Sunday Herald Sun - - Finance -

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.

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