Article / 10 February 2017 at 14:30 GMT

Steen's Chronicle: When change is not change — #SaxoStrats

Chief Economist & CIO / Saxo Bank
Denmark
  • Trump's economic policies flawed, jobs focus misguided
  • New US presidency likely to resemble that of Nixon
  • Present selloff in bond yields likely temporary

Trump
Donald Trump may be a colourful character, particularly as far as 21st century politicians go, but investors should watch what he does, not what he says. Photo: Wikimedia Commons

By Steen Jakobsen

I have spent the last month on the road around Europe meeting with clients and investors. It has led me to some interesting discussions and conclusions.

President Trump remains an enigma even for people who have met him; his personality is at best erratic and at worst compulsive but having said that, his ability to "keep the ball rolling" impresses me. In the process of doing so, he has been able to convince many of the investors I respect most to buy into the concept of "an animal spirit", the vconcept instilled in us economists by Adam Smith's idea of a laissez-faire economy.

(This, of course, was the only "model" prior to Karl Marx's definitions of capitalism and communism.)

There is, however, one problem with Trump's apparent invocation of said spirits... laissez-faire is the exact opposite of the president's beliefs! In Trump's view, the "animal spirit" involves forcing companies (and that's to put it diplomatically) to keep jobs in the US despite its hurting earnings, productivity, and long-term growth. 

It's also interesting how Trump wants to "create jobs" in an economy where the Federal Reserve, among others, is concerned about the heated labour market. The US' present unemployment level, in fact, is below the country's historical average.

A word of advice for The Donald: It's not jobs per se that you need more of, but rather a more productive US. Higher productivity will then force wages up and increase the quality of available jobs.

Unemployment

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Source: Federal Reserve

There is a near-perfect correlation between GDP growth and productivity. In this area, Trump's policy runs directly counter to the "preferred" solution, which would be a massive investment in basic research, more competition, and (most importantly) a major upgrade of the US educational system.
Instead, the president will force jobs to remain in the US while the quality of those jobs is driven by the mistaken concept of "keeping industries alive". Such an approach, of course, favours manufacturing at a higher marginal cost over conversion to more competitive and productive set-ups. 

This represents a desperate attempt by Trump to return to the manufacturing base of the US in the 1950s and '60s .

Nonfarm Payrolls
Source: Federal Reserve

The new Nixon?

I have long argued that the best way to understand Donald Trump is to look back at Richard Nixon's presidency. Under Nixon, the US saw foreign policy disengagement (the Nixon Doctrine), a weak dollar regime (consider Treasury Secretary Connally's "it's our dollar, but your problem" line), a very nationalistic agenda, a "in-your-face" presidential attitude, and a White House that was constantly at war with Fed – a war that then-Fed chair Burns ultimately lost. 

These are but a few of the similarities.

To my eyes, this theory was semi-confirmed when I learned that one of the personal things Trump will bring to the Oval Office is a letter from Nixon. My recent travels actually provided further confirmation of my idea that Trump admires and seeks to emulate Nixon, but as I received this information under the Chatham House Rule you will have to take my word for it!

So here we are, three weeks into the Donald's first term – what have we learned?

He has been able to reconfirm the narrative on US reflation but on the “actuals” – i.e. what he has he done relative to what he has promised – Trump is tallying up major losses:

  • The travel ban is now headed for a Supreme Court ruling .
  • The Affordable Care Act looks more likely to the replaced than repealed, and then only in 2018.
  • Foreign policy has been a mess with The Donald playing tough but backing down faster than you can count to three (after seemingly making a prime target of China, for example, Trump suddenly acknowledged decades of US foreign policy overnight by nodding to the 'One China' policy, i.e. no recognition for Taiwan).
  • The president has gone from a "Nato is useless" stance to attending the May Nato summit (which is more of a politically charged housewarming than a summit; Nato is moving its headquarters).
  • On February 9, The Donald promised a “phenomenal" tax plan, sending the markets off to the races once again… 

The point? Don’t judge US policy or trade based on what Trump says; look at what he does. This is critical... ignore the tweets but look at what is executed relative to the empty promises made.

Trump is starting to look more and more like Obama on foreign policy and his domestic momentum will now be focused on the “phenomenal" tax plan – a tax plan which has so far left us with more questions than answers.

Donald Trump
"What part of 'phenomenal' don't you people understand?" Photo: Wikimedia Commons 

When White House press secretary Sean Spicer was asked if the promised proposal would meld with the one suggested by House Republicans, the answer came back as follows:

I don’t want to get any further ahead of it, but I will tell you it is going to be the first time that this nation’s seen a full, comprehensive tax reform in a long, long time..." 

To this, I think Tidwell from Jerry Maguire should have the last word: show me the money!
So enough about The Donald.

In the real world the market is more than confused; even seasoned, multi-decade veterans are struggling to make sense of its direction but it’s fair to say that the consensus remains:

Equity: reflation, TINA (there is no alternative), momentum, deregulation rules .
Fixed Income: the present selloff in yields is temporary. Either Trump delivers or the Fed gets behind in raising rates. 
FX: the US dollar will fly; the border tax could mean a one-off, 25% increase in its value. 
Economics: small impact on growth this year as the consensus survey says GDP growth in 2017 and 2018 will be 2.3% and CPI will be 2.4-2.5%.

My take, remains the same (which of course is really more a function of my being old and not able to adjust):

My general model is the good old “permanent portfolio” which means a 25% allocation to each of four asset classes: commodities, equities, fixed income and cash(or real estate) 

This is then annualy rebalanced back to 25% – the modern version is risk parity. The following chart displays risk parity versus the S&P 500... yes, you see the same returns but there is significantly less volatility.

Risk Parity
Source: Bloomberg

Right now, however, my allocation is:

Equities: 25% (respecting the momentum).
Fixed income: 50% (see attached memo)
Commodities: 25% (overweight gold and silver).
Cash: zero.

The ratio of equity to fixed income is stretched:
Equities to fixed income
Source: Bloomberg 

Here is quick overview of view and direction from our simple chart model:

US dollar index: short (weekly), still offered but daily shows consolidation (chart)
US dollar index: long (daily), Trump has changed direction on big dollar (chart)
WTI crude: long, a good reaction to data this week, but technicals are starting to look tired/offered (chart)
Gold: long (chart)
US 30-year: long (weekly), despite tax plan promises (chart)

SPX: long, valuation stretched but momentum strong (chart)
China: short, but some support from Trump backing down on harsh China trash talk (chart)
Japan: long, but big risk next week (chart)
EMG: long, big momentum upside (chart)

Finally, I will wish you an excellent weekend and close with a Donald joke... 

"How do you know you are reading one of Trump's books?
It starts at Chapter 11".

— Edited by Michael McKenna

Steen Jakobsen is chief economist and CIO at Saxo Bank

Download document

Steen's Chronicle – memo February 10, 2017

12 February
Market Predator Market Predator
This graph below is serious message. "Y" axe interprets ratio between people in Manufacturing and all employees. It means in 1944 almost 40% of total employment capacity were in Manufacturing, 70 years later less than 10% of all people work in Manufacturing. Conclusion: US is hardly Manufacturing economy again regardless of Mr. Trump! Moreover it's not curve in the chart it's nearly straight line.
14 February
MG Morden MG Morden
In 1944 the world was at war. Whilst there was production it cannot have been too productive but it did save us from a tyranny. The 1950’s was probably more productive, whilst it was replacing all that was blown up in the previous decade. In the UK. Having said that the 50’s, 60.s and 70.s were very manufacturing orientated. The advances from Turings machine code to the advanced computer technologies now. Steen is right about investment in technology and education. Was the investment of putting a man on the moon the stimulus we are enjoying today?
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