in these pages many times before that investors prefer a solid base case, including a significant dose of certainty. Speculators, on the other hand, love periods of turmoil. Opportunity knocks.
With most of pricing reset near the same levels as a year ago, we look forward to seeing a lot more detail about what will be proposed, and what will likely be accepted.
Until next time—good investing.