Let’s face it, it’s a whole new world under President Trump and we need to know how to invest under a new world order of President Trump. Since the election, domestic stocks have been on a tear. Unfortunately, it has not been such a good experience for the other asset classes such as gold, real estate, international equities and especially bonds, which have been taken out to the woodshed and beaten to a pulp. So clearly a change in strategy is necessary.
Now that it’s official, President Trump is in office and we really have a new world order! Trump ran on the change from running the economy based on “monetary policy,” which was what the soon-to-be former President Obama based the economy on, to one of “fiscal policy”, much like Ronald Reagan did. Although both are used to pursue policies of higher economic growth and controlling inflation, they are far apart from each other.
Let me explain the difference between Monetary and Fiscal policy and how this is going to affect you and me:
Monetary policy is controlled and operated by the Central Bank or what we call ‘The Fed’. However, it is not one bank. It is a group of the 12 bank governors of the 12 Federal Reserve Bank districts. The group’s official name is the Federal Reserve Board of Governors, or the Federal Reserve System. It was created by an Act of Congress in 1913.
The Fed is a financial institution that works independently from the executive or judicial branches of government and its powers are derived directly from Congress. Alexander Hamilton was the first secretary of the Treasury in 1780 and from what I hear, he couldn’t sing or dance nearly as good as Lin-Manuel Miranda, the star of the new hit Broadway musical. Although, I hear he was quite the lady’s man and he did understand money.
The primary function of the Fed is adjusting interest rates and influencing the nation’s money supply.
For example: The Fed may have an inflation target of 2%, as they say they do now. If they feel inflation is going to go above the inflation target due to strong economic growth, then they will increase interest rates. Higher interest rates increase borrowing costs and reduce consumer spending and investment, leading to lower demand and therefore lower inflation. If the economy went into recession, the Central Bank would do the opposite and cut interest rates.
Fiscal policy is carried out by the government and involves changing tax rates and levels of government spending to influence aggregate demand in the economy.
Under fiscal policy, to increase demand and economic growth, the government would cut taxes and increase spending. This of course will lead to a higher budget deficit. However, they would argue that increased economic growth will also generate higher taxes. To reduce demand and lower inflation, the government would increase tax rates and cut spending.
How will this affect the US Economy and how I invest?
The fiscal stimulus under Ben Bernanke, aka, Quantitative Easing 1-4, created a huge boom for our economy, which continued under Janet Yellen. Donald Trump essentially handed us QE 5 through his proposed $1 trillion infrastructure budget. Just like the QE programs before them, this will throw a lot of money into the economy.
Pouring this much money on the economy will certainly raise GDP growth for the short- term. However, it will also bring upon a much earlier return of inflation and higher interest rates. It will also likely keep the boom and bust cycle intact, with the next crash in a few years.
The new “fiscal” policy certainly has everybody excited, but what impact will it have on the economy and financial market’s? Of course, we will benefit lower taxes and regulation. For the most part, investing in the next few years will be very different from the last few years, so put a plan in place to Trump up your portfolio!
Select sectors of the stock market should do well under the new fiscal policy, but not all so be very diligent how you build your portfolio. With interest rates set to rise and inflation to pick up, treasury bonds are out. That creates a huge challenge for investors to have a portfolio that participates when the market goes up but doesn’t get killed when it goes down. Work closely with your retirement advisor to make sure you are positioned correctly to get the best returns with the least risk possible.
I continue to be concerned with the serious demographic challenges that lie ahead. The 90 million baby-boomers are now past their spending years and the 65 million Generation X-ers can’t possibly create the same purchasing power. It’s not until the 85 million echo-boomers (the kids of the baby boomers), hit their peak spending stride in 2023 will things truly turn around.
I applaud Trump’s plan to spend money, but we have seen this strategy before with Japan. I devote a whole chapter to Japan’s tireless effort to revive their economy in my new book: Surfing the Retirement Tsunami – Your guide to staying afloat and retiring comfortably.
Japan has tried a combination of fiscal and monetary policy for 25 years to no avail. The bottom line is that an economy simply needs more consumers for it to grow. This is something that none of the developed countries will have for at least the next 5-7 years. Luckily, we have much better demographics than Japan.
President Trump’s economic vision calls for deep tax cuts for businesses and individuals and at least $1 trillion in new spending to rebuild roads, bridges and any other of America’s crumbling infrastructure. Many people are calling this Reagan 2.0. Obviously, this will result in higher debt and budget deficits, though the new President insists that increased economic growth will pay for all of this.
The problem comes down to the country’s debt problem. When Reagan took over, the U.S. debt was a fraction of what it is today. As bond guru’s Hoisington Management wrote in their post-election update:
The economy is extremely over-indebted, turning even more so this year. In the latest statistical year, debt of the four main domestic non-financial sectors increased by $2.2 trillion while GDP gained only $450 billion. Debt of these four sectors (household, business, Federal and state/local) surged to a new high relative to GDP. This will serve as a restraint on growth for years to come. Also, the economy is in an expansion that is 6 1/2 years old. This means that pent-up demand for virtually all big ticket items is exhausted – apartments, single family homes, new vehicles and plant and equipment. Rents are falling as a result of a massive apartment construction boom. Reflecting a huge stock of new vehicles and significant easing of credit standards, the auto market appears saturated. Vehicle sales for the first ten months of this year have fallen slightly below last year’s sales pace. New and used car prices are down 1.2% over the past year. The residential housing market appears to have topped out even before the sharp recent advance in mortgage yields, which will place downward pressure on this market.
Even if the new policy is successful, it will take several years to see and feel the impact. Hopefully, we can get stocks to go higher in anticipation of future growth, but with rates staying low because we are still in a slow growth deflationary environment until 2023.
Most importantly, every portfolio should be tactically hands-on managed, never buy and hold, or what I like to call buy-and-hope. Be sure your retirement advisor/portfolio manager is using all 6 asset classes: stocks, bonds, commodities (including gold), real estate, international and cash, not just one or two. This is the way to achieve your objectives and to get the best returns with the least risk possible.
Trump up your portfolio!
Successful investing starts with proper planning and working with a retirement advisor who can help you create a customized retirement master plan and adjust your portfolio to take advantage of a Trump presidency.
As always, please feel free to contact me.