Trump Cards: What Hand Have Investors Been Dealt?

Trump on economic policy

Thursday, November 17, 2016 wecbcast by Caroline Miller, BCA Research. She made following points:

• Infrastructure program and tax cuts will increase budget deficit
• Tax reduction will not give a lot of bang for the buck compared to government spending programs regarding GDP growth
• Fed pressured by Trump policy to increase rates, leads to USD strength
• Europe needs 3 to 4 years to return to growth, Europe will not match rate increase
• Japan has still low inflation
• China is exporting structural deflation (overcapacity)
• Dollar strength, Trump protectionism will hurt emerging Asia most
• High corporate debt level in emerging markets
• US Equity: no visibility of corporate earnings growth, wild card of Trump appointees
• US protectionism and backlash are a threat to growth
• US deficit will steepen yield curve
• Trump tax program will benefit small caps not multinationals

Investment recommendations:

• Underweight of duration in US bonds, preference of TIPS
• Underweight of peripheral european bonds
• Overweight of USD vs. EUR
• Overweight in pharma, staples, utilities (defensive stocks)
• Underweight in tech, industrials and commodities (cyclical stocks)
• Underweight in US vs. European equities: strong USD will hamper US profits. Profit margins are very high in the US historically and compared to Europe. They can't grow on that level

We have entered a new economic environment in the US.

Larry Summers: Rates will stay lower for longer than you think

Today's FT has an opinion piece of Lawrence Summers:

Real rates in the US will only increase mildly because of the following reasons:

1. Real rates are trending down for 20 years.
2. As rates rise in the US, foreign capital is attracted which will strenghten the dollar and in turn reduces demand for traded goods.
3. Low rates have already pulled demand forward, resulting in lower levels of demand for the future (e.g demand for cars).
4. Regularitory pressure is inhibiting lending to small and medium sized companies.
5. Inflation is getting more difficult to measure as services such as healthcare where quality is hard to measure
6. Most importantly is that global growth outlook is too weak for a rate hike of the usual 300 - 450 basis points. The markets expect a more realistic increase of 100 basis points.

Central bankers have less tools in their cupboard than they assume.