Does history repeat?
Apparently it does…
The US Dow Jones Industrial Average hit fresh highs last week. That’s the third consecutive week higher in a row.
Yet, despite the rich getting richer, the majority have missed the entire rally and remain on the sidelines.
It shouldn’t be a huge shock…
A rally based on rumours, hope and expectations…who wouldn’t want to get involved!?
Fortunately, as we have outlined over the past few weeks, the end of the Trump ‘fun’ run appears near. It’s time to get ready for a 10–15% stock market correction. The Aussie stock market should follow the US in correcting lower.
The forecast comes down to one main reason — Donald Trump.
Now, if you think we’re here to bash Trump, think again. The mainstream media does a pretty good job with its one-sided reporting. For that reason, we will tell you the truth about his economic policies.
Starting with the bad…
Here’s a massive negative
Trump has one terrible economic policy — tariffs. He wants to place a 45% tariff on Chinese goods and a 35% ‘border’ tax on Mexico.
Does the Great Depression ring a bell?
US President J Edgar Hoover signed the now-infamous Smoot-Hawley tariff bill into law during 1930. It increased import duties by more than 50% for more than 890 goods. This law initially intended to raise prices to help farmers and grow US employment.
The results were catastrophic. The US Department of State said the following:
‘U.S. imports from Europe declined from a 1929 high of $1334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2341 million in 1929 to $784 million in 1932.
‘Overall, world trade declined by 66% between 1929 and 1934.
‘Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.’
Two years later, unemployment had reached almost 24% in the US; more than 5,000 banks had failed; and hundreds of thousands were homeless and living in shanty towns called ‘Hoovervilles’.
If the US wants to avoid another Great Depression, it should think seriously about raising tariffs. In my view, the Smoot-Hawley tariff triggered the sovereign-debt defaults. That’s what ultimately caused the depression.
The bottom line: Import taxes are a terrible idea for the stock market and world economy. Fortunately, however, Trump offers three positive economic policies to offset the one negative.
The ‘ignored’ positives
First, the US drastically needs a US$1 trillion infrastructure package. Most of its buildings require major upgrades. The country’s airports are rundown, and its bridges and roads are crumbling. When you compare the country to Singapore or Hong Kong, the US looks like a third-world country.
Second, massive tax cuts spell ‘great news’ for the economy.
That might seem strange. The mainstream, as well as politicians, will tell you otherwise. They will tell you that ‘trickle-down’ economics (more on that below) doesn’t work, and that it will blow out the budget.
That’s a lie sold to raise taxes!
Trickle-down economics works. The theory implies that the benefits of the wealthy ‘trickle down’ to everyone else. These benefits are usually tax cuts on businesses, high-income earners, capital gains and dividends.
That dollar — when spent on, say, food or entertainment — gets passed to someone else (i.e. a worker) via wages or business profits (i.e. which can be distributed as dividends). That person spends…and, well, you get the point.
Likewise, when a business has more confidence about the future, it will invest in capital and labour. Trump’s tax cuts incentivise businesses to invest for growth.
If you have more money to spend, you will probably spend it. Sure, you might save it. But most people would spend. And, if you invest your funds back into the stock market, that should increase your wealth with companies expanding with lower taxes.
Of course, the mainstream media always argues the plan won’t work. It uses ‘Reaganomics’ (a form of trickle-down economics) as an example and says that it didn’t work.
Reaganomics did work — it stimulated the economy and gained the confidence of the people. However, it also blew out the budget because the government couldn’t control its spending.
Ronald Reagan tripled the national debt during his two terms, from US$900 billion to US$2.7 trillion. Military spending blew out the budget. The Soviet Union had a huge military at the time. And Reagan promised, if elected, to turn the US military around.
That was a time when the US military was weak. In fact, President Jimmy Carter announced on TV that the country was experiencing a ‘crisis of confidence’ on 30 June 1979. The world was locked in fear. Remember, gold skyrocketed and hit US$875 per ounce during January 1980.
When people don’t have confidence in the economy and live in fear, they won’t spend a cent. Reaganomics turned around the US economy.
Trump’s tax plans should also kick-start the economy. Of course, the Trump establishment needs to rein in spending to avoid a crisis.
Don’t hold your breath…
Trump believes in debt — it’s how he grew his empire. But, while his aggressive fiscal policies (i.e. rebuilding military, spending on infrastructure, etc.) should blow out the budget and help create the next financial crisis, lower taxes should also stimulate the economy. Capital will move into the US. Businesses will expand, and that should create jobs.
Finally, Obamacare has been a disaster, doubling the healthcare costs for most Americans. Repealing and replacing the policy is a great idea. Healthcare is Trump’s main focus at the moment.
Promises and dreams — about to be broken?
Trump was elected for his ‘out of the box’ policies. And most of them are bullish for the stock market. That’s why traders ‘bought the rumour’, and could soon be able to ‘sell the news’.
CNBC reported on 24 February:
‘Investors are hopeful that President Donald Trump will wrap some details around tax reform and other market-friendly programs when he speaks to Congress in the week ahead.
‘Expectations are high, but the likelihood is low that many real details on individual and corporate tax reform or fiscal stimulus will be forthcoming by Tuesday evening. However, the president did say on Feb. 9 that he would have a “phenomenal” tax plan just about now and some traders still hang on that hope.’
Trump addresses the US Congress tomorrow morning for the first time. A lot of investors — myself included — will be watching eagerly. Punters want to hear news on all the topics above, especially tax.
There’s a good chance we will hear something. Trump said he would talk about ‘tax plans’ within the next two to three weeks…a fortnight ago.
Remember, the stock market is driven on rumours…not facts. Facts get priced into markets once the rumour has concluded. In other words, Trump’s words could ‘conclude’ the rumour. The stock market could peak tomorrow and turn lower. Without more rumours floated by Trump, the stock market could see a correction during March.
If the stock market pulls back next month, look to load up on your favourite stocks. The stock market isn’t close to crashing. Trump’s ‘bullish’ policies should drive capital into the stock market throughout the year.
Editor, Markets and Money
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