How Responsible Investors can Survive and Thrive in the Trump Economy

By David M Leff- David Leff is Founder and Managing Director of 84 Capital LLC, an alternative market strategy advisory firm, targeting family offices and high net worth individuals. Our firm works with some of David’s family office clients.

Stock markets have rallied to all-time highs, interest rates have risen to multi-year highs, and the US dollar, too, has reached levels versus other currencies last seen in 2005. Clearly, markets eagerly anticipate President Trump’s business growth agenda of tax cuts, infrastructure spending, and de-regulation. While it is irresponsible to assume that Trump can implement all of his agenda, it is equally irresponsible to assume he can’t accomplish anything. How does a careful, non-momentum chasing investor engage, survive and thrive in such an environment?

Let’s first analyze the new economic regime’s most salient risks and rewards.

First, the political and investment landscape has become far more volatile than previously. Trump’s temperament, his contentious relations with many members of Government, and his will to fundamentally alter the international trade and diplomatic status quo might exacerbate already-troubled situations. This can lead to a wide range of economic outcomes. Resetting the US’ political relationships with Iran, China, Germany, and the European Union might lead to outcomes ranging from mutually respectful relations between strong powers, to geopolitical chaos, and possibly war. And his agenda to renegotiate trade policy vis a vis China, Mexico, and Germany might cause anything from a revitalized US middle class and manufacturing base, to a worldwide trade war, leading to a global depression.

Surging Inflation is another heightened Trump-era risk. There may be reflation (ie real returns outpacing inflation), or stagflation (inflation outpacing real returns); but inflation it is, causing higher prices, and interest rates. Even before Trump’s election, inflation had slowly been re-emerging across the US and other developed economies (via “Cost-Push” inflation, resulting from a fully-employed skilled work force, rising commodity prices, and flagging productivity; even as the economy stagnates).

Trump’s economic initiatives to revitalize the middle class, and re-invigorate the US’ manufacturing base, however, might accelerate inflation, as “Demand-Pull” inflation, caused by revivified “animal spirits”, and extensive de-regulation, spurs business creation and expansion. Thus, small business optimism indices have reached all time highs, and have stayed there, since Trump’s election. And Banks’ excessive dry kindling of Quantitative Easing-generated cash, doused in the lighter fluid of historically-low rates, and readily supplied to these newly waked businesses, might exacerbate the inflationary conflagration, as accelerated economic activity causes massive demands on commodities and other resources.

Additionally, Trump’s protectionist trade policies might eliminate cheap imports, forcing producers and consumers to shift towards more expensive, domestically-produced inputs and products.

David Einhorn, Greenlight Capital’s highly-successful Founder and Managing Director, might have stated it best: “Trump’s policies might be good for Main Street, but bad for Wall Street”. If his policies fail to be enacted, a disappointed market might selloff furiously. But even if fully-enacted, they might lead primarily to job and wage growth, even while inflation, and trade wars, and uncertainty negatively affect profits. Higher rates, too, can be disproportionately harmful for equities, if asset managers re-allocate en masse towards bonds at the expense of stocks.

How, then, can investors best protect themselves, and even profit, from this mix of uncertainty and inflation, but position themselves for the most achievable of Trump’s pro-growth policies ?

I suggest that conservative investors build their Trump-era portfolios using the following components:

Gold – To protect against Trump-induced volatility and event risk; and to hedge against stagflation, if expectations for real (inflation-adjusted) economic growth rates approach zero.

TIPS – Credit risk-free and liquid hedges against realized inflation (but are exposed to deflation, as well as increases in real rates).

Investments in domestic business/corporations that have positive interest rate sensitivity, domestic supply chains, are net exporters, and already-profitable businesses that benefit from lower tax rates – highly-regulated Berkshire Hathaway, especially with its’ built-in hedge of both cash hoard and 1.2x book value share buyback commitment, is the most obvious example.

Floating Rate Bank Loans – Taking measured credit risk, in order to provide income that increases with short-term rate and inflationary expectations.

Finally, Shares in Regional and Community Banks – De-regulation is the most easily-accomplished part of Trump’s agenda: If he can’t repeal growth-choking laws such as Dodd-Frank via Congress, he can encourage lax enforcement of its’ provisions. Small banks, because of their closeness to revitalized small business, and their profits’ high sensitivity to regulation, are best positioned to benefit from this environment. Their profitability will also benefit exponentially from rising net interest margins, and a steeper yield curve.

Investors can tailor each of these sub-strategies’ relative weights, based on their own risk tolerance, and how they assess the probability of future economic/political outcomes. When investing in this volatile and uncertain environment, I recommend that you consult with an advisor to help you tailor each of these sub-strategies’ relative weights, based on your own risk tolerance, and your own assessment of probability of future economic/political outcomes. Although uncertainty is the name of the game at the moment, that doesn’t mean there won’t be winners, and by following these tips, you can increase your odds of success.

-David Leff is the Founder and Managing Director of 84 Capital LLC, an Alternative Market Strategy Advisory, targeting Family Offices and High Net Worth Individuals.

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