The Implications of a Trump Led Economy
While Mr Trump winning the election in a not so surprising effort, we have to come to the realization that we are in for weird and strange ride when it comes to the future of our beloved economy.
Now before I get started I want to add this disclaimer. I didn't vote for Trump or Hillary, who I did vote for doesn’t matter, my point in bringing this up is that I don't want to sound pro Hillary or anti Trump. I am just a guy who looks at the numbers and makes rational choices (tries to).
I will be using Video from Mr Trump's speeches as I do not want people saying I am misquoting our President-elect.
Trump on Free Trade
This one is the big one. Trump has been hard on free trade. In Mr Trump's eyes we have been fooled into giving money to foreign countries at the expense of our people. He really isn’t wrong; we do give China a lot of business, Japan is killing us on the car front and Ford does manufacture their vehicles in Mexico.
But why is that? Because it's cheaper! Here is a story:
About a year or so ago I was looking for a virtual assistant to help with some cold email stuff. I did some research and came across an American firm that provided VAs for about $100 dollars a month, which isn’t that expensive. The problem was I would only need one to work for 5 hours a week. I didn’t want to spend that. So I looked overseas and found a VA for 3 dollars an hour. $3 dollars per hour, 5 hours a week times 4 weeks = $60 dollars per month for a savings of $40 a month. Did I have to sacrifice quality of work? No, not really. She spoke english pretty well so there wasn’t a language barrier. I got what I needed done in three months and saved a total $120 which could later be reinvested into another part of my life.
Now stop and think for a second and apply this on a larger scale when talking about Apple, Microsoft or any other American firm that manufactures overseas. Our companies are saving billions of dollars by manufacturing overseas. Yes, we have lost the made in America logo we all value so much but any ceo with half a brain wouldn’t cut their profits by 20% just to make consumables here in the USA.
Mr Trump wants to renegotiate NAFTA, which I think is wonderful, but we have to be mindful that if we withdraw from NAFTA, that means our companies can't do business in other countries. No Coke in China, No WalMart in Mexico, and no xbox in Japan among other items. For our major firms, that's a ton of growth lost. We are talking billions of total profits washed away with a spill of a few drops of ink.
If profits are lost, downsizing happens, if downsizing happens, jobs are lost. If jobs are lost, people stop buying goods, if we stop buying goods, then the economy crumbles. This is a real possibility if Mr Trump is true to his word.
Trump on Immigration
I do agree that we need to find a way to solve the immigration problem. The way Mr Trump wants to do it however will be costing us a lot of money. About 6-10 billion for a wall, countless man hours to hunt down and send the illegals back to their respective countries. How are we going to pay for this?
But, Mr Trump has also said that he is going to lower income tax across the board. ( which again I agree with) The problem is we can’t pay for items now. With a lower income tax household free cash flow is gonna get pretty tight pretty fast. Yes, there will a simulated increase in spending from citizens once their lower income kicks in but that effect will be a slow trickle as people realize they have more to spend. Will that extra money be enough to cover the expenses of deporting these citizens? Time will tell. It's more likely that he will cut the budget of another program; hopefully not education.
Trump on the FED
For those of you who don’t know what the fed is for, the fed Is an independent central bank that is responsible for setting interest rates.
Of course we all know that interests are low and have been for a while the question Mr Trump, brings up is, are the Feds artificially creating low interests rates to keep Mr Obama’s last few months of presidency a smooth one?
Low interest rates have a direct effort on the markets. The markets are pretty high and the market stay as it is now paying 25 times earnings will become the norm. Low interest rates are good for some and bad for others.
First, a government that controls the central bank might be tempted to finance budget deficits by printing money. Second, to provide economic stability, a steady hand on the monetary controls is required, which demands some insulation from day-to-day politics. Third, monetary policy done right is a technical thing, like running a utility. It’s basically apolitical.
The premise that the government can disagree with the Fed is fine disagreement is healthy it's the posturing and the intimidation that Mr Trump has been employing is what seems to me to be anti American. Mr Trump along with his distant republican family believe in smaller weaker government, yet by attacking the one truly independent group in our country seems hypocritical.
Do we really want a Fed ran by congress? I can’t say that I do.
Charlie Munger once said, “ show me where I will die so I will never go there” It's not that these outcomes will definitely happen it's that they are far more likely to happen now that Trump is our next President.
If things go poorly we will stand to face a recession that we may not be able to climb out of. I wish people cared more about the implications of our leaders actions, instead of who grabs what allegedly or who did what allegedly. Policies matter and if Mr Trump holds to true the policies he wants to use, then our margin of safety isn’t very high.
I want you all to understand what can happen in the near future, money can get tight, interest rates may go up, jobs may be lost, the questions are "are you living below your means?" "Are you buying inflation resistant assets?" We can not control how our president acts, all we can do is control our own circle.