Waking up each morning and listening to the media/market pundits talking about the many failures and future demise of Trump and his administration is quite frankly getting boring.
I wonder if they and their followership have been short the U.S stock market since the election. If so, they missed out in two of the strongest quarterly gains in years.
They all continue advise us to sell/short the market today as they have each day since the Trump election. Are they putting their political/social views ahead of the reality that reflation is a global phenomenon; earnings are rising for the first time in a long time; monetary policy remains accommodative: and there is an air of optimism permeating the business community and the public that we have not seen in many, many years not just here but abroad too. Have you noticed the gains in foreign markets last quarter? Is that a coincidence or is accelerating global growth a reality?
I have never been disillusioned that the process of change would take longer than many expected. I said from the get-go that (unfortunately) healthcare would be first up of the Trump agenda followed by tax legislation and a huge infrastructure program. I never expected any major legislation to be passed much before late fall.
Reducing regulations that stifled businesses and bilateral trade deals would be an ongoing process throughout the year. Last week I said that that the failure for the House to pass healthcare legislation should be perceived as a positive as it moved the time frame up to deal with taxes, including repatriation of foreign retained earnings, and the infrastructure program which will have a positive impact on domestic growth beginning later this year. Also I felt that Trump and his team learned from the healthcare experience and would move future bills forward differently gaining support early on from other members of Congress, businesses and, most of all, the people.
Trump must remember that he ran on a populist agenda benefitting the middle classes at the expense of the entrenched establishment and rich. Unfortunately, the establishment controls Congress so Trump must garner support for his agenda and apply pressure to the establishment, including the ultra conservatives in his party supported by the Koch family, or he will lose more seats in Congress next election. Trump must really clean the swamp even if it takes longer to pass his agenda to "Make America Great" and "America First" becomes reality. Who can really vote against lower taxes and a huge infrastructure program? Both bills will pass this year.
Fair trade, less regulations, and energy independence all also major components of Trump's agenda. Changes in trade policies will take years as Wilbur Ross and his team negotiate one-off bilateral deals with each major trade partner. Did you read the NAFTA paper circulating around the White House? Not so bad! Don't expect the U.S to cause trade wars but expect instead some accommodations from our trade partners to buy more U.S goods; tighten enforcement of existing trade laws; and make large investments in the U.S to build plants here and hire U.S employees.
Watch closely what comes out of Trump's meeting with Chinese President Xi Jinping this week in Florida as a key to future relations between the two countries. You may be pleasantly surprised. By the way, growth in U.S domestic energy production as we strive for energy independence will also reduce the future trade deficit boosting reported GNP.
While U.S reported growth in the first quarter slowed from a strong fourth quarter, growth overseas accelerated boosting global growth above previous expectations. I expect the IMF to raise their global growth forecasts for 2017 and 2018 while also raising their inflation expectations. Expect the key monetary authorities to all remain accommodative staying one step behind as they all look in the rear view mirror until they see the impact of the Trump agenda on the U.S economy once passed and not before. The dollar regained strength last week as money flows into the U.S, strengthened buying our treasuries as the interest rate differential with foreign rates had widened. Our yield curve flattened more last week further penalizing the financial stocks. I expect this to be a temporary phenomenon as U.S growth accelerates as the year progresses. Major city center banks still sell at a discount to tangible book and to the market multiple with above average yields.
Bottom line is to stay the course and be patient as change is a process and takes time. The key is when, not if, it will occur as I see more agreement on the tax and infrastructure parts of Trump's agenda such that I fully expect passage of both bills by the fall of this year. In the meantime, global growth has accelerated for a host of reasons boosting profitability while interest rates remain low. Not a bad combination for the market as a whole and even better for those groups that benefit most from an acceleration in global growth. It does not hurt the markets that M&A activity has accelerated and it appears that OPEC will extend its cuts for another six months, which boosted energy prices last week.
Our core beliefs remain intact. I expect that first quarter earnings about to be reported will show further improvement from the fourth quarter reports, which were the best in many years. I also anticipate that corporations will remain cautious but optimistic until there is more certainty that Trump's agenda is passed. That is good news, as it will serve to extend the cycle, as there will be few, if any, excesses.
Despite what you hear from the pundits, global economic acceleration is a reality. It will only get stronger once the Trump agenda is passed. Invest in those companies that are leveraged most to accelerating growth, better pricing, adherence to trade laws and less regulation. The Trump agenda is just icing on the cake.
We will continue to offer our point of view, which reflects our thought process on how and where we invest. Paix et Prospérité continues to significantly outperform the markets as we have now done since our inception in 2013 and over my 45 year career. Active management investing is alive and well!
Review all the facts; pause, reflect and consider mindset shifts; update constantly your asset allocation and risk controls; do first hand independent research on each investable idea and...
Invest Accordingly!
William A. Ehrman is managing partner at Paix et Prosperite LLC. He served as head of the Investment committee at Century Capital Associates, followed by head of investments for Worldwide Equities and Private Equities at the Quantum Fund. He was George Soros’ first partner.