In defiance of the will of the people, our slogan for the year just begun must be “Make Kev (the middle part of him, anyway) Small Again.” We’re not talking the fakery of cosmetic makeovers or the desperation of fad diets, gentle reader. The mirror may show a man of a certain age, but the inner man says 25, so we pause to drop and give you 50.
WHOA! Give us a moment. Catching our breath. There, we’ve managed to light a Marlboro. “Curse Sir Walter Raleigh, he was such a stupid get!” (Thanks, John Lennon). Much better. The heart rate is steady enough to type again, and the fine Virginia tobacco curling in our lungs is allowing us to think great thoughts and deliver them, as Athena sprang from the brow of Zeus, fully formed to a waiting world.
We have to begin with Time’s Person of the Year. Like any blowhard or child, Donald Trump won’t sense a bit of irony when he rails against the Federal Reserve for raising rates in the coming months. We can only imagine the new president dueling with Janet Yellen and brethren via Twitter. It’ll probably go something like this:
Mr. Trump: “She kept ’em low for Hillary & now disses the people. Big Mistake #FEDUP”
Ms. Yellen: “Data tell different story. Drink up. Punch bowl coming away #PARTYPOOPER”
Mr. Trump: “Waterford? Nice. It’ll make a beautiful chandelier in White House visitors’ men’s room, and Fed’s gonna pay for it!”
Ms. Yellen: “The reverse repo is in the mail!”
Mr. Trump, the Wharton School graduate, will declare victory, knowing nobody on his side knows the Fed is draining reserves. Working men and women everywhere will hail the chief’s latest triumph over the elites.
Trumpians will hardly be able to catch their breath, though, before the repeal of Obamacare restores the delivery of healthcare to its former glory before the socialists ruined things. The irony (there’s that word again) is that, despite all the fulmination against the Affordable Care Act, the tacit acknowledgement in its replacement is that the “market” was a failure. It’s our opinion that whatever replacement is fashioned will be just another step toward an eventual single-payer system. Again, no one will notice.
As for investing in the stock market – we’re reluctant. It’s too expensive at 127% of gross domestic product. It seems to us, the growing share of corporate profits at the expense of wages in the national income and profit accounts has been a significant factor in the stock market’s higher valuation. According to the St. Louis Fed, profits were 5.8% of GDP in 1990, compared with 9.3% in 2015, while wages and salaries slipped from 46.6% to 43% in the same periods.
Ironically, though, the election of Mr. Trump (and the strong showing by Bernie Sanders in the Democratic Party tussle for that matter) was in large part driven by a sense that the billionaire real estate developer could reverse that trend. If he delivers, and the scale starts to tip toward labor, it seems fair to conclude that market participants would consider current valuations too high.
All that is rather long-term, though. In the shorter run, the biggest risk to equities is likely to be the unforeseen shock. Of course, that fatuous observation is always a shadow on the investment horizon, but we think the probability is greater in the age of Trump. There is something strange about a man (or the speechwriter channeling him) who sees “American carnage” when he looks out his window or believes Hillary Clinton’s 2.9 million popular vote advantage was the result of fraudulently cast ballots.
We are no head shrinker, but we’re willing to bet Republican mainstreamers are grasping at whatever psychological strategies available to keep the president on the rails. They may well succeed, but a geopolitical or domestic political crisis is probably a greater risk than usual.
We also think the market is just beginning to consider the fallout from protectionism and the risk of diminished global trade implicit in Mr. Trump’s walls and border tax threats.
Still, all could go well. The path in 2017 could very well resemble the magical golf hole we traversed recently. We approached the narrow, 175-yard par three lined on both sides with towering old pines. Our first shot was well-struck, but alas, it hooked square into the trunk of one of them, the ball landing in the short fairway. We then smacked a wedge into a pine on the right side, the ball caroming further back on the fairway. Chagrined but unbowed, we wielded the wedge once more. A delicious collision of blade, ball and turf sent a shiver of pleasure through our athletic pose. The dimpled sphere bounced once on the green. Then, just as we feared it would bounce off, it miraculously hit the stick and dropped into the hole. The greatest par save of our career – successful but a harrowing ride. Investing in 2017 could be something like that.