by / Thursday, 13 April 2017

It is both interesting and disgusting that a business (any business) can intentionally screw up (routinely booking too many passengers as a course of business) and then hold their customers responsible for that screw up. United Airlines must win the prize this year for the most reprehensible corporate policy for dealing with the people who pay their bills. But they also get this year’s most creative euphemism award for using the word “reaccommodate” to describe what was essentially a “knockdown, drag out” of a paying passenger who refused to kowtow to their demands.

President Trump has had one of the more interesting first three months in office that we can recollect, even with a Republican majority in the House and the Senate. Of course, it is worth remembering that the Republican Party basically disowned Donald Trump WHILE he was campaigning to be president. So, having a Republican majority in Congress doesn’t necessarily translate into smooth sailing for a president who is neither Democrat nor Republican.

Trump discovered that concept fairly quickly when the attempt to repeal Obamacare didn’t even make it far enough to get rejected by the Senate. Oops! Bad start. Thought reforming health care might be less complicated than that.

Tax reform, the next item on Trump’s to-do list, is not going to be much easier. The biggest hang-up with tax reform is the seemingly impossible task of making it “revenue neutral,” which would be required for Republicans to be able to push the bill through the Senate via budget reconciliation.

To get around the revenue neutral requirement, Republicans have two options:

  1. Work with Democrats to make the tax cuts permanent by achieving a bipartisan agreement

  2. Enact cuts with an expiration date (i.e. the sunset provisions used with the Bush tax cuts of 2001 and 2003.)

We think achieving revenue neutrality is not very likely. And, although we think Trump could work with the Democrats, we highly doubt a bipartisan tax plan would work for Trump like it did for Ronald Reagan in the early 80s. Our guess is that they will opt for door #2 above.

Trump’s election represented a giant shift in the American idea about its place in the world. Nationalism and the idea of “America First” were key factors in the election, particularly in the battleground states between the coasts. The notion that we should no longer meddle in the affairs of other countries struck a chord with many voters.

And Trump stuck to that rhetoric… until last week when he ordered the attack on a Syrian air base. The video footage of the Assad regime’s abhorrent use of chemical weapons on its citizens proved too much to ignore. We are not surprised that the President has changed his mind… he has shown that he is apt to do that. What is unclear is what further involvement the U.S. will have in Syria and elsewhere, and what implication that may have for economic policy.

However, it had to be somewhat gratifying to President Trump when he finally discovered a presidential action that didn’t need approval from Congress.

Repeal Obamacare? You need approval from Congress.
Tax Reform? You need approval from Congress.
Supreme Court nominee? Ditto.

Bombing Syria?

No House approval needed.
No Senate filibuster.
No nothing.

That had to feel like it was almost too easy.

And to top it off, he was able to orchestrate this attack while Xi Jingping, President of the People’s Republic of China, happened to be visiting. Let’s face it, chest thumping is not nearly as gratifying when there are no witnesses.

The U.S. and China are the two largest economies in the world so the outcome of this meeting could set the tone for the global economy. Trump was very critical of the Chinese during his campaign, threatening to label them a currency manipulator and even challenging the “One China” notion by first speaking directly with Taiwan’s leaders almost immediately after his victory.

China needs U.S. consumers to purchase its low-cost goods and fuel its economy, and American consumers benefit from buying those goods on the cheap. The notion that those goods could be produced in the U.S. has several pitfalls, another topic for discussion.

If it comes to a trade war, China would be hurt worse than the U.S., but the U.S. working class would be impacted. The U.S. certainly holds the upper hand in any negotiation, but the two countries are still co-dependent.

Some believe China has bargaining power by owning all our debt… well they don’t. As of October 2016, Japan is the largest holder of outstanding U.S. Treasury bonds (if you ignore the Federal Reserve). Any leverage China has by holding U.S. bonds is minimal.

The “Trump Effect” on investments seems to have run its course… at least temporarily. As we noted in our December Investment Commentary (Strangest Election Ever), bonds got crushed after the election due to investor expectations of improved economic growth and higher interest rates.

We said then:

We repeat – the president of the United States gets way too much blame when things are bad and way too much credit when things are good. There are much larger global economic forces at work. I said the exact same thing four years ago in the November 2012 Investment Commentary, Fiscal Mudslide.

The Trump victory did not erase $19 trillion in debt. It’s still there. We still owe it. It is still an enormous number that more than likely will hinder growth. Combine that with the massive debts owed by other major developed nations, and robust global economic growth just seems to be an ambitious notion.

The 30-year U.S. Treasury Bond fell in price so much that one month ago at had a yield of 3.21%, up from 2.6% the day before the election. As of this writing, it is back down to 2.89%, a significant indication that growth may be less immediate than previously thought.

In last month’s commentary (Happy Anniversary to a Raging Bull Market), we included a graph illustrating how quiet the stock market has been. The graph indicated that the Volatility Index (VIX) was very low (Enya).

We believe that volatility may pick up within the coming months… particularly as it becomes clear that Congress will be heading into the August recess without a meaningful tax plan. However, our investment mandate is not to time the market. We continue to be invested for the long term with a focus on downside risk (our large allocation to gold and our cash buffer afford the portfolio some protection). As volatility picks up, we may use it as an opportunity to begin hedging the portfolio.