…only in the US.

Brexit

In June 2016, the UK held a vote on the question of whether it it should leave the European Union.

EU membership also gave the UK enormous economic advantages. For one thing, its domestic firms could extend their reach into continental Europe worrying about tariffs or delays getting through customs. The UK was also the preferred destination for foreign firms desiring to enter the EU market. Three reasons: its legal system is clear and its rules well-understood (because of this, London is a major financial hub); its language is English, the first foreign language most international businesspeople will learn; and opening a plant there gave access not only to the 65 million or so locals but also to the quarter of a billion people elsewhere in the EU.

Not everyone in the UK was thrilled. The major irritants about the EU in UK citizens’ minds, as I see it, were that the UK wasn’t in charge and that membership meant dissolving member countries’ borders–allowing citizens of anywhere in the EU, including migrant/seasonal workers, free access to each member’s domestic economy.

Discontent was vocal enough that, in a put-up-or-shut-up move, in June 2016, the UK held a vote on the question of whether it it should leave the European Union. The country voted to leave.

The result has been what one would easily have predicted. The foreign multinationals moved to other locations so they could stay inside the EU. The art market moved to Paris. Continental European banks, despite their clunkiness, continue to take corporate business from their UK counterparts. Public companies have established listings elsewhere. The trend growth in UK GDP has shrunk from around +2% yearly to close to zero.

The pro-Brexit vote was, I would imagine, emotionally satisfying for many. But it has been an economic disaster for those voters, as well as for their children and generations to come.

Trumponomics

Looking through a slightly different lens, what the UK did back then was twofold–it expelled foreign workers and it restored the trade barriers (i.e., tariffs) with the rest of the EU.

This is what Trump says he wants to do.

He says he’s also intending to neuter the Federal Reserve and replace it with the Republican monetary strategy of the 1970s, meaning interest rates controlled by the executive and Congress. I lived through the aftermath of the ensuing economic trainwreck in my early years as a securities analyst–runaway inflation, Treasury yields at 20%, short-term rates at 26%.

you and me

It’s unclear how much of his agenda Trump will actually attempt to fulfill. Last time around, he promised to upgrade the country’s decrepit infrastructure–but did nothing.

The trick for us as investors is what it always is–find stocks that will produce relative (and absolute) gains, no matter what the economic circumstances. The first step in this process, I think, is to understand what the general economic environment will be.

I’m surprised both that Trump won the election and that he, and Republicans in general, did it so handily.

As a professional investor, the most important issue, I think, is not what I might want/like to happen but what I think will happen given the factual economic circumstances.

What jumps out to me in financial market so far is that Russian stocks are up sharply. As far as the domestic market is concerned the two big winning indices so far are the Dow and the Russell 2000. The latter is filled with smaller companies whose main focus is on domestic revenues and earnings. The former is a mish-mash of aging stalwarts from a half-century ago, with newer blood injected by the index’s owner, S&P. It too has a more significant focus than the S&P 500 on mature, US-centric companies.

Put a different way, it’s the US multinationals, who have a global focus rather than a concentration of domestic assets and earnings, that are lagging.

Cryptocurrencies are up a lot, too, as is TSLA, presumably a result of the strong influence Elon Musk et al are expected to have over the incoming administration.

A key issue is how much of the economic agenda Trump espoused on the campaign trail will be enacted. The three big ones that I see are: tariffs, tax cuts and deportation of foreign-born workers. The first and last will in all likelihood depress economic growth. Extension of the tax cuts for the wealthy enacted during Trump’s first term will likely make the federal budget deficit worse–and give more impetus to the world’s desire to find an alternative to the dollar as the basis of global finance.

The question for us as stock market investors is what companies will prosper in this environment.

More tomorrow.

I’ve been travelling and am just getting to my Keeping Score page. Not much to report, though–a slightly down month, with no obvious (to me, anyway) patterns.

I did a small fudge to get to the month-end figures–subtracting the month-to-date (i.e., through yesterday) figures from the quarter-to-date to get October. Shouldn’t make any difference, though.

I was cleaning up my desk the other day and came across a 2019 synopsis of the work of French philosopher and social theorist, Jean Baudrillard, that I’d printed from the Stanford Encyclopedia of Philosophy (an excellent source, something like Cliff notes on steroids). I read it again.

Baudrillard was an idiosyncratic thinker on the fringe of the large group of post-WWII continental European intellectuals who had lived in the heart of that conflict and who struggled with the question of how the center, and most advanced area, of the intellectual universe, i.e., continental Europe, could have spawned something as evil as the Nazi movement, with its notions of white supremacy, world conquest, and death camps as the means to eradicate “inferior” races. Even worse, it was the US, a land of uncultured babes in the woods, who effected their rescue.

It was in the US, though, that Baudrillard thought he saw the essence of what went so badly wrong in Europe. Disneyland. Not just the fact of the theme park, but that the media-created fantasy of Disneyland is, in his view, more real for most Americans than the actuality of things in the US. No need to visit the historic sites of America’s past, go to Frontierland instead. No need to see the length and breadth of California when there’s the California Experience, that’s all in one place and contains the essence of the Golden State.

More broadly stated, the media-created cultural fantasy of what the US is, according to Baudrillard more real for most people than actual country itself. And most Americans live cognitively in the fantasy rather than in the real world.

I’m writing about this because it strikes me that Trump World is a very similar fantasy construct.

The real Trump is the aging personality with weird hair who played the the role of a successful businessman on TV reality show, who now paints himself orange every day, and who seems to be in serious cognitive decline. A recent public apology from one of the show’s creators indicates that Trump was the only business person down on his luck enough to take the reality show job.

The Disneyland version of Trump is of a savvy, successful, glamorous, wealthy entrepreneur, however, not the creator of a litany of failed businesses ranging from Trump University to Trump Steaks, who has also been convicted of cooking the company books.

One might argue that there isn’t much difference between choosing Disneyland over a drive down the California coast vs. voting for an empty shell portraying itself as a successful businessman. I don’t think that’s right, however. Trump has a social and economic agenda that reads like a compendium of the worst economic and social mistakes the US has made since the end of the Civil War.

I happened to be listening to a photography YouTube this morning and noticed one by the economist Robert Reich nearby. The latter was an account of Donald Trump’s varied business ventures, from Trump Steaks to Trump Mortgage (which apparently opened its doors just as the domestic housing market was beginning its epic, multi-year collapse in 2007) to the “fraudulent” Trump University, the failed New Jersey casinos…–a staggering tale of business ignorance, ineptitude and, in my view, cruelty during a long period in which commerce in the US was generally booming. The Reich piece closed with the observation that had Trump simply put the money he inherited into an S&P index fund he would have far more than he does today.

Concerning as this may strike one, I’m not sure that the fact that Trump has so often been the dumb money is the country’s #1 worry. Rather, I think, it’s this singular lack of business acumen coupled with Trump’s fanboy attachment to white supremacists, Vladimir Putin, and industrialists backing him who need government influence to keep their empires from imploding.

Trump also appears to be in steep cognitive decline (the litany of his business failures suggests his marble bag was never brimming over), so J D Vance, someone we know little about other than his clear willingness to throw his constituents in Springfield, Ohio, under the bus for personal gain, may end up being the actual chief executive.

In other words, a big mess.

How do we protect ourselves from the considerable harm to the country that this duo appears to have in store for us?

I haven’t made up my mind, but taking off my hat as a human being and putting on my investing hat…

…if Trump is elected and is able to push his agenda–tariffs + tax cuts for his wealthy backers–through Congress, the immediate result will be a significant economic slowdown in the US. If he were successful in the (economically crazy) agenda of deporting non-citizen workers, the slump will be deeper.

…I think all this would trigger a significant rise in interest rates, as foreigners began to worry about the safety of Treasury bonds, making the economic situation worse. That would likely be accentuated to some degree by a fall in the dollar, as investors began to seek safer havens. Probably great for cryptocurrencies, as well as for Xi and Putin. For Americans other than export-oriented manufacturers, though, this would be the worst of all possible worlds.

None of this is the stuff bull markets are made of. At some point, export-oriented firms might become very interesting. On the other hand, electing a Hitler-wannabe doesn’t exactly burnish the “made in America” brand. So components might be the thing.

more tomorrow