HindeSight Letters | The beauty of me is that I’m very rich
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The beauty of me is that I’m very rich

donald-trump-hindesight-dec-2016

Long-term readers will have heard my big number maths before, back in 2012. At the time it was in reference to the extraordinary cost of the London Olympics and G4S’s contract for security at the games.

A million seconds is 11 days, a billion seconds is 32 years and a trillion seconds is 32,000 years.

Since Donald Trump’s unexpected election in the United States, there has been an ‘announcement’ of a U$1 trillion infrastructure program, which will include rebuilding roads, rails, shipyards, you name it, in order to ‘Make America great again’!

The immediate effects in the marketplace have been truly astounding, especially since the most important thing about any announcement is realising that you don’t really need to have a plan to show anyone straight away. Any stock that is connected with rebuilding – whether it be concrete, copper, or something more random – has seen spectacular gains.

hindesight-dec-2016-graph

Nobody can argue that the US needs to upgrade their infrastructure. Any first-time visiting foreigner, from Europe or Asia, will be particularly surprised at the crumbling, archaic state of the transport system, which obviously dates from the 1960s and 1970s, at best, compared to the modern feel of most transit hubs in the rest of the world. The surprise is why it hasn’t taken place sooner. Standard Keynesian economics would suggest that the government should have embarked on a program after the 2008 financial crisis, rather than leave all the work in ‘re-igniting’ the economy to the huge money printing policies of the world’s central banks.

While the stocks boosted by Trumpanomics enjoy their moment in the sun, embarking on an infrastructure program when the unemployment rate is back to its lowest level in 10 years has rattled inflation concerns and, as a result, the world’s bond markets have taken a huge bath. The Bloomberg Barclays Multiverse Index has lost $3.5 trillion in market value in a month. Big numbers again!

The utopian belief in the common good of government infrastructure spending is widespread but, unfortunately, the real world doesn’t seem to agree. While it may create jobs (obviously not necessary at this economic juncture), one thing it definitely does do is add to the debt load of countries.

As most countries are struggling to restrain their Debt-to-GDP ratios with their ageing populations, adding an infrastructure program is going to blow these even higher. Donald Trump’s team have clearly not studied the ineffectiveness of these programs in Japan over the last decade or seen the roads to nowhere in Europe, especially in Spain. A part of the ‘plan’ is the financing of these activities from corporate tax breaks and public-private enterprises. With the level of actual tax paid by businesses at minuscule levels relative to GDP, we can laugh quietly at this as well.

Of course, one of the best ways to reduce the level of debt is to inflate your way out and make those debts worth a lot less in real terms. Trump favours issuing 50-100 year bonds, probably for this very reason. It is much easier to inflate away these than the current bond market of 5.8 years average duration.

We are left with the conclusion that ‘The Donald’ is going to give us plenty to talk about in the financial markets for the foreseeable future, but we should learn that his announcements, whether they are ‘Tweeted’ or contained in actual interviews, should be taken with the understanding that was the way the wind was blowing that particular day. The US will not spend $1 trillion on infrastructure in his presidency any more than our own UK government will spend £500 billion. It will be watered down and argued against, as we worry about the national debts again, and then no doubt forgotten altogether.

Human nature is tremendously fickle, swinging between pessimism and optimism at the stroke of a hat. The election of a previously thought ‘unelectable loose cannon’ saw the stock market down 5% on the morning of the result, and then rise to an all-time high within a month. In time, I fear that the original pessimism about a Trump victory will come home to roost big time, and while there will be huge financial worries, these may not be our biggest worry.

While we fear that the tumultuous events of Brexit and Trump which defined 2016 will produce great challenges in future, we look forward in the short term to the holiday season and wish all our readers a Merry Christmas and Happy New Year.

 

 

 

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