You may have picked up from comments I have made on the Website, but more particularly on Twitter, that I am feeling extremely Bullish about Markets at the moment and I am more than Fully Invested with a Long Spreadbet on the S&P500 and I might even add to that position.
There are 2 main reasons for this - firstly the recent Breakout to New All Time Highs on the US Major Indexes (and also on the FTSE100) is Technically a very Bullish event. In the early part of the Week just gone we had a bit of a Pullback but this already seems to have sucked in a new load of Bulls and it looks to me like Markets are turning up again - Friday was especially strong after a big Jobs Number in the US (I will move on to some Charts later where I will show these moves). Secondly, despite the confusion this Price Bullishness has caused among Investors, the Fundamentals look highly supportive of this move - and a Programme I heard on BBC Radio 4 on Thursday demonstrates this very well.
The blurb for the Programme is as follows:
“President Trump says he'll make America richer. He's promised a raft of radical economic reforms including a huge cut in tax on businesses, an income tax cut, a massive reduction in regulation, and investment in America's infrastructure.
His goal is to get America's economy growing at roughly double its current rate. He also wants to create 25 million new jobs, and put 'America first' in every policy decision.
But are these goals achievable and are the measures he's proposing likely to work?
David Aaronovitch explores what 'Trumponomics' might mean in practice and asks a range of experts whether his plans for the economy will lead to boom or bust.
Guests include Arthur Laffer, Professor John Kay, Diana Furchtgott-Roth and Jim Tankersley.”
The Key Points I took from the discussion are as follows:
- The first part of Trump’s growth boosting Policies is around Tax Cuts. He wants to lower Personal Tax for pretty much everyone but the big gains for the Economy will come from cutting Corporate Tax Rates. At the moment they seem to be about 39.6% (when you combine State and Federal Taxes) and Trump aims to chop them to 19.6%. Globally in the OECD the average is 25% so this will give US a big advantage compared to the current situation where Companies have an incentive to Invest Overseas not in America.
- The issue of US Corporations with Cash Overseas has been a big issue for a long time but for some weird unfathomable reason the Obama Administration did nothing about this (probably on the Golf Course). Trump is proposing to change the Tax Rules so that Companies can bring their Dosh home to the US without being penalised with 35% Tax on it (I think that is the figure they mentioned). John Kay in the discussion claims this will have little effect but I am not convinced - I would expect this to encourage a lot of Money to flow back to the US and that can only help the US Economy grow - even if in just a small way.
- I have said for a long time that part of the problems The West has with regard to moribund GDP Growth has arisen from Over-Regulation - we seem to have Parliamentary systems across most countries that just add new Laws but never take away existing Laws - with the result that over many decades the Regulatory burden has just grown and grown with horrible stifling effects. This is particularly a problem of Europe and was one of the major reasons I voted to escape the tyranny - the worst effect it has is that it entrenches and supports Big Businesses by creating false ‘Economic Moats’ and prevents new Businesses from being formed and in this way extracts dynamism from an Economy. You can forget all about ‘Creative Disruption’. Trump’s aims in this area are astonishing - he is talking about chopping out 75% of Regulation on Firms - I suspect that is a hugely inflated figure but at least it shows an intent to take America in the right direction (in a Political sense as well !!). He is talking about a Freeze on existing Regulations and for any New Regs that are brought in, 2 Old Regs will have to go (this is music to my ears !!).
- The last booster is around Infrastructure Spending. This is also a difficult bit to achieve and I suspect Trump will face many battles around his plans in this area. He is intending to use Tax Credits to encourage Private Business to invest in Infrastructure Projects and to fund partly by borrowing. This would probably work fine for things like Toll Roads and Toll Bridges but it would have limitations for necessary Infrastructure that does not easily lend itself to a Revenue Stream - it will be interesting to see what his full plans are around this. It is mentioned in the Radio Programme that there should be a Budget produced at the end of February or Early March - that should tell us a lot. To get an idea of the scale of what Trump is talking about, under Reagan and George W. Bush Government Spending rocketed but this was mainly on the Military - Trump intends a far bigger boost than either of these and it will not just be limited to the Armed Forces.
- Perhaps the most interesting bit of the Programme is near the start when David Aaronovitch talks to Arthur Laffer (of the ‘Laffer Curve’ fame - the idea that lowering Tax Rates actually increases the Total Tax Take for a Government) who was an advisor to Ronnie Reagan back in the 1980s. He makes the point that under Reagan they achieved Annualised Growth Rates of as much as 8% for a period of 18 months starting from January 1983 - bearing in mind that current US GDP Growth is about 2% this is an astonishing number (China is not even managing 8% at the moment although of course no one really knows what China’s Growth Rate really is). It doesn’t take a genius to figure out that if Growth accelerates to these kind of numbers it will have a huge boost to Profitability of US Companies - and hence the rise in US Stocks makes a lot of sense. In addition, if the US (remember, this is the most important and largest Economy in the World) achieves such rapid Growth then the knock on to all other Countries will be considerable - as the saying goes, “If America sneezes, the Rest of the World catches a cold”. For this reason, a boom in the US will not only drive US Stocks up but it will also boost UK Stocks and Europe etc. Of course such Growth Rates cannot be sustained for long, but Laffer reckons GDP Growth of about 5% to 7% is possible and another speaker on the Programme reckons 3% longer term is very possible - compared to the current 2% that is break-neck speed and it must be appreciated that this is after the Short Term Boosts when Growth Rates could be much higher. Laffer makes the point that it is easier to get very high Growth Rates when you are coming from a low base, as we are at the moment.
- In terms of Capacity, the current Labour Force Participation Rate is said to be 62.7% and this is low as it is back at 1978 levels and has declined since 2008 - this implies there is a lot of spare Capacity and rapid Growth may not immediately result in higher Inflation. There are clearly a huge number of ‘Economically Inactive’ potential workers that are not counted in the Official Unemployment numbers - this is the same in the UK and all over Europe.
- Laffer makes the point that the Republicans are in a very unusual situation in that they hold all 7 Major Branches of the State - he lists these as: The White House, State Legislatures, Governorships, US Supreme Court, The Senate, The Congress, The Federal Reserve (I am not convinced by the latter as Janet Yellen was an Obama appointment - perhaps the theory is that she is supposed to be neutral - hmmm.) The relevance of this is that the Democrats are extremely weak for the duration and despite various skirmishes along the way, the Republicans should be able to get their way and drive the Growth Agenda through.
Anyway, that’s the gist of it and much of what was said makes a lot of sense to me and I expect to see a big change in how Economies are managed as a result of this. If Europeans see the US booming they will soon realise that the crop of Politicians that have been ruling the roost for recent decades has let them down badly and we will see a clamour for more Free Market thinking and some proper Growth Policies. It is certainly shaping up to be a very interesting period for both Economics and Politics around the World after much tedium. Of course, a really scary idea is that if Trump is successful in boosting US growth, then he will most definitely be President for 8 years - remember, “it’s the economy, stupid”……….
When looking at this sort of stuff we must throw away our Political Biases and try to think rationally and objectively about what Trump’s Policies are most likely to bring in terms of the effect on Stocks. It is pretty basic Economics that lowering Taxes and cutting Regulations will boost Economic Growth and if Trump’s Infrastructure Plans are anything like what he suggests, then this will give a huge Keynesian type Boost. In such an environment I think Stocks can go massively higher and we could be on the verge of a big Stockmarket Boom - as ever, we will face countless problems along the way, particularly stemming from Europe over 2017 but overall I am going to be positioned very much on the Long tack and I will just use bits of Hedging to tactically ride out any Pullbacks along the way.
Something else to consider is that many Stocks (and Stockmarket Indexes) appear to be very fully Valued if not Over-Valued. However, if Growth is set to take off like I think it might, then these apparent Over Valuations might actually not be anything like as bad as they appear as Upgrades by Brokers to Earnings Forecasts could make those P/E Valuations a lot lower.