Rudi's View | 10:01 AM
In this week's Weekly Insights:
-Preparing For Tougher Times Ahead
-Invitation To FNArena Subscribers & Readers
-On The Money Puzzle Podcast
By Rudi Filapek-Vandyck, Editor
Preparing For Tougher Times Ahead
A little over four months since the 2024 presidential election and circa seven weeks after Donald J Trump was sworn in as the 47th president of the USA, financial markets are grappling with the realisation this new administration is not simply about getting rid of red tape and lowering taxes.
There's a much more radical strategy that is being rolled out, making America more isolationist and American businesses home base-focused. Forcefully unwinding 80 years of trading and investing globally will never be a rapid and smooth process.
Can it 'work' in the way the Trump administration thinks it should?
One of my favourite expressions, one I often use in relation to central bank policies and specific economic initiatives is: in theory, there is no difference between theory and practice. In practice, however, there almost always is.
It's quite popular among investors these days to mock all those forecasts that economic recession and a savage bear market would be the result of never-before-witnessed central bank tightening but the consensus recession never arrived and the brief bear market for Quality, Growth and Technology stocks that did eventuate has long been forgotten about as these stocks rallied to fresh all-time highs by late last year.
Both economists and financial markets have an abysmal track record when it comes to accurately predicting the future, but one thing cannot be ignored or denied: markets don't like uncertainty.
Right now, there are very few matters that remain set in stone or that can be relied upon with 100% certainty.
To a very large extent, this is of the US president's own making as we all know he likes the broad media attention, as well as creating chaos to leave everyone else guessing about his next possible moves, and thus there are no guarantees left for financial markets looking for clues and likely outcomes.
The one question that remains on my mind is how much of a backflip, and how many backflips, will follow once protests in the streets reach enough members of Congress and inside this administration as many actions and inititiatives will hurt US businesses and households hard and, frankly, they often seem to make little sense, also taking into account many US citizens that will be feeling the pain voted for Trump at the November election.
Even more important, the radical change that is being forced upon the US economy has never been attempted before. There is literally no historical precedent.
Sure, there have been times when the US, and other countries, actively applied and relied upon tariffs, but that never before has occurred in the context of weening the entire economy away from international trading.
No precedent means there's no historical framework investors can rely upon for what's coming up next. Are tariffs inflationary? They can be, assuming consumers simply keep buying irrespective of higher prices. They can also be deflationary if higher prices have the opposite effect.
Pick your pick. It is well possible that inflation comes first, then the economic slow down and deflation.
Constant messaging by the US administration that plans and implications have been well-thought through and offer no surprises will only harden the market's anxiety that things may well become a lot worse first.
No surprise thus, the overall climate for US equities, and in Australia as well, has deteriorated in recent weeks. Gone are the widespread enthusiasm and forecasts of yet another year of positive return.
Right now the mood is Risk Off and general anxiety revolves around how low can these markets fall?
How we respond to this change in the overall climate and direction of the share market is very much a personal choice. One school of thought tells us anything nefarious will prove to be but temporary.
History shows things always get back on the right track, as that's the scenario that always plays out, even after global wars, financial system meltdowns and severe economic recessions.
The flipside is, of course, there are plenty of stocks around that never recovered from the Nasdaq meltdown (25 years ago), or from the GFC (18 years ago), or more recently the covid lockdowns (4-plus years ago).
Plus it can take many, many years to make up for the fall in capital value of our investments in case markets do experience a deep and prolonged bear market.
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