the Trump economy

Recent election polling seems to show that potential voters don’t approve of anything in the Trump administration except its handling of the economy. One might argue that in comparison with supporting white racism, subverting the Justice Department, causing tens of thousands of Americans to die needlessly from the coronavirus and trying to corrupt the military, blunting economic growth is the least bad thing Trump has done.

It appears, however, the common belief is that Trump has actually done good things for US economic growth during his time in office and that on economic grounds he would be a better presidential choice than Joe Biden. (Personally, I think it’s a sign of the extreme poverty of domestic politics that the Democrats can’t come up with a better candidate than Biden but that’s another issue.) My opinion is that Trump is worse than economically clueless; I think he has been doing potentially incalculable damage to the long-term economic prospects of the country. If so, why don’t people realize this?

I think the explanation is in the financial results of Walmart (WMT), the largest retailer in the US. WMT’s target market is Americans of average and somewhat below average income. The company started in the midwest. Political action by incumbent retailers in California and the Northeast have limited its exposure to those areas. So it’s a reasonable thermometer for economic health in the rest of the country.

EPS growth for WMT over the past seven years is as follows:

year yoy eps growth

2019 +6.3%

2018 +11.1%

2017 +2.3%

2016 -5.5%

2015 -9.9%

2014 -0.8%

2013 +1.8%.

Note: Like many retailers, WMT’s fiscal year runs from February through January of the following calendar year. So, for example, what I’ve labeled as 2019 is actually 2/19 – 1/20.

What I read from these numbers is that recovery from the financial crisis of 2007-09 didn’t reach the large chunks of America that WMT services until almost eight years after the overall economy bottomed. This coincided with Trump’s election.

Did Trump cause this pickup or is it simply the “trickle down” of recovery to a a part of the country neither major party cared that much about? I don’t see anything in Trump’s past or present performance record to make me think it’s the former.

Hong Kong, ironies and all

The British seized Hong Kong in the mid-nineteenth century if furtherance of its plan to balance its trade accounts by forcing China to buy the opium it was cultivating in India.  When China announced it was not renewing the 99-year lease forced on them by British arms, Parliament vetoed the idea of granting Chinese residents of the colony citizenship.  The reason for the abandonment?   …England was too cold for Hong Kongers to feel comfortable.

Last month, however, Parliament is now responding to China’s effectively ending Hong Kong’s status as a Special Administrative Region 25 years earlier than promised by offering a path to British citizenship to all pre-Handover (July 1, 1997) Hong Kong citizens.

This at the same time Donald Trump is taking the opposite tack, fomenting anti-Chinese prejudice and apparently condoning race violence in Minnesota by quoting ur-racist George Wallace on Twitter.

The circumstances of the reintegration of Hong Kong into China are, strictly speaking, not a US diplomatic problem. The seizure of land and its return to China are an issue between China and the UK. There is a possible US connection, however. Xi may feel that both the White House and 10 Downing Street are occupied at the moment by epic incompetents, whose shelf life must be limited. So there will be no easier time than now to break the handover agreement and meld Hong Kong back into China.

Trump is framing his response to the Beijing move as opposition. In reality his opting to treat Hong Kong just like any other part of China is giving Xi exactly what he wants. Given that Trump has disavowed cooperation with international allies, he may have no choice.

In another irony, China is now discussing joining the Trans-Pacific Partnership. That’s the anti-China influence group created by the US that Trump withdrew us from early in his administration. If so, Trump will have transformed an anti-Beijing coalition into an anti-US one.

I do think the US and China are in a contest for world economic and cultural dominance. China has the advantage of a much larger population. The US has incumbency, global allies grateful for past support, the dollar, its research universities, its worldwide financial system and its dominance in semiconductor manufacturing. It seems to me that the effect so far, if not the intent, of Trump’s making America “great” again has been to blunt the US edge in all these areas without any thought of gain in return.

I think that this is forcing US-based multinationals to consider the possibility that they may not be able to remain both world leaders and American. Arguably, this train of thought runs much deeper in American society, and is the basis of the massive outperformance of NASDAQ over the Russell 2000 over the past several years.

random thoughts on Trump and the military

I grew up in a very conservative area. I joined the Army after I graduated from college, thinking I would make it a career and that it was my duty as a citizen to serve rather than go on to graduate school. I served for 3 years, 7 months, including a year with the 101st Airborne in Vietnam (I signed up for three years but my contract got lost in Washington and wasn’t approved for almost 2/3 of a year). I left as a captain in 1972. I wasn’t a model soldier and the Army of that day had a very strong anti-intellectual bias (nothing as bad as the Marines were, though) so I knew it wasn’t for me.

My first company commander, later killed during his second tour in Vietnam, was a high school dropout from the Midwest who got a GED and went to OCS. His version of “Duty, Honor, Country” was “everyone wants the privilege of command; few want the burden of leadership.” The key to success as a leader, he taught me, is to downplay the former and embrace the latter. Trump’s insistence on public shows of deference and his desire for Stalin-esque military parades show he doesn’t have a clue.

Trump has pardoned a convicted war criminal against the wishes of the Navy, on the one hand, while destroying the career of a Navy captain who wanted to save his aircraft carrier crew from coronavirus deaths, on the other. The captain’s crime? …contradicting Trump’s false assertion that the virus was a hoax. The Seal? …I have a bias: my experience is that no one will testify against a fellow soldier in a combat zone, no matter what he has done. What I find telling is that he was actually convicted of the lesser offense and that the Navy contested the pardon.

Deploying US soldiers against other US citizens is a very fraught enterprise. I was with the 5th Mechanized Infantry at the Democratic Convention in Chicago in 1968. My unit, which spent the week at a nearby navy base, was chock full of Vietnam veterans. We had two main concerns: no one wanted to be killed by a demonstrator after having survived Vietnam; everyone feared the potential consequences of harming a civilian, even if ordered to do so. This is the last kind of operation anyone wants to be involved in. Trump clearly cares about none of this.

Even more troubling, the clear message I hear in the statements of senior military officials is that illegal orders must not be obeyed. Their clear fear is that in an act of political theater Trump will illegally command troops to assault civilians and that junior officers will do so (we’ve seen one instance in the “this is a bible” photo-op already). If form follows true, Trump will lie about what he did in any later investigation. This will have obvious negative consequences for the soldiers involved. But it will also have the larger negative consequence of eroding faith in commanders and in the belief that orders should be obeyed.

the stock market during the pandemic

One of the older academic ways of looking at stocks is the dividend discount model, which starts with the extreme simplification that stocks are a funny kind of bond. This implies that we can determine what a stock is worth by figuring out as best we can what a company will earn in every future period, calculating the present value of each and summing the results.

This works very well in the bond world, where the holder gets periodic pre-determined interest payments + return of principal at the end of the borrowing’s life. Not so great with stocks, as the craziness of the Nifty Fifty era in the early 1970s showed. If we assume, as people did back then, that corporations have close to infinite life, then the present value of even pathetic future earnings becomes a gigantic number.

One thing this approach gets right, though, is that it’s reasonable to think of the value of a stock as its asset value today plus the sum of the yearly amounts we think the company can add to that in the future.

Say a company will grow for the next ten years before starting to fade away. Also let’s say the pandemic wipes out 2020 earnings completely and half the potential growth for 2021–numbers I’ve plucked out of the air …but you have to start somewhere. How much less is the company worth in a pandemic-gripped world than we thought before?

A fast-growing company should be able to repair damage and resume expansion relatively quickly; a slow-growth firm will take longer; a senescent company may not survive.

To make up numbers, the fast grower may be worth 10% less than we thought pre-pandemic, the slow grower 25% less. Avoid the walking dead. And, of course, there are firms like Amazon whose near-term and long-term prospects are enhanced by the present difficulties.

After an initial panic (a typical market first step) that saw prices plunge by almost a third, the stock market has been at work, little by little, evaluating future prospects. In my experience, this is what the stock market does best.

I think we’ve reached a point where the market is looking at slow growers and thinking that their underperformance so far vs. fast growers has left them too cheap. So we’re likely in a phase where investors are picking through the rubble for hidden gems, finding the money to buy them by selling year-to-date winners.

The biggest complicating factor is one equity investors routinely try to avoid: politics. Put to the side Trump’s handling of the economy, which I regard as a disaster of epic proportions in the making. But this isn’t really visible yet. His catastrophic bungling of the coronavirus crisis, which has produced a worst-in-the-world outcome for the US, is. To deflect attention from this failure, he is trying to manufacture a bogus civil rights crisis in 1960s segregationist style.

Is there popular support for the Putin-esque world Trump appears bent on creating? If so, who would want to live in this country? As a citizen, my personal hope is that Trump has gone a step too far through his escalating attack on the integrity of the armed forces.

As an investor, my picture has been of an incompetent administration acting as Trump appears to to me have always done, ineptly but to the disadvantage of those who trust and support him.–and facing an equally inept political opposition determined mostly to defend its own party apparatus. Hence, my belief in gradual capital flight.

Maybe there will be a wider range of possible outcomes as Trump drifts further away from reality. For now though, the only clear idea I have is that economy-sensitives will play catchup for a while, at the expense of pandemic beneficiaries.

reopening rally back on?

That’s what it looks like from yesterday’s price action and today’s futures–both showing the US economy-centric Russell 2000 outperforming the much more international NASDAQ.  The latter, of course, has been the engine driving US stocks for the past 2 1/2 years.

The reason?   Trump continues to do substantial damage to the long-term prospects of the US.  That hasn’t changed.  Nor has the fact that his management incompetence has caused more American deaths that all the wars the US has been in since 1945.  But the performance differential between NASDAQ and the Russell 200 has become so massive that a significant countertrend rally is on the cards.

like a bad movie script…

That stopped in its tracks last week when Trump tweeted segregationist messages urging police to shoot/imprison demonstrators protesting the death of George Floyd at the hands of Minnesota police.  It’s not pretty to see a president eager to incite widespread domestic violence he can call out the army to suppress (something no sane person would want) simply to distract attention from the coronavirus deaths his incompetence is causing.

Suddenly the stock market was back late last week to “capital flight” mode (I’m using this term because, to me, the market has had the feel of Mexico in the early 1980s).

…swiftly tossed into the reject pile

The president basically can’t deploy federal troops into a state without local permission.  And Trump seems to have lost his P. T. Barnum-like persuasive power since wilting during the virus crisis.  Governors appear to have been appalled by his advocacy of violence during a recent conference call.

why is the market rising as this scary story unfolds?

I don’t know.  Nevertheless, this is what’s happening.

No matter what, I think internal market dynamics favor the R2000 over NASDAQ for the moment.

I think ultra-low interest rates favor stocks over fixed income or cash.

Where else would money go  …Japan?  …China?  …the EU?   …the UK?   …emerging markets?  All of these places have substantial warts, either in terms of their economies or their stock markets.  Because of this, the first step in Trump-driven capital flight, I think, would be portfolio concentration in names with global reach, dual listings or the ability to shift domicile away from the US, i.e., a shift away from R2000 and toward NASDAQ.

NASDAQ is now pulling the R2000 up with it.  I also don’t think the current situation would remain stable if Wall Street begins to consider the large damage to long-term economic prospects, to say nothing of civil liberties, were Trump to be reelected.