As the US licks its wounds after one of the most divisive elections in history, the markets appear to anticipate a positive economic outcome.
On the election night, the overnight futures markets plummeted with the expectations of a Clinton victory. But it didn’t take long for a rebound. By morning, the markets returned back to normal.
The LF Brook Absolute Return Fund lost -2.52% in the second quarter of 2021, compared to a positive performance of 7.59% for its benchmark, the MSCI Daily TR Net World Index. Year-to-date the fund has returned 4.6% compared to 11.9% for its benchmark. Q2 2021 hedge fund letters, conferences and more According to a copy Read More
Lower taxes and a less regulated environment are good for the economy. And I hope Trump pulls it off. However, I am worried that what we see now is just a post-election honeymoon.
Like most candidates, Donald Trump will not fulfill all of his promises. Hopefully, he will compromise on some divisive issues and won’t go to extremes. However, contrary to popular belief, the biggest issue is not Trump.
President Trump will do his best to reform government and stimulate business. But he will have to fulfill that in the face of major economic headwinds, some of which are outside his control.
Here are the five strongest ones.
Five Major Issues for Trump
- Unprecedented debt levels: The US government has accumulated almost $20 Trillion in IOUs. That doesn’t even factor in unfunded liabilities or the cost of a massive infrastructure program.
- ZIRP: The Fed has made it clear it will raise rates going forward. But the economy is now too weak to weather higher interest rates. The nation’s bank is pretty much out of magic bullets to stimulate the economy should it falter.
- Rioting around the country: We can hope that time heals deep political divisions in the US. However, political discourse is breaking out and many citizens are willing to resort to violence.
President Trump will need to be very savvy if he is to lead a united America towards peace and prosperity.
- Recession: The US has had eight consecutive years of growth without a recession. Despite an overdue recession, the markets seem positive. Will they be disappointed?
- Washington reforms: President Trump has a mandate, yet very little power to reform the political system in Washington. Crony capitalism is entrenched and the ties between Wall Street and K Street will stay resilient.
Introducing reforms that curb the power of special interests in DC is a gargantuan task. Will Trump succeed? Only time will tell.
The Best Insurance
Like all Americans, I hope for a bright future. Hence I continue to invest in high-grade bonds and stocks. However, a period of high-volatility is inevitable. Think QE, negative interest rates, an overdue recession, levels of debt, you name it. Now add up the political risk that comes with a Trump-led administration.
I don’t doubt Trump’s desire to bring change was sincere and I hope he succeeds. But hope makes for a very bad investment strategy. Hence your portfolio should always be prepared for the worst.
The best hedge? Gold and other precious metals.
Precious metals rarely do well in times of stability and prosperity. But during economic stress, they are the best natural refuge. Whether it’s high deflation or high inflation, gold almost always shines.
In the 1970s—a period of double-digit inflation—gold rose from $35/oz. to a peak of over $800. During the 2008 financial crisis, gold jumped from $760/oz. in November 2008 to $1,130/oz. at the end of 2009.
We all pay for insurance that we hope we never claim. Nobody wants to get money for a house fire, auto accident, or heaven forbid, the death of a loved one. Yet, we buy it.
With all of this in mind, I am increasing my own allocation to gold and precious metals from 10% to 15% of my portfolio. I suggest you do the same.
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