#9 – 2016 the rise of asset prices

As we reflect upon the economic impacts of what happened in 2016 (from the whipsaw we saw through Brexit and Donald Trump), and what is in store or 2017. I thought it would be useful to visually see some of the developments.


Clearly the most transformative year in some time, as expectations and economic benchmarks across the spectrum: inflation, the currency markets, commodities, equities and interest rates all increased rapidly as the market

Some highlights:

  •  A surge in inflation five-year US forward swaps — a measure of the average inflation expectation over five years beginning in five years.
  • Rising inflation expectations also revised projections for the Fed, as investors anticipate a faster tightening cycle to counter the prospect of a hotter economy and increasing consumer prices
  • US banks were among the chief beneficiaries of higher Treasury yields and a steeper yield curve. Financials are expected to earn more money from lending as long-term fixed rates for loans and mortgages climb further above overnight and short-term borrowing costs (as well as benefit from regulation)
  • European bank stocks enjoyed a powerful rally after a battering in the first half of the year, when news of looming legal penalties, negative interest rates, the UK’s Brexit vote and fears over the Italian banking sector sunk share prices
  • The closely followed three-month Libor rate — a global floating interest rate benchmark that trillions of dollars of corporate loans, credit cards and derivatives contracts are tied to — neared 1 per cent for the first time since the US emerged from recession in 2009.
  • Higher commodity prices provided the ballast for the US energy sector’s rebound, with Brent crude — the international oil benchmark — up more than 90 per cent from its February low.

Hold on to your seats for 2017, the first 100 days of the Donald Trump administration will be likely volatile, as the sky high expectations of the market (for Donald Trump and his ability to deliver on tax reform, and infrastructure spending) will come into focus. Happy new year to all!


#8 – Framing is everything.

Framing is everything. The way an issue is presented, can dramatically influence how someone perceives what follows. We often (even sometimes unconsciously) have a bias towards how we approach issues. It begins with what we learned in school, what we watched as we grew up and the culture all around us. Recently, over the holidays through the generosity of my wife’s grandmother, inherited Goodrich’s “History of the United States” – published in 1852, and “The Centennial History of the United States” published in 1872 by J.D McCabe. Leafing through these books, I wanted to take an example of something that children in America were taught, and compare to what we know today. This is not just a US phenomenon, we know history books in other cultures often reflect the bias of that nation.

 I believe that it is in incumbent on us to challenge bias, bottom out facts and understand the full perspective. A healthy dose of skepticism is needed. Often time’s racism and prejudice are embedded deeply in these issues. And as we know history often repeats itself, so understanding how these biases are rooted can be useful to prevent them from happening again in the future.

The Trail of Tears.

Let’s take an example and juxtapose against these old US history books that I recently obtained. We know how awful the trail of tears was during Andrew Jackson’s tenure as President of the United States in the 1830s. At the beginning of the 1830s, nearly 125,000 Native Americans lived on millions of acres of land in Georgia, Tennessee, Alabama, North Carolina and Florida–land their ancestors had occupied and cultivated for generations. By the end of the decade, very few natives remained anywhere in the southeastern United States. Thousands more were killed.[1]

White Americans, particularly those who lived on the western frontier, often feared and resented the Native Americans they encountered: To them, American Indians seemed to be an unfamiliar, alien people who occupied land that white settlers wanted (and believed they deserved).

Working on behalf of white settlers who wanted to grow cotton on the Indians’ land, the federal government forced them to leave their homelands and walk thousands of miles to a specially designated “Indian territory” across the Mississippi River. This difficult and sometimes deadly journey is known as the Trail of Tears.

State governments joined in this effort to drive Native Americans out of the South. Several states passed laws limiting Native American sovereignty and rights and encroaching on their territory. In a few cases, such as Cherokee Nation v. Georgia (1831) and Worcester v. Georgia (1832), the U.S. Supreme Court objected to these practices and affirmed that native nations were sovereign nations “in which the laws of Georgia [and other states] can have no force.” Even so, the maltreatment continued. As President Andrew Jackson noted in 1832, if no one intended to enforce the Supreme Court’s rulings (which he certainly did not), then the decisions would “[fall]…still born.” Southern states were determined to take ownership of Indian lands and would go to great lengths to secure this territory.

Andrew Jackson largely ignored the US Supreme Court, and instead work with congress to pass the Indian Removal Act. The Indian Removal Act, gave the federal government the power to exchange Native-held land in the cotton kingdom east of the Mississippi for land to the west, in the “Indian colonization zone” that the United States had acquired as part of the Louisiana Purchase. (This “Indian territory” was located in present-day Oklahoma.)

The law required the government to negotiate removal treaties fairly, voluntarily and peacefully: It did not permit the president or anyone else to coerce Native nations into giving up their land. However, President Jackson and his government frequently ignored the letter of the law and forced Native Americans to vacate lands they had lived on for generations

So what happened?

The Choctaw: In 1831, the Choctaw, became the first nation to be expelled from its land altogether. They made the journey to Indian Territory on foot (some “bound in chains and marched double file,” one historian writes) and without any food, supplies or other help from the government. Thousands of people died along the way. It was, one Choctaw leader told an Alabama newspaper, a “trail of tears and death.”

The Creeks: In 1836, the federal government drove the Creeks from their land for the last time: 3,500 of the 15,000 Creeks who set out for Oklahoma did not survive the trip.

The Cherokees: By 1838, only about 2,000 Cherokees had left their Georgia homeland for Indian Territory. President Martin Van Buren sent General Winfield Scott and 7,000 soldiers to expedite the removal process. Scott and his troops forced the Cherokee into stockades at bayonet point while whites looted their homes and belongings. Then, they marched the Indians more than 1,200 miles to Indian Territory. Whooping cough, typhus, dysentery, cholera and starvation were epidemic along the way, and historians estimate that more than 5,000 Cherokee died as a result of the journey.

What did our history books teach kids growing up in 1850s-1890s (Goodrich – a History of the United States 1852)

So what then did our history books note to students growing up in the US around this time? (in 1852 and 1972) 20 years and 40 years after these events took place?

Charles A. Goodrich begins with some background in the early chapters on US History and Native Americans and notes the following:

“War was the favorite employment of the savages of North America. It roused from the lethargy into which they fell when they ceased from the chase, and furnished them an opportunity to distinguish themselves, and to achieve deeds of glory and taste the sweets of revenge” (Goodrich, pg. 22)

Note the usage of “savages” and the sweeping generalizations and assumptions “roused from the lethargy”

Further as he describes the Trail of Tears, notes the following:

“We shall only add that in May 1938 a military force of several thousand men under the command of General Scott was assembled on the Cherokee territory, for the purpose of removing the nation to the territory assigned theme, in accordance with the policy recommended by General Jackson, to remove all Indian tribes”.

Goodrich makes no mention of the losses that the Cherokee suffered. He spends very little time covering the range of forced removals and there impacts on the Native Americans.  Or that the US Supreme Court had ruled  that Georgia’s removal of Cherokees was unconstitutional, and that Jackson’s policy was not well supported by the US constitution or recent Supreme Court rulings. Goodrich also seems to paint this episode in US history as a rather small after-though “we shall only add”, and spends very little time on examining what happened to the Native Americans.  Goodrich, largely reflects Jackson’s years as triumphant and a resume of his accomplishments.

In JD McCabes “Centennial history of the United States” more time is spent examining the policies of Andrew Jackson, yet still frames the issue as

“The first important act of the new president was to recommend to Congress the removal of all the Indian tribes remaining east of the Mississippi to new homes west of that stream. Such a measure he contended would give to them a broader range, and one more suited to their wants” Yet it makes no mention of the Supreme Court decision, or perspective on why Jackson was recommending the policy. After reading much of these chapters, it would often seem logical that the Native Americans should be removed?

Challenge the status quo and ensure your understanding of what is factual is actually the full set of facts.


[1] The following summary of the trail of tears is leveraged from http://www.history.com/topics/native-american-history/trail-of-tears

#7 – how bad can it get with Trump?

The last few blogs have focused on some of the upside that might come to our personal finances as a result of Trump’s economic plan to spend and cut taxes. Much less time in this blog has been spent on the unintended consequences of his trade policies (if pursued). You all probably have seen one of his controversial tweets, shooting off the hip in response to the day’s developments (whether it his tweet regarding the China capture of a US drone, or the most recent horrific terrorist act in Germany). Trump’s discussion of his proposed tariff’s and his trade approach with China might even be scarier.

A recent article by Tim Worstall in Forbes sum’s it up well.

“The Chinese government is a despicable, parasitic, brutal, brass-knuckled, crass, callous, amoral, ruthless and totally totalitarian imperialist power that reigns over the world’s leading cancer factory, its most prolific propaganda mill and the biggest police state and prison on the face of the earth”

That is the view of Peter Navarro, the man chosen by Donald Trump to lead a new presidential office for US trade and industrial policy. This same guy has put forward policy proposals which run counter to all modern views of economics. That trade is a zero sum game, and that VAT (Value added Tax) favors  export economies.  Both of these notions are incorrect. Trade is a voluntary exchange in which both parties partake in; if it was a zero sum game – would anyone participate? A VAT system is entirely neutral upon the source of goods and services–it is a tax upon the place of consumption and thus has no effect upon place of supply at all.

The reason these ideas are scary, is this could be the basis for which Trump and other support tariffs and taxes to protect US made goods (the rationale for pursuing a protectionist agenda). This in the end could hurt overall growth and GDP – as consumer prices will be driven up as a result of US consumers being forced to buy US goods (which are not competitive on a global basis)

 I have been looking closely at previous presidencies who have echoed much of the same rhetoric as Trump.

Let’s unpack the Make America  Great theme – cut taxes? spend? and protect American made goods? Let’s take a look at Reagan and Hoover. Two presidents that campaigned on aspects of this same message.

Are we on the cusp of Hoover like outcome? or could it be more positive…. such as the Reagan years?


Following  Calvin Coolidge’s 1922 Fordney-McCumber Tariff act. Tariffs were increased on foreign imports.  Hoover  in the first 90 days in offices, passed the Smoot-Hawley Tariff which protected American agricultural goods. Hoover believed it was essential to balance the budget despite falling tax revenue, so he raised the tax rates.

At first, the tariff seemed to be a success. According to historian Robert Sobel, “Factory payrolls, construction contracts, and industrial production all increased sharply.” However, larger economic problems loomed in the guise of weak banks. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent. U.S. imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1

And yet  the economy kept falling and unemployment rates rose to about 25%. We know that Hoover was likely dealt a tough hand with the Stock Market Crashed in October 1929, and the Great Depression that followed. Yet, the Smoot-Hawley Tariff clearly did not help.  This downward spiral, plus his support for prohibition policies that had lost favor, set the stage for Hoover’s overwhelming defeat in 1932 by Democrat  Franklin D. Roosevelt who promised a New Deal.

Figure 1 – Timeline and Key Economic Indicators from Hoover’s Years



Entering the presidency in 1981, Reagan implemented sweeping new political and economic initiatives. His policies, dubbed “Reaganomics” advocated tax rate reduction to spur economic growth, control of the money supply to curb inflation, economic deregulation, and reduction in government spending.

Over his two terms, the economy saw a reduction of inflation from 12.5% to 4.4%,

While Reagan did enact cuts in domestic discretionary spending, increased military spending contributed to increased federal outlays overall, even after adjustment for inflation

Figure 2 – Timeline and Key Economic Indicators from Hoover’s Years


This sums it up well, over the first two years, while Hoover was successful in reducing the trade balance (closed it by 68 %), GDP tanked (with the economy shrinking by more than 20%). While in Reagan’s case it took a bit longer for the S&P to grow yet, GDP maintained a steady upward track.

Figure 3 – Comparison of Performance (Hoover and Reagan first two years)

Change over first 2 years in office Change in S&P Change in P/E Ratio Change in GDP Change in Trade Balance
Hoover -24% 19% -21% 68%
Reagan 8% 27% 13% -139%

Figure 4 – so what is going to be?

Trump is off to a better start than Reagan and Hoover, but anything can happen!