“There you go, again.”

Ronald Reagan

The United States of America, the most powerful nation in the history of the world, is about to embark on unprecedented experiment. Led by a man who exhibits all the signs of narcissistic personality disorder, the USA will disrupt an established order on geo political, societal, and economic levels that has been in place since the end of World War II. This will be Brexit on steroids. The only issue is the degree to which this will occur. But, make no mistake, in some shape, manner or form occur it will.

For many investment professionals, who, due to their adherence to their learned methodologies, can’t see past the end of their Discounted Cash Flow (DCF) model noses, will embrace anything that drives up the downstream inputs into the DCF model: earnings, growth of earnings and a discount factor, a fact that last week’s initial equity markets’ celebration demonstrated quite clearly (see page 4). And who can blame them? Two of the three inputs – earnings and growth of earnings – are about to receive a nice boost from trickle-down 2.0. If there was a financial market related cause to pause, however, it would be the rapid rise in long term interest rates last week. Having gotten the economic story far more right than wrong over the past several decades, respecting the message of the market means respecting the message of the fixed income market as well. But, exactly what message is it sending?

The initial knee-jerk interpretation of the bond market’s rate surge is trickle-down 2.0 will be an increase in economic activity thereby warranting a greater asset allocation into risk assets. Normalization of interest rates becomes the logical outcome. And, normalization of interest rates is not just good it is vitally necessary for when (not if) a recession comes along monetary policy needs to be an available lever that can be pulled to counter act the depressionary effects of an economic downturn. For it takes approximately 4% to make it so. However, a 4% Fed funds rate is a damn sight higher than where rates stand today.

Another initial knee-jerk interpretation of last week’s bond market’s rate surge is that inflation is headed the USA’s way. Higher inflation means higher interest rates. But that is not set in stone as the stimulus-induced inflationary forces of trickle-down 2.0 will collide with the deflationary thematic forces of globalization and innovation. Then there is a looming trade war should Mr. Trump’s campaign rhetoric become a reality. A trade war in whatever form (e.g. tariffs) and to whatever degree is depressionary on economic activity and corporate profitability. Speaking of inflation, the specter of stagflation cannot be ignored. Rising domestic inflationary forces coupled with stagnant wage and earnings growth due to the complex push/pull of all the above-noted factors makes for much careful monitoring, analysis and more analysis.

Investment Strategy Implications

Trickle-down economics 2.0 is the perfect book end to the grand experiment of 36 years ago. We know it will have a short term stimulative effect. Fiscal spending coupled with tax cuts does that. The question is whether it will have a sustainable and positive effect on the US economy – an economy that is substantially different from the one we had in 1980. For it to be successful it starts with the man who said he and only he alone could solve America’s problems. We shall see.

One final comment that will likely be visited upon Mr. Trump in the coming weeks and months: when you raise expectations by over-promising you run the risk of not meeting expectations. And that leads to all sorts of problems with those who are disappointed. Better to under promise and over deliver. But that’s not what we have, is it?

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