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November 9, 2016

Trump wins. Now what?

Were you surprised first by Brexit and now by President Trump? You are not alone – the New York Times tracks nine highly-regarded pollsters and they unanimously expected a Clinton win only one day ago. We had our fair share of political shocks this year but this one, arguably, “trumps” them all. In essence, it is another sign of a major rejection of the political status quo. The perceived losers of globalization have turned the incumbent political system on its head, and with it we should expect change.

Here are our early thoughts on Trump’s victory and what it probably means for investors.

So why was Trump elected?

Trump as much as Brexit is a vote against the political establishment from a large part of the society. It is all too easy to disparage his voters but we should not forget that they have some real complains that have not been addressed:

  • Real wages have barely grown in the last 10 years for most of the lower and middle classes in all western countries. In tandem, asset owners have been the beneficiary of globalization and loose monetary policy. This has amplified inequality. This morning I saw a statistic where across the G7, 65% of parents believe their children will be worse off than they are. Is it really a surprise that we see a political backlash? It looks like the end of global austerity to me.
  • Political parties seem interchangeable. If the parties of center have become indistinguishable, the only way disgruntled voters can voice their opposition is via extremist parties or outsiders taking over an established party (Trump). No surprise there!

It will not help to bash Trump voters. If we do not take their concerns serious, the mainstream parties will soon no longer be mainstream. The US election results should remind investors that there is plenty of scope for political surprises in other countries too. There are several significant elections looming in Europe over the next 18 months, which could be profoundly important for the future of the Eurozone project. It would be wrong to assume that America has a monopoly on disgruntled voters…

So what does it mean for investors

Uncertainty abounds as Mr. Trump prepares to take office. His campaign featured a shape-shifting list of policy proposals, often seeming to change hour to hour. The Donald has promised everything to everyone: massive tax cuts, huge infrastructure build-outs, upgrade to the military, a wall on the Mexican border, etc. However, if we were to distill his key points, we are left with two key policies:

  1. More fiscal spending. Actually most economists welcome a shift from an over-reliance on monetary policy to a looser fiscal policy. Given the poor state of the US infrastructure, this would also be money well spend and would boost growth. However, expansionary fiscal policy at a time when the US economy is already at or below 5% unemployment will lead to more inflation pressure in the future.
  2. More protectionism. Trump made clear several times that he does not see globalization as an unalloyed good. He talked about renegotiating existing trade deals and freezing current negotiations. You are not going to see a sudden break with previous policy, but rather some protectionist laws here, some capital controls there — it’s a death by a thousand cuts. But what did globalization in the past mean? I put pressure on prices and was thus disinflationary. A reverse of that policy should therefore be inflationary over time.

In summary, populism = inflation = bad for fixed income and bond proxies. More specifically, investors would do well to take a hard look at what has worked best in the last few years – this should be a good guide to what you should be careful with going forward.

What really matters now

The US Presidential Election is extremely important for investors – but in a different way than you may think. The election says more about yourself and your investing approach than anything else. Anyone who made a material change to their portfolio ahead of the vote basically gambled on a uncertain outcome. But investing has nothing to do with gambling! A systematic approach to investing focuses only on what we can control, i.e. asset allocation, costs and behavior. The US Presidential election is outside of our control and we need to separate long-term investing from taking short-term bets.

This is basically on opportunity to take an honest look in the mirror. If you reacted pre-election, you probably acted in panic. Taking emotions out of the investment process is critical if you want to achieve your long-term financial goals.

Will financial markets calm down after the US election. Unlikely. Bad news sells and the Italian constitutional referendum on Dec 4th will be another opportunity to scare people into believing the world (or rather the Euro/EU) is about to end. Funny thing is, despite the best efforts of the doomsayers, the world keeps on turning…

If you prefer an evidence-based approach to investing to one based on emotion, you can reach us on +49 89 89 89 95 05 or just send us an email.

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