Today I’m not going to report what anyone in the MSM says. There’s a pointed reason for that. They have failed.
It’s the MSM that’s given rise to President Trump. It, and its greedy allies in government and big business – our global elites – that supposedly champion liberal democracy and capitalism but in reality are just pigs with snouts in the trough. It is they that have hollowed out the middle classes. They that have denuded generations of basic needs like affordable houses. They that have failed to manage immigration in the interests of their fellow citizens.
They will no doubt be tearing bodices and gnashing teeth at the terrible injustice of it all, without taking a moment to reflect that it is they that have brought their system to a close. By profiteering at the expense of functional markets and meritocracy they have lost the social licence to operate their favoured system and now something new is emerging to take it from them.
That paradigm shift is towards a much more closed social and economic regime that condemns the global elitist. The nation state is back. Protectionism is back. Borders are back. Immigration is finished. The new dominant and accelerating trend is deglobalisation.
It will take its shape now in the US in whatever form Donald Trump decides. But it is not in the US where the deglobalisation hammer will fall hardest. On the contrary. Once past the market shock a Trump Administration holding Capitol Hill will be highly stimulatory with massive tax cuts, a big onshoring drive via protections and huge labour deportations. He is going to have to let wages run too or he’ll also get tossed out.
No, it is Europe that has now entered a fatal decline. Even more than Brexit, the Trump victory has authorised every disenfranchised middle classman and nutter to tear up the eurozone. Next year’s dizzying array of European elections are now tripwires attached to nuclear devices for the Continent.
Australia is very poorly placed to weather this shift. The post-mining boom adjustment has been based upon high immigration and huge offshore borrowings to fuel house prices and construction. Both have completely misread the developing circumstances. Immigration is going to be cut. I don’t know by who. It doesn’t matter. Whoever it is will win the next election.
As well, Australian offshore funding costs are going to rise as accelerating degloblisation is discounted in all externally funded economies. There is no country on earth more exposed to that.
The other major impact will be on the budget. We don’t know yet how seriously to take Donald Trump’s threats of withdrawal from North Asia. I suspect they’re largely mercantile in nature. But either way, Australia’s defense budget is going to have rise very materially. We may even need the A-bomb. That means cuts elsewhere and more incremental pressure on Australia’s debt-addled households that depend upon government largesse.
This new world order is very unstable. It is filled with ‘strongman’ leaders that can throw their weight around rather than the technocrats of yesteryear that kept the arteries of globalisation unclogged. We’ve shifted from institutional certainty to deep political flux. Assets will need to be discounted accordingly. It is still too early to be definitive but my thoughts today are:
- After the initial shock, as I say, I expect the US economy to do well for a time. Trump economic policies are very inflationary. As such the USD is a screaming buy. Especially since everywhere else will be forced to ease all the more aggressively to offset their restive populations.
- US bonds are a sell in the short term. You can’t cut corporate tax rates from 35% to 15% without freaking out the bond vigilantes. Having said that, they are now a safe haven bid as much as a yield play so the losses may be contained. Moreover, the Fed is going to have to tighten more quickly so the risk of recession also rises with Trump stimulus. So medium term bonds are probably a buy. Indeed we may even see a curve flattening pretty quickly.
- Equities are torn. A massive company tax cut would hugely boost net profits but rising labour income will be drawn from corporate profits and geopolitical risk will be much higher, not to mention a bond sell-off killing value metrics. Perhaps a short term buy into medium term sell as the Fed tightens.
- Commodities are going crazy for now but I can’t see it lasting. Chinese authorities are getting increasingly desperate in their efforts to kill the futures bubble. They will have to succeed or China is confronting a building inflationary shock. If Trump hits China with a 40% tariff then the fallout will be big. As well, a US dollar bull market is completely inconsistent with rising commodity prices. When the bulk bubble eventually deflates I’d expect that monetary headwind to bite. Having said that, China may respond by dropping the yuan even faster (though that would be very dangerous) and could support speculative commodity demand seeking to hedge. It may also be forced to stimulate more investment as its external conditions weaken. That may boil down to a goodly pull back ahead but not to previous lows.
- Gold is now an essential part of any portfolio. It’s future is bright.
- Locally, I see the Aussie dollar as a sitting duck. If US rates are going to rise then it’s going to fall. For the first time in a long time I am forced to seriously contemplate that the local monetary easing is over. It’s not because we’re doing well but because everywhere else might do better, US inflation rise and the AUD fall by itself. Having said that, by this time next year I expect we’ll have virtually no way to grow domestic demand beyond fiscal bleed so that still orients me towards more easing. Then there are the rising recessionary risks in both the US as the Fed tightens and in Europe as disintegration closes in.
- I see no reason to own Australian shares.
- Australian bonds now have a question mark.
- Australian property is in all sorts of trouble. The massive oversupply already on the way is going to be greeted by falling immigration as politics swings behind The Hansoning and rising funding spreads.
- Behind all of that looms the euro Balkanisation and an historic shock to everything.
It is simply too early to able to call this yet in full, not least because we don’t know how much of Trump’s platform is pure bluster nor how much will be implemented and at what pace.
To say the least, big things are afoot as the global wanker is chased into oblivion.
