#6 – Monitoring for Inflation and Trump Economic Indicators

After analyzing and monitoring a couple key indicators (e.g., oil, mortgage rates) that we laid out in the previous post on what a Trump presidency will mean for your personal finances, I am further of the belief, that many of these impacts will be fairly pronounced. To recap some of the biggest near term considerations that may impact your personal finances.

  • Interest rates will rise (and are rising), which will impact the demand for housing prices, which should normalize the  housing market and likely mitigate a housing bubble (less buyers willing to spend $$ on higher interest rates), but challenge’s the overall timing of whether to buy or rent.
  • Money will be spent, and a lot of it. Monitor where these infrastructure projects will be undertaken, and where an additional impact on the real estate market will occur (as a result of new railroads and infrastructure projects)
  • Rising tide of equity prices – driven by infrastructure spending, tax cuts and Trump’s de-regulation agenda (get into equities! and have some exposure)
  • Rising yield curve and impact on Fixed Income investments (reduce allocation in Fixed Income)
  • Monitor appetite of US debt securities (from foreign holders of US debt – e.g., China) (keep an eye on this)
  • Monitor Tax deduction / credit changes and how you can optimize to meet these potential changes

Below is a brief update of those indicators and some analysis to support the above observations.

Figure 1: Update of Inflation Indicators

Reviewing the last year (and namely in the last month) of Inflation Indicators, since Trump was elected we can see a marked increase in the yield curve and change in mortgage rates (3% increase month over month) and the ten year treasury yield curve (up 14%)

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Figure 2: Correlation of Indicators

As Treasury Yield Curves have increased or decreased, Gold has moved in the opposite direction (-.90 strength)

As the Baltic Index has decreased or increased – Crude Oil has followed a similar path (.87 strength)

As you would expect as mortgage rates  increase they are highly correlated with the same direction moves from the Treasury Yield Curve (.92 strength), and a decline in

correlation

Figure 3: Summary of Foreign Holdings of US Debt

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Figure 4: Top Holders of US Debt

China and other countries including Japan continue to trim there US Debt Holdings. Will be key to watching as Trump spends more, whether appetite for US treasuries will change.

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Source for above data is US Treasury Reporting and Bloomberg.

 

 

#5 – Financial Recommendations to Navigate a Trump Presidency

Like many Americans, I am disappointed in the outcome of the election, and have spent a few days soul searching on how  deeply divided our country is, and how we even got here.  I have spent some time analyzing the rural and urban divide, and the anger that many Americans feel as they are either left behind in the new modern economy, or  feel misrepresented by our status quo government (see blog #1 below). Leaving the social, foreign policy and numerous other challenges we will face aside (brought on by a  Republican Senate, House, Supreme Court and Presidency). I will focus on some pragmatic considerations that we can personally prepare for (from a financial perspective), which I hope you will find useful.

I as many of you know, am a history aficionado, and have spent some researching and thinking about the future uncertain path we are headed down and reflecting on when we have seen this before from previous experiences. Drawing upon US history (e.g., Nixon – inflation of 9% in 1972), and learning’s from the author of intelligent investor (Benjamin Graham, and even as far back as Roman History (e.g., Caesar), we can start to build a understanding of what may happen, and what we can do to prepare for what’s next.

What do we know so far on Trump’s economic policies?

He will cut taxes for businesses (likely a flat rate 15% rate give or take), incentivizing corporations to repatriate cash to the US.
– He will simply the tax code and likely introduce tax breaks for many (including a new child care tax credit)
– He will spend, and spend more – likely on infrastructure projects to stimulate growth
– He loves debt financing, and will more or less ignore the debt limits (subject to moderate/budget hawk Republicans in Congress)
– He will pursue an agenda of deregulation, putting less pressure on banks (from a supervisory and regulatory perspective)
– He will put a great deal of pressure on Federal Reserve Monetary policy – to support the above growth agenda

So what could happen?

– Trump could actually spark some additional near term growth
– Bond prices/yields will jump (reflecting a decline in there value)
– Likely leading to significant deficit growth in the US debt borrowing
– Banks will make more money and will have less supervisory/regulatory pressure and will have more money to lend to consumers and companies
– Inflation becomes more likely, as more money is pumped into the US system, and as consumers expectations rise, so will prices.
– Monetary policy  will try to address these increases (through interest rates raises)
– Leading to a scenario where mortgage rates increase, and the rates the US pays on it’s debt to increases…
– And… the potential for creditors and counterparties that own US debt to not believe that it can be paid back (this will be one to watch, the change in US growth vs. the change in the US deficit and what will win)

So what can you do?

– REITs, Real Estate Investments and TIPs (treasury Inflation Protected Securities) offer natural choices to combat inflation (some may prefer Gold here as another alternative)
– Avoid a heavy weighting of non-inflation protected fixed income investments, increase your exposure to equities, and avoid staying in CASH (as it will devalue relative to the increase in inflation)
– Understand tax deductions and changes to the tax codes in detail. Align your business and personal expense strategies relative to the above changes
– Monitor the 10 year treasury yield curve, oil and gold to monitor inflation / and potential changes to these leading indicators
– Monitor how rating agencies, and creditors are viewing US debt (and whether it still be viewed as credible as time)

A few charts I will leave you with that will frame already what’s happened in the last few weeks.

Source: US treasury as of 11/1/2016 and Nasdaq Crude and Gold Prices

A review of inflation forward looking indicators (Treasuries, oil and gold), yields the following insights (somewhat mixed)

  • 10 year treasury yields have just reached 2015 highs (at 2.15%)  in nearly 7 days!
  • Yet Oil and Gold are dropping likely reflecting a “risk on” trade as investors seek equities

 

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