Trumponomics: What Is IT? Why Did IT Happen? How Would It Go?

| About: SPDR S&P (SPY)

Summary

Donald Trump's upset win would be a historical event like Brexit.

Strong growth, accelerated inflation, and a higher probability of the Fed's rate increases are anticipated.

Trump victory would end the Bretton Woods System (1946) and the Smithsonian Agreement (1971) which were set up primarily by Keynes.

The market perspectives are all bullish in a longer run as well as in a short term.

Donald Trump surely has two faces, campaign Trump ("CT") and post-election (or President) Trump ("PT"). The CT was against women, rude, and temperamental, while the PT is gentle, relaxed, and decent. After a phone interview with him, Peggy Noonan, a well-known columnist of the Wall Street Journal, says, "He was dignified, hilarious and modest." ("What to Tell Your Children about Trump," The WSJ, Nov. 19-20, 2016, p. A11)

What would be the relationship between the Brexit vote in June and the Trump upset victory? They are closely related each other in my view. First, the process of both events was almost identical from the beginning to the end as we witnessed. Second, Brexit was a referendum for Remain or Leave at the European Union while the U.S. election was a sort of a referendum for Change or No Change of the current progressive (or liberal) government, which has concentrated on the redistribution of incomes rather than economic growth over eight years. Third, both events remain in the hands of conservatives, even though the routes are different.

The British Labor Party was down several years ago but the political cycle of the U.S. (liberal - Trump Revolution - conservative) seems to be lagging the British cycle (liberal - conservative - Brexit - conservative). Brexit rejected Remain campaign. Trump's win chose Change of the Obama-Clinton administration, reshaping a somewhat historical start toward conservative and nationalistic administration.

Political events and economic systems mutually affect each other. After World War II, the Bretton Woods System was established exactly seven decades ago in 1946. John Maynard Keynes (represented the British government) and Harry D. White (represented the U.S. Treasury) reached a historical agreement with other trading countries (without the Fed's explicit endorsement). Most call it a "gold" standard, but it was actually a "U.S. dollar" standard, including a provision, assuring the convertibility of gold to the dollar at $38 per ounce.

In 1971 (when I left my first footprint on American soil), President Nixon discontinued the gold conversion by the Smithsonian Agreement, proclaiming, "I am a Keynesian." Exchange rates of each country were pegged to the dollar in the original system. But after 1971, exchange rates have been "managed' (or "dirty" or "manipulated"). Over exactly four and a half decades (1971-2016) the ongoing "global trading clearing house" role of the U.S. finally would end by "Trump Revolution."

The chronic trade deficits of the U.S. vis-à-vis trading countries (in particular, China, Germany, and Japan), overspending of George W. Bush II and Barack Obama I & II (all together 12 years), and most critically the Fed's "courageous" monetary policy (without the help of the fiscal side) have contributed to the condition of the U.S. debts to far over a manageable level.

Economic growth, productivity, and real income of people have been down gradually. The 2016 election turned out to be a wake-up call for a new reality - rewinding the past seven decade of globalization and free trade.

Martin Feldstein, Harvard Professor and chairman of the Business Cycle Dating Committee at the NBER, asserted:

"President-elect Donald Trump will soon be working with Republican majorities in the House and Senate to reshape tax and spending laws to increase economic growth, raise living standard, protect America's economic future…His challenge will be to do this in a way that is fiscally responsible…The good news is Mr. Trump can look forward to at least two years with support of both Houses of Congress to solve [four] problems and strengthen the U.S. economy." ("Squaring Trumponomics With Reality," The WSJ, Nov. 19-20, 2016, p.A19. The emphases are mine.)

He points out the four problems which have not been attempted to solve by the current administration for the past eight years:

· Jobs and corporate taxes

· Personal taxes

· National debt and Social Securities

· Infrastructure

Trumponomics ("T") seems to be similar with Regonomics ("R") as most think. But it would be a "Nixonomics" ("N") because of two reasons. First, T is more far away from establishments (or elites) than R, and a little away from N. Second, the fiscal stimulus influenced by Keynes would be stronger in T than in N, and much more than in R. Of course, both T and N are different because economic situations differ: the former is low inflation and a full employment while the latter was high inflation due mainly oil embargo of the OPEC and a severe recession (1973-1975).

Trump pledged the $1 trillion Infrastructure Plan which would be carried out. The projects would not increase the government debts by letting private investors fund in exchange of tax credits. The policy makers and investors also expect a timely and vigorous fiscal stimulus when a recession occur.

In addition to an optimal policy mix with Fed's monetary policy, the expectations of dismantling the Dodd-Frank Act, reversing regulations imposed by executive orders, and other market-friendly measures fueled the Trump rally.

Figure 1 shows the ups and downs of the prior- and post-election markets with Schwab Broad Market ETF (NYSEARCA:SCHB) and Schwab U.S. Aggregate Bond ETF (NYSEARCA:SCHZ). The downward or upward consecutive nine and seven runs are highlighted. Nine declines of S&P (Oct. 25 - Nov. 4), seven slides of DOW (Oct. 24 - Nov.4), and seven advances of DOW (Nov. 7 - Nov. 15) were extremely rare movements. These unusual markets reflected a combination of wrong expectations, confusion, and over-reactions.

Yesterday (Nov. 21, 2016) and today (Nov. 22, 2016) Dow Jones Industrial Average, S&P 500, and Nasdaq Average made a trifecta of records for two days in a low. Today, they were closed at 19,023.87, 2,202.94, and 5,386.35, respectively; extended their post-election rally. Investors have stacked into industrials, banks, and health-care stocks on bets that the Trump administration would boost infrastructure spending and loosen regulation.

Such no-clear directions, sudden changes in volumes, and unexpected sector rotations provide ample opportunities to hedge and active funds which underperformed index funds on average until last year. Long-term investor, however, would be better not to jump on the security-pickers' bandwagon. Instead it would be better to stick with the planned course with well-diversified portfolios.

Table 1: Performance Comparison: Portfolio vs. S&P 500 Stock Index

Daily Percent Change

Cumulative Percent Change

DATE

DOW

S&P

DOW

S&P

SCHB

SCHZ

DOW

S&P

SCHB

SCHZ

10/24/2016

18,223.03

2,151.33

*

*

*

*

*

*

*

*

10/25/2016

18,169.27

2,143.16

-0.30%

-0.38%

-0.41%

0.00%

-0.30%

-0.38%

-0.41%

0.00%

10/26/2016

18,199.22

2,139.43

0.16%

-0.17%

-0.27%

-0.13%

-0.13%

-0.55%

-0.68%

-0.13%

10/27/2016

18,169.68

2,133.04

-0.16%

-0.30%

-0.47%

-0.23%

-0.29%

-0.85%

-1.14%

-0.36%

10/28/2016

18,161.94

2,126.46

-0.04%

-0.31%

-0.25%

-0.06%

-0.34%

-1.16%

-1.40%

-0.41%

10/31/2016

18,142.42

2,126.15

-0.11%

-0.01%

0.10%

0.06%

-0.44%

-1.18%

-1.30%

-0.36%

11/1/2016

18,037.10

2,111.72

-0.58%

-0.68%

-0.76%

-0.17%

-1.03%

-1.86%

-2.06%

-0.53%

11/2/2016

17,959.64

2,097.94

-0.43%

-0.65%

-0.71%

0.06%

-1.46%

-2.51%

-2.78%

-0.47%

11/3/2016

17,930.67

2,088.66

-0.16%

-0.44%

-0.42%

0.00%

-1.62%

-2.96%

-3.19%

-0.47%

11/4/2016

17,888.28

2,085.18

-0.24%

-0.17%

-0.04%

0.11%

-1.85%

-3.12%

-3.23%

-0.36%

11/7/2016

18,259.60

2,131.52

2.05%

2.20%

2.13%

-0.11%

0.20%

-0.93%

-1.11%

-0.47%

11/8/2016

18,332.74

2,139.56

0.40%

0.38%

0.25%

-0.15%

0.60%

-0.55%

-0.85%

-0.62%

11/9/2016

18,589.69

2,163.26

1.39%

1.10%

1.41%

-0.85%

1.99%

0.55%

0.56%

-1.47%

11/10/2016

18,807.88

2,167.48

1.17%

0.19%

0.33%

-0.44%

3.16%

0.75%

0.88%

-1.91%

11/11/2016

18,847.67

2,164.45

0.21%

-0.14%

0.08%

-0.25%

3.37%

0.61%

0.96%

-2.16%

11/14/2016

18,868.69

2,164.20

0.11%

-0.01%

0.25%

-0.42%

3.48%

0.60%

1.21%

-2.59%

11/15/2016

18,923.06

2,180.39

0.29%

0.75%

0.74%

0.06%

3.77%

1.34%

1.95%

-2.53%

11/16/2016

18,868.14

2,176.94

-0.29%

-0.16%

-0.13%

0.12%

3.48%

1.18%

1.81%

-2.41%

11/17/2016

18,161.94

2,126.46

-3.81%

-2.35%

0.53%

-0.23%

-0.34%

-1.16%

2.34%

-2.64%

11/18/2016

18,161.94

2,126.46

0.00%

0.00%

-0.11%

-0.29%

-0.34%

-1.16%

2.23%

-2.93%

11/21/2016

18,956.69

2,198.18

4.28%

3.32%

0.66%

0.02%

3.95%

2.15%

2.89%

-2.91%

11/22/2016

19,023.87

2,202.94

0.35%

0.22%

0.30%

0.12%

4.30%

2.37%

3.19%

-2.80%

Note: The percent change formula: 200*(B-A)/(B+A)

Click to enlarge

As a voter, we would join political and ideological debates but as an investor, we should not be distracted by them. It's better to focus only on the impact of them, by assuming that all politics and fiscal actions - election outcomes, laws, or executive orders, etc. - are given.

President Obama made a record of regulations with his "pen and telephones" without going through Congress for the past six years. The over-regulations and his hard policy on negotiations with Republican Party on taxes, spending, deficit and debt issues, healthcare, and entitlements, and no counter-cyclical financial stimulus, has pulling economic growth, interest rates, and inflation down. The Fed's monetary policy has been the only locomotive to move the economy from the financial crisis in 2007-2008, ending a low-growth low-rate environment. This was where we were on Nov. 8.

My market prospects are (1) highly optimistic, (2) relatively optimistic, (3) cautiously optimistic, and (4) optimistic in Period 1 (six years or beyond), Period 2 (three to less than six years), Period 3 (one to three years), and Period 4 (less than one year), respectively, because:

· Period 1 (2022 and later): An upswing started in Period 2 would continue at least until 2024 (an election year). A 4.0% or more of growth rate, inflation rate, and the Fed's benchmark rate would be anticipated.

· Period 2 (2019-2022): After a mild and short-lived (one year or so) "inventory recession" during Period 3, a new strong expansion (with a 3.5% of growth, inflation, and Fed rate) would be expected.

· Period 3 (2017-2019): Economic growth would accelerate by an optimal policy mix and gradual Fed rate increases. Rapid growth would ironically shorten the length of the current upswing, reaching its peak due perhaps to inventory build-up. Investors fear Great Recession (which is painful as we felt before), but should not do a garden-variety (or inventory adjustment) one (which is normal.)

· Period 4 (until the end of 2017): This is the first year of Trump administration (2017). The market would be rocky with heightened volatility. An upward trend, however, would be developed and annual growth rate would be 3% or more. Inflation would be lower than 3%. The Fed rate would be lower than 1.5%.

Trump Revolution ("TR") is not leaving the Keynesian world. It simply changed the focus from Keynes' international financial framework (Bretton Woods System and Smithsonian Agreement) to his public-work policies to stimulate economy in general as well as fiscal policy to solve recession problems in particular. As a result, TR reminds all of us, "We All Are Keynesian."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.