what comes next (iii)

the Trump presidency

It seems to me Trump was elected president because he pledged to address the legitimate grievances of Americans who lost their livelihoods as globalization shifted jobs abroad. Conventional economics argues, and Bruce Springsteen sings, that those jobs are never coming back. Economic theory says government is supposed to help repair this kind of damage through better education, subsidies and retraining for displaced workers, new infrastructure that will allow higher value-added businesses to spring up. 35 years of observing the rhythms of developing countries in Asia have convinced me the conventional wisdom is right.

Most of the developed world has done this. From the onset of this shift in the1980s to the present, however, the US has been uniquely negligent among world powers in addressing the problem, holding instead to a seventeenth-century view that things will take care of themselves. This has created a fertile field for Trump to plow.

I wrote in June 2016 in the post linked above fixing the downside of rapid technological change shouldn’t include electing “a latter-day Ned Ludd” as president. But that’s precisely what the US did that November. The electorate chose a brilliant self-marketer, though a person of dubious character and possessed of whatever the opposite of the Midas touch in real estate is called. His chief qualification was to have played the role of a successful businessman on a TV reality show. The other candidate, Hillary, not only didn’t get the social justice issue created by the demise of heavy industry here, but reeked of privilege and actually denigrated the victims of Washington’s neglect.

what he delivered

reviving the 1950s industrial base

–During his term, Trump delivered none of the new infrastructure he promised. No better education and no retraining/subsidies.. No beautiful new national healthcare insurance plan, either–only a sustained effort, now in the Supreme Court, to remove the ACA plan already in place. Fewer people are employed today in the industries of the Fifties he promised to restore than when he took office.

Trump did manufacture a large income tax break for the ultra-wealthy (who tend to save extra money, not spend it, so this is the least effective type of stimulus), punching a big hole in the Federal budget by doing so.

His goodby move: Trump has refused to concede. His public position is that a gigantic cabal consisting of communists, Democrats, the CIA, Republican officials in battleground states and South American dictators conspired to infect even paper ballots with an evil computer algorithm that changed millions of Trump votes into Biden votes… He has reportedly raised $170 million+ from supporters since the election, on the idea needs money to prove this in court. Of that whopping amount, however, over $130 million+, according to the Washington Post, has been siphoned off (the appeal’s fine print alerts givers to this) into a Trump-controlled Political Action Committee instead. The PAC format allows him to use the money for just about anything after he leaves office. Hard to know whether Trump’s cognitive well has run so dry or whether this is just another ripoff of people who’ve trusted him.

The main point about his industrial revival promise, though, is that by doing nothing, he made the economic situation for his supporters somewhat worse. It’s no different from what his predecessors neglect, except for his promise. Spilled milk, but an important social issue that Biden should address

trade policy

–Trump’s trade policy is another matter. It’s a mix of the long ago discredited depression-deepening strategy perfected by Herbert Hoover and the similar policies of the ruling LDP in Japan that have produced three decades, and counting, of economic stagnation there–and a gigantic wealth-sapping currency devaluation.

Trump’s general idea: make consumers to buy local products they don’t want by using tariffs to hinder or block access to the imports people actually desire to buy. Two obvious problems: (1) other countries retaliate. They raise their own tariff walls, designed to hurt the US by targeting exports from strong US companies; (2) protected industries usually don’t get any better. They simply raise their prices to close to the new level of imports, forcing local consumers to pay extra for bad products. A knock-on effect: capital investment in a tariff war aggressor country declines. That’s because imported raw materials and components may end up being subject to tariffs; retaliatory tariffs may remove the possibility of exporting output.

All of the negatives have happened this time around.

The biggest losers have, again, been Trump supporters, notably in agriculture, which has been the target of retaliatory tariffs. Since most of the trade war has been waged through executive order rather than legislation, a large share of this GDP depressant should be easy to reverse. Just withdraw the relevant orders. A complication: tariffs have opened the door to new competitors, soybeans from Brazil going to China are maybe the most prominent example. Prices and volumes for US farmers will likely be a looong time reaching the status quo ante.

immigration

–trend real GDP growth for the US is about 2%. This breaks out into 0.75% from increase in the domestic workforce, 0.75% from immigration and 0.5% from productivity improvements. Closing the borders has removed the middle 0.75, reducing trend real growth by close to 40%. Again, this should be easy to reverse.

white racism

—-as a human being, I find Trump’s white racism appalling. As a portfolio manager, I think talented foreigners will hesitate to take jobs in the US either because they or their families won’t be safe or because they don’t want to live in a place where skin color matters more than character or skill. In the same vein, talented Americans may choose to leave. US-incorporated firms that need cutting-edge talent may be forced to follow the skilled workers to the exit, as well. This is a potentially very serious problem.

—-there’s also the issue of branding–foreign customers visit the US as tourists or buy American products in part to express their participation in the culture of the land of the free and the home of the brave. I’m not sure where in the world white racism is an aspirational goal that consumers want to support.

I have no idea how this will work itself out.

the pandemic

–2020 will likely turn out to be the worst year for GDP in the US over the past century, except for 1932, the low point of the Great Depression, and 1946, when factories churning out war materials shut down. The Financial Times suggests that the total economic loss from covid, including premature death and physical/mental impairment, is twice the loss in GDP. In the case of the US, that would be something like $16 trillion so far (about $130,000 per US family). Given Trump’s continuing message to his supporters, even today, to disregard medical safety recommendations (Republicans in Wisconsin and Michigan are trying to impeach their governors for mandating mask-wearing), it’s no shock that the US has been disproportionately badly hurt. Although the US is an advanced economy and comprises only about 4% of the world’s population, we have 20%+ of the world’s covid cases and 20%- of the world’s deaths. Public health experts are suggesting that US covid deaths may reach 450,000 by spring–more than all the American soldiers who died in WWII. The difference in outcomes between the US and other OECD countries like South Korea, Japan, Canada, or even China, is shocking.

Trump’s pandemic bungling sounds too much like the Jonestown massacre to dismiss it as the triviality the administration tries to pitch it as. My guess is that the pandemic damage will not be permanent or continuing (although Trump’s anti-vaxxer stance won’t help) but that the extra cost to the country of Trump’s failure to lead ($8 trillion and counting?) will either delay or dampen any economic bounceback next year.

my bottom line so far

We’re in a stock market that I think has a lot of similarities with the late-1980s in Japan. Back then, interest rates near zero caused explosive expansion of PE multiples and, eventually, wild speculation. That market reversed itself at the first sign that interest rates were about to rise. I think the same sort of thing will happen in the US.

I have no idea when the economy will be healthy enough for rates to begin to move up. My guess is that we’re at least six months away. I imagine that the bond market, not the Fed, will take the lead. That move will probably be triggered by anecdotal evidence that the economy is ticking up.

That might be a response to Biden reversing some of the crazy things listed above that Trump has done (if you want to see the long-term effects of Trump-like policies, just look at Japan since then). On the other hand, having the pandemic under control might be a sine qua non for rates to go up. In that case, the triggering information will likely come from medical experts.

I find it hard to believe that the spread between market haves, like TSLA, and have-nots, like Energy can get any wider.

I suspect that the stars of a new market direction will be Financials, Consumer discretionary and Industrials (which in the US is a consumer-oriented sector in disguise). It will probably be easier to identify areas to avoid–like Utilities, Energy, Materials, Real Estate, Staples–than those to overweight. That doesn’t do us as much good as the number of sectors might suggest, since those five make up only about 17% of the market.

It may make sense to reverse portfolio orientation to feature US-centric firms vs. multinationals or exporters. That’s an iffy call as things stand now, though, since a rebounding US may still be weaker than a so-so Asia. We also don’t know whether Biden will be able to lower the ultra-high dysfunction level of Congress and do more than just rescinding Trump’s executive orders.

On a less macro level, I think it will be important to sort out tech names into those with strong long-term prospects vs. those that are pure products of speculative fever. SPACs would be the first place I’d look for the latter.

One response

  1. Really interesting comments Dan – thank you. I think you are 100% right about the backdrop that enable Trumps rise – we really need to upgrade the economic prospects for our citizens before we get another populist. I think you may be right about a resurgence in consumer spending (Consumer discretionary), which is strange because of the dire shape of the economy. With so much debt in the economy, rising interest rates will be catastrophic, so I don’t think we will see that for quite some time unless there is an exogenous force which causes rates to rise.

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