December 13, 2016
Year-end provides investors with an opportunity to assess past performance, adjust strategies and set a base-case outlook for the coming months.
A new Trump Administration in Washington and recent voter backlashes in Italy and the UK suggest that this year, a longer outlook is in order.
Following are guesses about how ten trends are likely to play out during the coming US Presidential election cycle.
1. Trump wins election; but not a mandate
Trump’s electoral college win gives him the Presidency. However, Hillary Clinton, his main opponent, got at least 2.5 million more votes than he did. This will create huge resistance to his policies at the congressional level and on the ground.
Thought there was gridlock before? You ain’t seen nothing yet.
2. Big government conservatism
A Republican presidency, without a popular mandate, suggests that the only changes that Mr. Trump is sure to get backing from Democrats in Congress is spending increases and tax/tariff hikes.
Anything else will require considerable horse trading. The upshot will be bigger government, more borrowing and larger debts.
3. From gridlock to sclerosis in Washington
Trump will be 70 when he is sworn in. But he won’t be the only one with aching joints. The average age of US Senators in 2012 was 61 [i]. The average age of US Supreme Court Justices is 69 [ii].
Longer political careers enable America to profit from politicians’ increased experience. However shutting youth out risks hampering the country’s ability to grow.
The past two decades have seen America’s increasingly aging politicians leveraging their wisdom, to foster entrenched interests at the expense of innovation and development.
If that trend continues Washington will further its shift from gridlock, which stems from policy differences, to outright sclerosis.
4. Oligarchical Trump will foster a loose Fed
To guess how a Trump Administration will approach monetary policy, you need to follow the money. The Donald comes to the Presidency burdened by a slew of business interests. These include not only his own real estate empire, but that of his son-in-law Jared Kushner’s family.
As real estate values are inversely correlated with interest rates, Trump will quickly realize that he has substantial incentives to make sure that the Fed keeps monetary policy as loose as it can possibly be.
5. Recession, and no bullets in the Fed's gun
Recessions, as can be seen on the following chart, usually hit the US every six or seven years. During the past three decades, the Fed has responded to each recession by cutting interest rates and printing money so that everyone felt richer.
When that did not work so well, government agencies started to change the way they calculated inflation, unemployment and national debt data, so things looked better than they really were.
This time around the Fed Funds is so close to zero and the Fed balance sheet is so bloated, that the best monetary policy will be able to do is to stem the decline.
6. America "eats its grandchildren"
An unmistakable sign of US government sclerosis has been the massive transfer of the country’s resources to its seniors. Older Americans get the best jobs, the lion’s share of government spending and control essentially all the country’s wealth.
In the past, youth were compensated with employment, educational and other opportunities.
That process is over.
Today America’s young are carrying tens of trillions of dollars worth of their parents’ unfunded pension liabilities and healthcare debt.
In addition, according to the US Federal Reserve, American youth hold more than $1.3 trillion in student debt.
Not surprisingly, more Americans aged 18 – 35 live with their parents than with their partners [iii].
Not surprisingly, US birth rates have been on a secular downtrend for some time, as increasing numbers of people simply can’t afford children.
The upshot is that after having borrowed the country to the hilt, despoiled the environment and consumed everything that moves, America’s boomers are now in the process of “eating their grandchildren.”
Unless America’s young start to vote in greater numbers and to organize politically, that trend is likely to continue.
7. Debt will grow, on and off the books
The US national debt clock, which is creeping toward $20 trillion [iv], is so boring, that politicians basically ignored it during the election campaign.
However debt pervades not just government, but the entire US economy. As of September 2016, total US business, household and government debt (excluding financial debt and off-balance sheet debt) amounted to $47 trillion [v], or roughly 260% of GDP.
Mr. Trump’s current solution? Borrow more, to finance a big infrastructure program and tax cuts (if he can get them through Congress). As such, US borrowing will almost certainly grow during the coming four years and quite fast, if the country slips into recession and revenues tank.
8. Protectionism will increase
Mr. Trump’s protectionist policies have a long history in the United States.
His economic mentors - Reed Smoot and Willis Hawley , - sponsored severe tariff legislation in the 1930s to help hard-pressed workers during the Great Depression.
The bad news, is that those tariffs made things worse. That’s because the countries the US targeted, particularly Canada and the UK, retaliated.
World trade plummeted and everyone got much, much poorer. Trump aside, rising protectionism is a secular trend.
Ambitious trade and investment deals (excluding small country deals) have been increasingly been rejected or stalled, for the past two decades
These range from the Multilateral Agreement on Investment (MAI), the Free Trade Area of the Americas to the recently shelved Trans-Pacific Partnership and stalled WTO negotiations.
Feel cheated by foreign workers? Wait until you see how much you will pay for goods when they are made in the good ole’ USA.
9. Regulations will spike
Every year tens of thousands of pages of laws and regulations are passed at all levels of government.
That process creates new jobs for regulators, lawyers, accountants and experts to research them and find new loopholes. However it does not create wealth.
Regulations stifle start-ups, investments, and reduce the productivity of existing businesses.
These are growing costs which – while debilitating – remain impossible to stop, as the public simply is incapable of understanding the complex and indecipherable rules that the bureaucrats impose.
Mr. Trump will fight hard to stem that tide. But no US President has left office with less laws on the books than when he came in.
10. Americans will turn to government
One would think that Americans would shun a broke, dysfunctional and sclerotic government.
However they will do nothing of the sort.
Americans have been educated in primary, middle and high schools, and universities, to believe that there is no problem for which more government is not the answer.
With the exception of the Mises Institute in Alabama, there are few signs anywhere of forces that encourage citizens to save and take responsibility for their own lives.
That trend will continue unless the culture changes.
The attractiveness of gold
So what does this all mean for gold?
Hard to say. Like any new President, one has to give Mr. Trump the benefit of the doubt. So far the stock markets, which are reasonably good predictors of future profit growth, have given two thumbs up.
That’s important, because (notwithstanding the US Federal Reserve’s dynamic stochastic general equilibrium models), the fundamental drivers of the economy are human emotions.
Furthermore, while medium term challenges look daunting, a lot of people, have lost a lot of money betting against America.
The default position thus has to be that Americans will figure out ways to patch things up and kick all those cans down the road.
That said, it never hurts to store a little extra food in the basement.
In an era of increased government spending, borrowing and money printing , hard assets seem like a reliable hedge.
[i] http://www.senate.gov/CRSpubs/c527ba93-dd4a-4ad6-b79d-b1c9865ca076.pdf. We could not immediately access the ages of the newly elected Senators.