The Trump Administration is about to turn Washington, and all whom deal with it, upside down. The status quo is out and accountability is in. Washington is about to be led and run by some very successful business leaders who know how to manage businesses with tight budgets, understand cost vs. benefit; understand the need to grow, invest in research and modern efficient plant and equipment; understand the need to be technologically ahead of the competition; and finally, the need to get rid of waste, redundancy - in other words, all inefficiency.
The days of the $400 screwdriver and what it represented is over; each line item of every budget and deal will be carefully examined; all contracts will have open and fair competition; each regulation will be analyzed for its cost/benefit; each aspect of the tax code will be reviewed with an eye towards promoting growth and global competitive advantage; social security will be revamped to make it more equitable; Medicare and Medicaid will be reviewed and updated to provide the most benefits at the lowest cost and improve the quality of our medical care for all; waste and redundancy will be eliminated; and trade and immigration policies will be changed to enhance our domestic economy and global positioning. Basically, each government department will be run like a well-oiled business. In essence, we will throw out the status quo and bring in its stead accountability and performance standards that must be met from top to bottom of our government.
Did you read the Barron's lead article this weekend "Prescription for U.S Economic Growth?" They identified from the current CBO long-term budget over $7.8 trillion in future spending cuts over the next 10 years plus another $750 billion in lower interest costs. The key to the success of the Barron's plan is to change the trajectory of growth in expenditures which is now forecasted to increase from approximately 21.5% of GNP to over 23% in 2026 today which instead would go down to under 18% of revenues by 2026 under their plan which happens to be about equal to what government revenues will be as a percent of GNP.
Barron's plan is well thought out and is highly doable. Specifically, $0.6 trillion would be cut out of the growth in social security and disability benefits; $0.7 trillion reduction in future interest costs on the government debt; $3.7 trillion reduction in future healthcare costs from repeal of Obamacare with new, more cost effective healthcare plans as well as other healthcare changes; and finally $2.6 trillion from a reduction in growth of other programs including the elimination/consolidation of two cabinet level departments.
Let's take Trump at his word that "waste, fraud and abuse is all over the place… and we will cut so much, your heads will spin."
So let's put the pieces together:
Large cuts in individual and business taxes; reductions in government regulations; fair and enforceable trade agreements; replacing Obamacare; changes in immigration policies; making the U.S energy independent; promoting domestic growth and jobs; and a huge reduction of government waste, fraud and abuse. If the Trump administration can deliver half of their plans, wow!
I keep saying that one of my rules for investing is to look for positive changes at the margin for my longs. Well, Trump's plan offers so much future upside potential that it is a major game changer still not factored into the markets. I suggest that you read Ray Dalio's piece in the WSJ last week in which he stated that a Trump administration could reignite animal spirits and lead to a booming U.S economy. By the way, Ray, who founded and heads one of the world's largest and most successful hedge funds, was not a Trump supporter, but clearly has had a mindset shift.
Data points and political winds, both here and abroad, continue to support a major mindset shift toward changes in global fiscal and regulatory policies to promote faster growth in the years ahead. The United States will lead the way and be the beacon of light for others to follow. Trump's team fully understands the need for global cooperation and trade, but only on terms that are fair to the United States and its citizens.
Will there be some difficult days ahead as Trump changes past policies that stunted growth and hurt our competitive position abroad? Of course, but an investor must look through the windshield, anticipating the positive impact the broad changes that his team will create and the longer-term benefits to our economy and citizens.
The bottom line is that we expect U.S. economic growth will accelerate by mid-2017 as his policies take effect and above-average growth would last for many years. We expect the Fed to stay one step behind until the full impact of his fiscal and regulatory policies can be seen and analyzed. We continue to recommend owning the reflation beneficiaries including industrial commodities and to sell/short the old winners. We would NOT own any bonds as the yield curve steepens and interest rates normalize at higher levels. The dollar will remain king.
Paix et Prospérité wishes all of you a Happy, Healthy and Prosperous New Year!
Remember to review all the facts; pause, reflect and consider mindset shifts; look through the windshield when considering asset allocation and risk controls; do independent research on each investable idea and…Invest Accordingly!