The ‘Trump Bump’ Claims Its Biggest Scalp

Donald Trump can do no wrong.

Less than a week into his presidency, the Dow Jones broke the 20,000-point barrier for the first time. Yesterday it was trading just above 20,100 points.

There’s no shortage of criticisms levied against Trump’s protectionist trade policies. Yet the president himself led the wave of optimism on Wall Street. First Trump reduced the regulatory burden on US manufacturers with the stroke of a pen. Then he cleared the way for the construction of two new oil pipelines.

In addition to strong US corporate earnings, traders liked what they saw. If Trump’s term in office proves to be anything like his first week, champagne will be in high demand on Wall Street.

Not surprisingly, the gold rally took a hit as traders piled into stocks to close out the week. Gold fell almost US$20 an ounce, putting a temporary end to what The Markets and Money editor Jason Stevenson calls the ‘fake’ gold rally. As Jason explained on Tuesday, smart investors have taken the ‘wait and see’ approach with Trump. Despite early optimism about Trump’s presidency on Wall Street, the uncertainties of his policies make caution the order of the day.

Jason doesn’t believe gold offers much value for investment purposes, but it could offer a great short-term trading opportunity.

Capital rushing back into stocks could also pave the way for the US Federal Reserve to raise rates in March. Just as global strategist Jim Rickards has been forecasting in Currency Wars Trader. Stock markets play an important role in shaping our perception of the economy’s health. The present feel-good factor in the US, think the Dow’s record-breaking run, could force the Fed’s hand in raising rates soon.

Yet any decision by the Fed to raise rates will only boost a US dollar that is already caught up in a bull market of its own.

One noticeable outcome of a rising US dollar has been increased tensions between the US and China. The Trump administration has levied accusations of currency manipulation. He claims the Middle Kingdom is deliberately devaluing the yuan. But, as Jason explained on Wednesday, there’s little truth to that at the moment.

China pegs the yuan to the US dollar in a 2% band. It wants a stable currency for business and investment purposes. It also wants cheaper imports, via a stronger yuan, to create cheaper goods to export to the rest of the world. The combination of cheap inputs (imports) and labour equals cheaper Chinese goods for export.

In other words, a stable yuan helps promote economic growth in China. There is no reason to manipulate the yuan lower, as it would make imports costlier.

But the yuan peg will eventually break as the greenback gains further momentum. According to Jason, the yuan could drop by as much as 25% this year against the greenback. Such a move would have severe repercussions for global markets. Click here to read Jason’s in-depth analysis, and what it will mean for the global economy.

The US dollar’s strength will also make the Reserve Bank of Australia’s decision-making more straightforward, with lower-than-expected inflation figures giving scope for the RBA to keep interest rates steady at 1.5%.

The Australian Bureau of Statistics headline consumer price index rose 0.5% in the December quarter. That’s down from 0.7% in the previous quarter.

With both domestic and international factors working in favour of keeping rates on hold, no changes are expected to the cash rate when the RBA next meets.

What’s more, with inflation trending higher, it’s expected that the current 1.5% cash rate will be the low-point for interest rates. Despite this, talks of a rate rise remain premature, and it could be a while before the RBA decides to finally raise rates.

Steady rates over the next several months should help support the Aussie property market. But the big real estate moves could take place in the US, which has already seen house prices rise back to levels last seen before the downturn of 2008. In fact, according to Cycles, Trends and Forecasts editor Callum Newman, US real estate is coming back into focus for a new generation of American property investors.

Writing in Markets and Money on Thursday, Callum presented a compelling case for a resurgent US property market. ‘Flipping houses’ — buying low, renovating, and selling higher — is on the rise, as people cast aside the lessons from 2008 in favour of chasing profits. With the previous downturn left behind in the cultural memory, the cycle of boom and bust has begun anew. If you’d like to learn more about what the future holds for both US and Australian housing markets over the decade, make sure to check out Callum’s work at Cycles, Trends and Forecasts.

Changing tack, on Monday and Friday, Markets and Money editor Vern Gowdie rounded off his four-part series on what the future holds for welfare and the age pension.

Vern argued that, as a society, we need to be mature enough to debate how best to maintain a social security system without creating an environment of resentment among young generations.

Yet self-interest within government threatens to derail this. Any government courageous enough to start the debate faces the axe at the ballot box. Short of urgent action, Vern concludes that the government will take the safer route: increase taxes, decrease benefits, and/or raise the pension-eligibility age.

Nonetheless, the welfare system, or Ponzi scheme as Vern calls it, requires an increasing taxpayer base to avoid collapse. That will require more skilled immigration — the very same thing that is causing backlash in Britain, Germany and the US.

Self-interest may prevail in politics, but Ponzi schemes always fail. For more on why the welfare system is doomed to collapse, click here and here.

Finally, before we leave you this week, Vern has just returned with The Markets and Money publisher Kris Sayce from a gathering in Baltimore with former Federal Reserve Chairman Dr Alan Greenspan.

Kris was joined by Dr Jim Walker, Chief Economist of Asianomics Group, this week to discuss some of the answers Dr Greenspan gave at the meeting — and those he deliberately avoided. To listen in on their conversation, which also covered the most promising emerging market in Asia right now, and much more, click here.

Until next week,

Mat Spasic,
For Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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