Both branches have now approved the Trump tax cut bill, which is now just waiting on Trump’s signature. His signature didn’t come immediately, with the suggestion that Trump may be holding off to delay some of the spending cuts until 2019.
My view continues to be that the tax cuts are a short-term sugar hit for the US economy, the “trickle down” economics will not work and the US economy will be in a worse place in two years when the benefit wears off.
The world is suffering from a demand deficit – which in my view has a root cause in inequality (see our primer for full details). Basically, give a poor person an extra $1,000 and they spend it, give a rich person an extra $1,000 and they save it. The irony is that some Keynesian spending will help – increasing government debt to invest in infrastructure would be a step in the right direction as it would create jobs and wage inflation for the poorer segments of society.
So Trump’s tax cuts get the increasing government deficits part right, they then mis-allocate the spending side so that all of the money goes to worsening the inequality. In the short term, this won’t matter – there is going to be enough new money sloshing around the economy to hide the weakness. Once the immediate effect of the new money washes through (probably about 18-24 months) the US economy will be left with structurally higher deficits, a vastly eroded tax base and nothing to show for it.
However, don’t let the moralist in you affect the investor in you. Every day, all over the world, politicians make short-term decisions to improve the short-term at the risk of the long term. If you sold equities every time this happened you would never invest. For the next year or two, there is likely to be a debt-driven economic boom that will temporarily help to relieve the demand deficit that the world is facing.
The problem as an investor is that markets have already priced a lot of growth in. While I’m expecting some consolidation over the next little while or a pullback in equity prices before they grind higher, I’m trying not to be too cute with the timing – there is a major stimulus coming.
With all that said, markets largely shrugged overnight with very little movement in the dollar:
or the AUD:
or US stock markets:
European markets fell:
But Dr Copper signalled its approval:
Oil extended its recent rally (although this is probably more based on inventory drawdowns than economic stimulus):
While US gas prices fell
Bond yields up around the world:
Other than that, the financial press continues to be fascinated with the comings and goings of various cryptocurrencies. I won’t bother linking for you, if there is one thing that approaches the bubble in prices of cryptocurrencies, it is the bubble in drivel trying to report on them.
Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.
The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.