A Trump White House - DMG Diversified Portfolio
Like him or loathe him, Donald Trump is shaping up to be a serious contender for the White House. He was dismissed when he first entered the Republican nomination race. He was dismissed when he was put up against an all-star cast of Republican hopefuls in the primaries. He was dismissed when he became the leading contender and the target of as much vitriol from his Republican colleagues as he was from his Democrat opponents. Media, political commentators, the body politic at large, it seems no one has been prepared to take Donald Trump seriously apart from the people that matter – the voters. Well I’m taking Trump seriously now – very seriously.
Trump has survived where others would not
It seems no-one has been prepared to put together some thoughts on what a Trump White House would look like simply because at each step along the way observers have constantly believed the American public would come to its senses and the comedic show would be put to an end. Well, it hasn’t. If there’s one thing you need to give Donald Trump credit for it’s an ear to what mainstream America is actually thinking (but political correctness is refraining them from saying) and an uncanny ability to deflect criticism. Such criticism would have put an end to the career of any other mere mortal politician but Trump has somehow been able to turn this criticism into a very effective attack weapon. This is superhero sort of stuff for a politician (irrespective of what side of political divide they hail from). That is why I’m treating a Trump White House as a very real possibility for our portfolios to grapple with come November.
We don’t usually place too much reliance on Politics.
Traditionally, I’m reticent to consider politics as a key determinant of portfolio outcomes. We’ve all seen political issues come and go in recent years – Iran, North Korea, Syria, the South China Sea, Brexit. Most have had but a fleeting impact on overall portfolio performance. Perhaps the biggest single political issue that has had true (enduring) portfolio consequences of late has been the on-off saga in Greece. But even then, this has had more to do with the economics of the situation than with the politics. Dare I say it, Trump is different. A Trump White House has a very real possibility of making a political outcome instrumental in determining longer term portfolio performance.
With Trump, things are different
Why? To answer this question you need to form a view of what would a Trump White House actually look like (and no I don’t mean some crass marbled facade entry, neon lit building that resembles his Taj Mahal casino in Atlantic City). To start with, one would think Trump would be pro-business and that ultimately this would be good for markets. On the surface ‘yes’ as Republican governments have always been good at cutting red-tape and taxes (in the hope of promoting a more entrepreneurial culture). But they have also been lousy in cutting expenditure to match. The result? A blow-out in the budget deficit – and yes, Trump has form here in the sense that he has been bankrupt no less than 4 times. A casual observation of US bond yields when Republicans were in office since the 1970s reveals an average 10 year Treasury yield 114 basis points higher than when the Democrats were in office.
And it is here that the rubber hits the road in terms of portfolio outcomes. The last thing an over-extended US equity market needs right now is rapidly rising long term bond yields. Doing so would in essence constitute an outgoing tide revealing just who isn’t wearing any bathers in the US corporate landscape – not a pleasant thought when a 69 year old Donald Trump is involved. It is for this reason that we need to carefully consider our portfolio positioning should Trump come to win the Oval Office on the 8th of November this year.
Investor sentiment is already fragile
We are already at the late stages of the investment cycle and as the recent display of just how fragile investor sentiment can be these days, it would not take much to tip us over the edge into another (perhaps more meaningful) global market correction. An unstable populist policy agenda with negative budgetary implications emanating out of the White House would not constitute a comforting backdrop for markets. It is for this reason what we would need to consider carefully not only our exposure to duration but risk assets in general should Donald Trump succeed in his ambition and win the US Presidential race. True, a US President Trump may not be the catalyst for the next market ‘event’ but it is highly unlikely that it would be supportive of a more stable environment either.
Finally, there is one bright spot in terms of a ‘President Trump’ outcome – coming to grips with a more adversarial l Russia and China. On first blush one would think that a hard-liner like Putin would run rings around Trump. However, harking back to older (and even colder) cold war days it needs to be remembered that during the early 1970s President Nixon had the CIA try to convince the Russians he was insane so that they’d think he would launch a retaliatory nuclear strike (even though it was no longer in his best interest to do so as there was less inhabitable earth to go around). Similarly, the Soviet KGB leaked fabricated medical reports as to Brezhnev’s senility with the same end in mind. It seems that when it comes to nuclear weapons having a cool, level-headed commander-in-chief in charge is somewhat of a drawback once the game theoretics of the situation are considered. An unpredictable Trump in the White House could be just what the Americans need to curtail Sino-Russian ambitions at this stage. Chilling stuff isn’t it?
By Bart Dowling, Portfolio Manager, DMG Diversified Portfolio.
This is a portfolio for clients of DMG Financial Planning.