Don’t get me wrong – I love my wife. But if she is not the #1 Trump hater in Texas, I have no idea who is. It has gotten to the point where we have had to ban the mention of “He Who Must Not Be Named” in the house, for fear of frightening the kids. And by “kids,” that includes me. But she is not alone. I also have some very loud friends that feel similarly. I thought things were smoothed over after the election – with “no use crying over spilled milk”, “what’s done is done – let it go” and “as citizens, let’s stand by the President.” But no. Trump started off his presidency with what can only be described as two unnecessary (mostly) donkey moves – insisting on the wall and his handling of the seven nation immigration ban, which contributed to earning him the lowest initial approval (and highest disapproval) ratings in history.
His presidency is dividing the nation. Perhaps the country started being divided before Trump came by and he is just a catalyst. All I know is that when traditional tree-huggers start burning things, there may be a bit more going on. This is not your usual Presidency. I can’t remember the last time a somewhat-prominent government official openly defied a Presidential order, and some of our former Presidents were, for lack of a better term, terrible. Trump is mean towards both enemies and allies. All right – maybe it’s just posturing for trade negotiations. But the thing that really surprised me was when he started taking multiple shots at the Terminator for low ratings on the show he “coproduces.” Really? Don’t you have more important things you need to be focused on? Are you mental?!? You look like an ass when you are that petty and you are the President of the United States! I want you to succeed! Help me, help you! But I digress…
What is the point of this? I fear the concern and anger could get worse before it gets better. And for it to get better, we have to assume what Trump does is actually successful. This remains to be seen. Those are some high hurdles. I am cautiously optimistic that Trump can eventually improve many sectors of the economy. But it’s a long road from here to there, and here are the things I think we need to keep a watch for, in case we head towards a negative path:
• Signs of change in the FOMC tone. Last week, I mentioned the FOMC would be concerned. My guess was that they are 75+% Democrat. So this is why I suggested that the hawkish tail at the last meeting should be smaller, all other things being equal. Yellen speaks in 1.5 weeks. It’s unlikely she says anything outrightly negative about the administration. But I will be looking for clues that she may be concerned about the direction the country is going in. Since the Fed rate path is not on a rate formula, there is more to the path of Fed hikes than just the employment rate and inflation rate. Perception will matter as well, and we should factor in the blue (Democratic) lenses through which the Fed looks at the world.
• Signs of change in equities. Then I got to thinking about perception from the markets, and the people who invest. I can see how companies could love him… low taxes, low regulation, cheap repatriation, etc. Well, unless you sell to the government, or work in pharma, or need to hire many immigrants, or rely on trade. That’s not a small number of companies. Then Trump may be a net negative to firms, despite his stimulus. The general trend towards passive investing (away from active managing and towards ETFs) has been contributing to the slow grind higher in equities. It’s not clear what gets this to stop, with everyone just automatically investing their 401(k)s in index funds. Trying to play for an equity dip is like swimming upstream. At least when there was more actively managed money you could get a large dip if everyone (the larger players) thought the same. But if the nation is divided, and Trump keeps driving the wedge into the country, wouldn’t you think some percentage of the haters would start liquidating their equity assets? Just look at the world through their blue-colored lenses. This may be too much to ask from Millennial Joe, who may not even realize he has a 401(k) that keeps investing a portion of his paycheck in S&P ETFs. But certainly if you were about to retire, it could be prudent to reduce if you thought Trump was going to run the country into the ground. If half of a company’s customer base is going to start boycotting their stores & products depending on their political position, that can’t be good. As another example of why this environment may not be good for stocks, take the pharmaceutical industry. From a valuation perspective, I have no idea how their already-high margins are going to hold when high drug prices have been in the headlines, Trump will almost certainly negotiate a better deal for the US government, and universal healthcare is probably going to be reduced (in scope AND benefits). If Ray Dalio thinks Trump could hurt the economy, there’s got to be some selling coming from Bridgewater and some other notable funds. It’s all about narrative, and that can snowball quickly.
• Civil Disorder. Last week, I referenced the game Diplomacy. Another game I liked when I was younger is “Civilization 2” by Sid Meier. As you may have guessed, I love strategy and expected value games, which is why I do what I do. What happens in Civ 2 is that the city basically shuts down when there are enough unhappy people to cause civil unrest. I’m not saying we are close to this now. But my over/under is about three more colossally stupid things before we get widespread civil unrest. Three is a lot. But it can happen in a short amount of time with this President. I’m sure he was dying to “fire” the judges who overturned his immigration ban. But there will be other cases that are no quite so written in stone (protected by the Constitution). For example…
• When is he going to touch entitlements? The thing that concerns me is that he’s (eventually) going to have to put the ban-hammer down on some entitlement programs. I don’t see how he’s going to get the budget to work out (or pass) otherwise. At some point he’s going to propose his tax cuts and stimulus and the fiscal conservatives are going to say, “and how are you going to pay for that?” There’s nothing wrong with cutting spending. But he’s not the smoothest guy we know. The thing with the “needy” is that they get awfully angry when you take away their free food. I’m just hopeful that it doesn’t happen before his approval ratings start going up. But his haters (Democrats) will hate him regardless.
• Can he lose the support in Congress? This would take stupidity of epic proportions, but if anyone is capable of it, Trump is. It goes without saying that a number of larger things he wants to do in terms of the budget and trade would require approval of Congress. Nobody wants a photo op with a 40% approval rating. That’s not how you get re-elected. Oh wait… Trump wants term limits and reduce lobbying (my post-Congressional career path). Why am I supporting this guy again?
This is why I said a few weeks back, “Make sure you have the Trump/cabinet stupidity tail covered. The risk is real and the protection is cheap.” This is still true. I am not saying all of the above will happen. I’m just saying there is a very real tail probability that the markets seem happy to ignore (see low vol). Again, I am very hopeful that things will work out, and that Trump’s “Master Plan” results in something close to the 3.5+% GDP and prosperity he thinks we will get. And actually, if Trump would just focus more on the “important” matters and not be such a donkey, I think he could eventually have some success with some of his policies. It’s just he’s making it more difficult than he should for the majority of people (and Congresspeople) to support him.