Global Market Commentary

November 17, 2016

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Market Summary
 
Here is a further summary of what we see to be the likely effects of Trump’s victory.

          Banks and Financials

Banks and financials will be helped.  The Dodd-Frank Act will not be entirely wiped out, but it will be moderated.  As written, it is a one-size-fits-all act, and it hugely penalizes regional and local banks — many of which have gone bankrupt during the last few years.  Dodd-Frank does not consider that small banks cannot afford or handle the regulatory and administrative costs that the Act places on them.  The new Congress will likely pass a new banking act that exempts smaller community and regional banks from some onerous and costly regulations, and will allow them to increase profits and in some cases stay in business when under the current regime they would have failed.  Such reforms would be positive for local and regional banks.  The head of the House Financial Services Committee, Jeb Hensarling, will offer his Financial Choice Act, which will rescue small banks and could pass within a few months.  Insurance companies and banks will be helped by higher interest rates.

          Bonds

Bonds, however, will be hurt by the very same thing that will help banks and insurance.  Strong economic growth, higher inflation (moving to about 3% in 2017), and greater concern that interest rates can rise even further in the future, will put an end to the bond market rally that has lasted over three decades and reached its end a few months ago.  We remain very concerned that our readers avoid the trap of buying bonds, and suggest that readers try to lock in fixed-rate mortgages at current low prices.  Variable rate mortgages will see increases in interest rates.

          Coal and Steel

China will decrease coal production and will thus allow Chinese coal companies to stop flooding the world market with coal.  By doing so, China will improve the profitability of their economy.  They will have many fewer non-performing loans to the coal industry.  Steel production requires coal and iron ore.  While China has a great deal of coal and is self-sufficient, they import 85% of their iron ore.  Steel makers with captive iron-ore supplies will be in a position to make much more money on steel than they have for years.  Mr. Trump proposes to spend $1 trillion on infrastructure in 10 years; in the last 10 years, China has spent $11 trillion on infrastructure.  China must continue to make more infrastructure investments for another 20 years or more to meet the requirements of growing and developing second- and third-tier cities away from the more highly developed coastal regions.

Demand for steel will continue with impetus from both China and the U.S.  The world steel industry will be able to make money on steel.

          Industrial Companies

Industrials that create infrastructure and other useful industrial equipment to rebuild the world infrastructure — machine tools, building products such as heating cooling equipment and plumbing, trucking, rails, pipelines, and many other infrastructure goods — will benefit.

          Medical, Healthcare, Biotech, and Drugs

Honorable drug providers who do not cheat and who provide good products at fair prices will do well, as will hospitals and suppliers who support medical infrastructure with equipment, nursing care, and in-home health care.

          Emerging Markets

Non-U.S. stocks may or may not have a hard time under the Trump administration.  One puzzle is China, where a recent rise of the Chinese market — about 20% from its bottom — has indicated the beginning of a new bull market.  China is still down about 11% in 2016.  India is OK from a general and long-term point of view; short-term, we are concerned about consumer spending because of a surprise announcement on November 8 that 500- and 1,000-rupee notes must be exchanged by Dec 31 or become unusable.  (The measure is part of the government’s effort to improve tax compliance and bring more activity into the formal economy — and the government’s willingness to tolerate the disruption that the law is causing speaks well of their determination to see reforms through.)

          Europe

Defections and threatened defections from the European Union make it less attractive as an investment destination.  On the other hand Britain is now more attractive.  The UK is benefitting from a stronger pound, as the EU’s negotiating stance is being softened by concerns that other EU countries might try to follow the UK out.  If the EU negotiators are too stubborn and put up too many trade barriers against Britain, the growth of EU nations could decline, causing others to consider leaving — and several are already considering it.  Elections and referenda this year will be harbingers, with Italy and Austria both thinking of leaving.

          South America

Brazil is faced with problems, and a strong dollar has made foreign investing hard for all Americans.  If the dollar stops its strong upward move, we can see some rally in Latin America, especially Brazil, Argentina, and Peru, but as we have been saying for months, the key is the U.S. dollar.  A strong dollar is bad for U.S. exporters and removes investment money from countries whose currencies are falling versus the dollar.

          Gold

Gold has declined for two reasons, both stemming from Mr. Trump’s election.

1.  The unexpected election of Mr. Trump caused many to conclude that the slow growth stagnant economy of the last 10 years would be replaced by a healthier and more vibrant U.S. and world economy in the future.  In hindsight it becomes obvious that much of the rally in gold was based upon a fear for the U.S. economic growth rate.  As we can see from the market’s reaction since the election, the U.S. stock market is now taking a much more positive view of potential U.S. economic growth for the next few years.

2.  Simultaneously, the election has caused a further spike up in the price of the U.S. dollar.  This makes U.S. exports a harder sell and pushes down the price of oil, gold, and other commodities.  Our interest in gold was stimulated by our view of an oncoming modest rise in inflation in 2017 to about 3%.  We will not be surprised to see U.S. inflation at 3% in 2017 in spite of the very rapid increase in the U.S. dollar this year.

3.  Clearly, many speculators expected Mrs. Clinton to win, and may have been buying gold to avoid higher U.S. taxes, but also because they thought Mr. Trump’s supporters would dispute the election, creating turmoil.

Thus we were wrong on gold.  It is possible that it can move lower before the greater inflation and economic growth numbers arrive in coming months.  Once inflation and economic growth are stimulated, we assume a higher price for gold unless the current very rapid increase in the U.S. dollar continues.

The U.S. dollar has risen by about 6% since late August — a very rapid rise for a major currency.  A continuation of this rise will keep the dollar from enjoying the benefits that would normally accrue from a higher inflation rate.

          Trade

Although trade policy figured prominently in the Trump campaign, we do not believe that the effects of Trump’s shifts in trade policy will materialize for some time.  In the long term there may be the potential for friction in trade relationships — but the immediate impact will be slight because of the long timeline for such renegotiations.

Thanks for reading; we welcome your calls and questions.

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