how to win in the era of trump
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How to Win in the Era of TrumpRBPI Webinar
February 7, 2017
INVESTORPLACE MEDIA
RB: Well, good afternoon everyone. This is Richard Band, editor of Profitable Investing newsletter, and welcome to the latest in our periodic webinars. Our last was on October 13th, about three and a half months ago, almost four months ago. It turned out to be a timely event. As you know, we were at that time looking forward to the election and its possible impact on the financial markets. At the time I was very much bullish on the stock market, expected a strong year-end rally, and that is in fact what we got, but here we are now close to new all-time highs.
Actually we had an all-time high during the day today for the NASDAQ. The Dow and S&P 500 are both very close to all-time highs as well as we speak, and we have a new president, perhaps one that was not the candidate expected by the majority of pundits back in October when we talked last, but we have Donald J. Trump as our new president, and our topic today is “How to Win in the Era of Trump.” Wow. This has been an amazing three months since the last webinar. We’ve seen a dramatic change in Washington, and it’s going to have some reverberations on our investments, not only in 2017 but undoubtedly for years to come.
So before we get into this presentation, I just want to go over a couple of things with you. As you know, we typically go through one half hour of my presentation in PowerPoint form, and then during the second half we will open it up to your questions. You have sent me a tremendous number of questions as always, and I will get to as many as possible, but I’m going to hold some of them over for the next issue of Profitable Investing. In our March issue I will dedicate a section to Q&A, so we look forward to being able to answer some questions in the issue that we can’t quite reach during the webinar, but we’ll take as many as possible. There will no blog today because we’re doing our webinar, so the next Profitable Investing blog, the Richard’s Journal, will be on Thursday.
Then finally one last housekeeping note. If you do have to bow out of this session before we end at 5:30 Eastern time, you can always catch up with us later. We will provide a link for you to view the slide deck and to also look at the transcript of the remarks as well. There will also be an audio recording available for you. So we’ve got it all covered if you have to leave anytime between now and the end of the webinar.
So let’s jump into our topic, “How to Win in the Era of Donald J. Trump,” and these certainly are unique circumstances that we’re facing in Washington right now. We have the Republican Party in control of the White House and Congress, the Congress very narrowly especially in the United States Senate as we saw today with that 51 to 50 vote on Betsy DeVos as the Secretary of Education, very closely divided in Congress. We have a Republican in the White House, but we also have a great number of Democrats out there who are not necessarily satisfied or pleased with the way the presidential election came out.
The official results say that we had 2.8 million more voters for Hillary Clinton than for Donald Trump. I put a question mark in there because Trump and some scholars actually are questioning whether all of those popular votes cast in favor of Mrs. Clinton were in fact legitimate. However, whatever the outcome of that controversy may be, it certainly appears that a great many people in the country and perhaps almost half are not so happy about the person that is sitting in the White House. So we have a deeply divided country, and perhaps I might say an evenly divided country, an almost evenly divided country. This is something pretty much unprecedented in our history as a nation.
We also have a highly polarizing president who arouses very positive feelings among some people and very negative feelings among others. The result of all of this, the division and the polarization has been what I call a high-speed chase for investors. Investors are chasing after whatever news they can obtain about the intentions of the Trump administration. What policies are going to be put in place? People are placing bets or speculating on how it’s all going to turn out. That’s really what’s been happening in the financial markets, especially the stock market but also the bond market since the election, a high-speed chase as people are trying to get some kind of an insight into where this administration is going to take us.
Before we get into some of the details, and I’ll do that immediately in the next few slides, I just want to underline one thing here. You don’t want to exaggerate the president’s power. This whole matter of what policies the administration is going to carry out here and act into law and then carry out in day-to-day policy, this whole question is going to evolve very gradually. There’s going to be a lot of back-and-forthing in Congress, and when the actual policies are put in place, it’s going to take time for them to be defined and actually executed. So you don’t want to assume that everything Trump says is actually going to be how it turns out. There’s going to be a lot of back-and-forthing in Congress before it’s all over.
That’s important to remember because I can remember eight years ago when Barack Obama was elected. I had some friends, very conservative Republicans who were convinced that Obama was going to push through a far left wing agenda and get his way on every issue. Of course these individuals felt that it was going to destroy the economy and stock market. Nothing of the kind actually happened. Obama accomplished only a limited number of his objectives, and the economy and stock market survived. So we don’t want to exaggerate the power of any president, whether it’s a Republican or a Democrat.
So with that caution or caveat in mind, let’s take a look at what Donald Trump is really like and what we can expect from his policies in terms of their effect upon the financial markets. First of all, I think it’s crucial to understand that Donald Trump is bringing to the White House a unique style as a dealmaker from the business sector. He’s not the typical political dealmaker. Most political dealmakers are backslappers. They are individuals who quickly back off when challenged and are always looking to accommodate as many points of view as possible.
This is not Trump. Bluster and threats are part of his business style. It is the way that he keeps his opponents off balance by constantly attacking, constantly attacking, and I know from some of the letters and messages that you have sent me as subscribers that many people are unsettled by this, by his constant tweeting and the remarks that he makes in the media and sometimes (Laughs) against the media. He tries to keep his opponents off balance, and this is not what we’re used to in our political dialogue.
Now the other side of the coin is that he does want to close the deal. Donald is someone who likes to see negotiations concluded successfully. He wants to make a deal, and he can sometimes back away at the last minute in order to back away on certain points of a negotiation in order to close the deal. He knows that is how you have to negotiate in business, but the risk here is that Trump may overplay his cards, and I think that’s the thing that you and I need to really kind of work through in our minds in the days and weeks to come.
Is Trump actually accomplishing things? Is he actually closing deals with the people in Congress, or is he coming on so strong, overplaying his cards that he actually makes enemies and people refuse to work with him? See that’s kind of the wild card, if you will, in this situation that Trump pushes it too far and people, they find his weaknesses and they start to push back at him.
So with that in mind, among the administration’s proposals, which of these are likely to pass and which are not? Let’s take a look at them briefly and how they are likely to affect our investments. The most likely I would say of all the Trump proposals to be enacted are the first three. The corporate tax reform, the personal tax cuts and the Obamacare overhaul. All of those I would say are likely, better than 50/50 mainly because the Republicans have enough strength in Congress to push these things through.
Now again reverting to something I said at the very beginning of this presentation, you don’t want to exaggerate the president’s power here. Once the corporate tax reform proposals are debated in Congress, once the personal tax cuts are debated in Congress, they’re likely to be watered down compared with the things the president was promising on the campaign trail. The reason I say this is that we’re facing a $500 billion budget deficit even under the existing regimen of taxes. So if the Republican Party wants to cut taxes significantly from here, they’re probably going to have to either accept a much larger deficit or they will have to take back some of those tax cuts in the form of closing loopholes.
So I think what’s going to happen in the end is that we will get some corporate tax reform. The base tax rate will be lowered, but some of the exclusions and some of the little privileges that have been written into the corporate tax law are probably going to be taken away, and the same with the personal tax cuts. They may lower the rate, but then there may be some things, some deductions and exemptions that Congress takes away so that the full impact of the tax cuts will not be quite as significant as would have been implied by Trump’s rhetoric on the campaign trail.
Likewise, with the Obamacare overhaul, there are certain things it’s clear the GOP majority wants to get rid of. For example, the mandate, the individual mandate requiring people to buy health insurance or else pay a penalty, that is probably going to go because a lot of people have chafed at that requirement, but will everything be thrown out? No. I don’t think so at all. In fact, I’m also certain that the provision in Obamacare that prevents insurance companies from denying coverage on the basis of a pre-existing health condition, that’s going to be kept. I don’t see how that’s going to be repealed. So there’s going to be some overhaul, but it won’t be as radical as had been promised during the campaign.
Now what about the big infrastructure spending program? Several readers had asked about that, and I think this is something we’re going to have to watch. I’m giving it 50/50 odds because I think we will get some kind of an infrastructure program. It can be justified on economic grounds, and I think both sides of the aisle want to see some kind of an infrastructure program, but to what extent will it be funded by the federal government and to what extent will it be funded by the private sector through things like tax credits? That remains to be seen, and it may turn out that the infrastructure program isn’t quite as big again as Trump had promised on the campaign trail.
In that event that the program turns out to be a little smaller than they were talking about, I wouldn’t be surprised to see some of these infrastructure stocks coming back down. They’ve had a big rally since Election Day. They might come back down, and I’d be interested in buying some of them. So to answer a subscriber’s question ahead of time, right now I’m not buying much in the way of infrastructure stocks.
We own a couple in our model portfolio like United Technologies and Siemens, two big infrastructure companies, but those stocks are both high, and I wouldn’t be interested in buying them just yet. I might be interested in buying them if they came back down a little, and they probably would come back down if the infrastructure program is scaled back from the initial one trillion or whatever else they’ve been talking about.
The next bullet is the one that I’m most concerned about, the possibility of trade-busting tariffs. I’m only putting a one in four odds on this outcome, but I am a little concerned with some of the rhetoric coming out of the White House and from some of the president’s advisors. If he picks a fight with too many of our trading partners, we could find that other countries impose tariffs much like this border adjustment tax that they’re talking about in Congress right now.
It sounds like a great thing. Put in a border adjustment tax, in other words a tariff on imports, and that will help our trade deficit and more people will buy American presumably. May be. Maybe it sounds great in theory except when you consider that other countries may very well do the same thing; raise tariffs on the things that we are trying to sell to them. So this tariff idea could easily backfire, and it’s something we need to watch very carefully, because a trade war is something that would be taken quite unfavorably by the stock market.
You just have to read about the Smoot-Hawley tariff of 1930. Go back and Google that one. Read about it, the Smoot-Hawley tariff of 1930 and what it did to world trade after the stock market crash in 1929. It basically sealed the doom of the global economy and thrust us into the Great Depression. So you’ve got to be careful about this. I will be watching that with an eagle eye to see whether the president backs off a little here, whether he is really a dealmaker or is he overplaying his cards. That will be critical for us as we go forward. We should know pretty well I would think in the next two to three months how far he’s going to go with this thing.
Then finally, sad to say, with all this talk about cutting taxes and spending more on infrastructure, I think the balanced budget is out. I think it’s extremely unlikely. That isn’t necessarily a disaster for 2017. We can probably get by with a somewhat bigger deficit than we have right now, but looking out into the 2020s during the time when many of us baby boomers will be (Laughs) either in retirement or thinking about retirement, these extremely unbalanced budgets, the huge deficit spending, the excessive borrowing all do not bode well for the value of the dollar a decade out.