“Bring on the wall!”
It’s the much-loved catchphrase of a certain perma-tanned gameshow host.
(It’s also Dale Winton’s catchphrase on BBC 1’s ‘Hole in the Wall’. Haha! See what I did there – oh, never mind).
Anyway, Donald Trump’s campaign to demonstrate that he meant absolutely everything he said before he was elected is continuing. And after a brief wobble during the week, markets seem to have decided they’re OK with that.
The Dow Jones has now breached the magic 20,000 mark.
So what’s next?
Dow 20,000 is nonsense, but let’s talk about it anyway
There are millions of “Dow 20,000 doesn’t matter” articles on the internet right now, so I’ll leave you to find them yourself.
It’s one of those wonderful examples of an entirely circular media-invented story. No one cares about Dow 20,000 except junior market reporters. And then, in reaction to their younger colleagues, you get a load of older hands writing articles castigating the world at large for caring about Dow 20,000, when in fact no one outside our little bubble gives a hoot.
Suffice to say, it’s just another number in a peculiarly flawed index.
John Authers in the FT is very good on the details. In short, the Dow Jones Industrial Average index is weighted by share price, not market capitalisation. So when the share price of Goldman Sachs moves, it has roughly eight times the effect of a move in the share price of General Electric ¬– even although GE is about three times the size of Goldman in terms of market cap. Crazy.
However, it does flag up the amount of progress that US shares have made since Trump’s election. And the more sensibly-composed S&P 500 is also at an all-time record. So it’s not just all down to the new fondness for financial stocks.
In short, the “Trump trade” – a bet on the US economy finally reflating and the boom times coming back – is back on.
Is this sustainable? How important is all of this for investors?
Well, let’s try to step back and take a look. I can’t give you a definitive answer (no crystal balls here, sadly). But maybe we can cut through some of the hysteria and dig into what matters.
Firstly, this isn’t all Trump’s doing. The global economy has just endured a banking crisis. It was an uncommonly large banking crisis, but they have happened more than a few times in the past. Given the amount of faith we have in them, banks go bust with surprising regularity.
James Ferguson of the MacroStrategy Partnership, and an occasional contributor to MoneyWeek, has pointed out on several occasions that recoveries from banking crises take a lot longer than your normal recovery.
So the fact that we’ve had slow, miserable growth is not surprising. That’s what happens after you have a banking crisis.
Now, it’s true that people are getting older. It’s true that we still have a lot of debt. It’s true that technology is “disrupting” everything in ways that are hard to get a grip on – one day we all believe that by next year, our electric cars will be dashing out to the shops by themselves on the orders of our sentient fridges; the next we’re staring at our smartphones thinking: “Is this it?”
But my suspicion is that it’s not “different this time”. There is no “secular stagnation”. We haven’t invented everything worth inventing, and now face a long slow decline into obsolescence and an overdue mass extinction event.
Instead, we’re just recovering from the fact that, once again, we pushed our financial system too hard, and it broke.
If that’s true, then Trump is really just riding a wave. What he does now can either hinder or help. But the pathway of the economy is heading for recovery and reflation.
Anyway you look at it, Trump’s policies are inflationary
So let’s assume that’s true, and that we have a backdrop that “wants” to be reflationary. Is Trump going to get in the way of that?
Let’s ignore the hysterics. I don’t like Trump, but the number of Hitler/WWII comparisons I’m seeing on Twitter – and from nominally serious individuals – is astounding. Maybe I’m overly optimistic or my knowledge of history is lacking, but it seems an over-reaction.
Let’s focus on the broad themes and take him, dispassionately, at his word.
Protectionism – broadly speaking – is bad. But it’s reflationary. All else being equal (and it never is), you’ll get slower growth but prices will go up. Stagflation. Not fun. But definitely not deflationary.
Being anti-immigration cuts down the number of people available for work. So that’s inflationary too.
Spending money on stuff like walls is inflationary. Why not dig a hole while you’re at it? Get a moat as well. Really, you can do what you want if you don’t care about how you pay for it. It’s really just the government handing borrowed, taxed or printed money to individuals in exchange for doing something that may or may not be productive or profitable. That’s inflationary.
Cutting taxes? Inflationary.
And god forbid – war? Inflationary.
I think we get the idea. Most of Trump’s policies are inflationary.
For now, that’s good for stocks. And for now, bonds don’t quite believe that Trump can pull it off. And his team keeps talking the dollar down.
But if inflation is what occurs, this equilibrium can’t be sustained for long. My hunch is that stocks will like inflation until ten-year bond yields get above 3%. Then they’ll start to get scared. If it stays there for a bit, they’ll calm down again. When and if we hit 4% – well, by then the US had better be booming or else there’ll be trouble in the markets.
What should you buy, given all this? Well, in the latest issue of MoneyWeek, out tomorrow, our Roundtable experts give their views on what happens next and what you should invest in. I’ll tell you right now, there are a couple of real gems in there that I’ve got my eye on – don’t miss it.
If you’re not already a subscriber, then this is a good issue to start with – if the tips in there come good, you could pay for your subscription pretty damn quickly. Here’s the link to sign up.