#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!


#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!










#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