LAST week Janet left her interest rate unchanged. This coming week Philip will do the same with his rate. Last week a “fake Trump effect” sent a shudder through global share markets; overnight Friday the “real Trump effect” sent the Dow back above 20,000 and almost to its all-time high.
The four things capture what is going to drive the investment environment through 2017 and into 2018.
Broadly, the — real — Trump effect will be good for the US economy and for global share markets.
In the 11 or so weeks between winning the election and actually arriving in the White House, the mere expectation of his arrival and what he had promised to do sent both business and consumer confidence in the US up strongly.
Over that period the Dow rose 7 per cent — actually, over 10 per cent if you count from the bottom of the panic in Asian markets, ours included, on November 9, before trading had opened on Wall St, when it became clear that he had won. Our market more or less followed.
In the two weeks since he’s actually been in the White House, actually “doing”, the Dow has more or less gone sideways. In general terms, it was due a pause after that run. It also got hit by the “fake Trump effect”.
I define this effect as people, in this case, investors, making real-world decisions on the basis of a mirage, of a Trump impact which didn’t actually exist.
In this first example, it was the reaction to his so-called visa ban. Yes, the actual mechanics were badly done.
But, knock, knock, does anyone realise these are not “Washington insiders” doing things (usually, NOT doing things, except making life difficult for ordinary people and businesses) the “proper” bureaucratic way; that they are actually, intentionally disruptive political outsiders?
It’s what they actually do that matters. Not how a hysterical press and interest groups depict what they do.
So the fake Trump effect disrupted Wall St for a few days and this fed negatively into global markets. We were also hit by our own realities: as the combination of the recently positive China effect flattening out and a more sober assessment of the rest of the non-resources side of the market impacted.
Overnight Friday we saw the real Trump effect kick in; when President Trump ordered a review of the Frank-Dodd restrictions on US banks.
Yes, in a big-picture sense Frank-Dodd might have been desirable: to try to prevent in the future the excesses that caused the global financial crisis.
But so far as the value of your investments and the investment opportunities over the next year or two are concerned, any move to free US banks will boost both the US economy and Wall St.
And that’s the whole, broader, crucial point. A President Trump IS going to deliver on Candidate Trump’s promises.
You have a choice: you can structure your investment decisions on the basis of what you or the media and generally hysterical interest groups think he should be doing; or you can structure your investments on the basis of what he is actually going to do.
That brings Janet — Janet Yellen — and the Fed, the US version of our Reserve Bank, into critical play. Last
week, her leaving the US official interest rate unchanged was “business as usual” but also hugely significant. Very simply, it showed she is going to “lag” the (real) Trump effect, not try to pre-empt it.
In December, when the Fed raised its rate for the first time in 2016 (after promising four hikes), Yellen said she intended to raise it three times in 2017.
No one expected a hike last week and she delivered on those expectations, while repeating the three-hikes mantra.
So this means investors should only prepare for three hikes? Yes — and no.
She’ll start out the way, so we would get a hike at either the next meeting in midMarch or early May. So Wall St is likely to bound ahead — on the twin positives of low rates and a Trump boom. But it could be setting itself for a sharp fall when Yellen is forced to try to catch-up with “surprise” hikes.
Then, the global investment environment would get very, very “interesting”.
The sooner Yellen hikes the better for Philip, our Reserve Bank governor Philip Lowe. The big thing he doesn’t want to do is to cut rates any lower.
The two things that might keep him awake at night are the Aussie dollar grinding back towards US80c and the jobless rate heading back towards 6 per cent. What would put him to sleep is Yellen hiking sooner or more. That would, broadly, give him the flexibility to either hike or cut, or just stay steady, as conditions demanded. In sum, we face a pretty good investment environment. Until suddenly we don’t.