We must start with Trump. The Republican Trump Party in the US has now become a cult. As a result of events last weekend, it is now somewhat more likely that Donald Trump will be the next President and that the Republicans will take control of both the House of Representatives and the Senate. With Trump’s cult status reaching new heights, this feeding of his self-belief combined with his unpredictability is a tad worrying for financial markets.
If he has effective TOTAL control the concern is that he will look to borrow vast sums at a time when there are already public warnings from central banks (not just the Federal Reserve) that politicians need to get hold of the debt problem i.e. countries living far beyond their means. If they do not, the government bond market, which finances this debt, will explode. It will be a variation of the Truss flash crash i.e. yields will rise sharply, the government bond market will become illiquid, and institutions will refuse to buy new government bonds.
The result would be chaos across financial markets as a whole.
Last night he also reconfirmed the economic illiteracy of the stated policies of himself and the Republicans. He again pledged to get inflation down. But as John Authers pointed out this week, you can’t do that if your wish list also includes tariffs on imports, a weaker dollar, and more government spending.
We will report back on the investment implications as events unfold.
Sticking with the US, last Thursday’s inflation numbers in the US encouraged hopes of a rate cut in September, with a 90% probability – no worries yet about Trumpflation! The result was a big jump in US smaller companies (Russell 2000 index). In contrast the tech-dominated NASDAQ index has fallen sharply as Joe Biden announced tighter controls on companies that share chip technology with China. The announcement was largely political theatre, and the market response was more to do with increasing nerves over AI.
Goldman Sachs produced very compelling research trashing the potential of artificial intelligence (AI), the AI dream having driven up the ongoing mania in the US stock market. In a nutshell a new technology is worth little if all it does is automate low cost tasks, which to a very large extent is where we are today. There is no transformation. Billions is being spent on a fantasy. The gullible business class has just spent around $500 billion on picks and shovels from the likes of Nvidia – but there is no gold, just big egos and depleting cash piles.
Over the last week it is the Dow Jones index in the US which is top dog, up 2.2%. It became largely irrelevant as a benchmark many years ago, supplanted by the S&P 500 index, but it doesn’t rely on tech stocks, and has a definite Value-bias. Are Value-style sectors and funds now the place to be? We will return to that in coming weeks.
Behind the Dow were Brazil, China (A shares), and India, up around 1.5%. At the bottom was China (Hong Kong, H shares), and Japan’s Nikkei, down a touch over 4%, and Europe (ex UK!) down 3%.
On that Chinese dichotomy, note that A shares are typically bought by Chinese domestic investors whereas H shares are the target of global investors. The latter might have expected more from the third plenum which has just finished, where the top brass set out high level medium to long term policies. More likely is that detailed reforms will be announced in the next week or two.
Though Japan’s Nikkei was down, note that their small caps continued trending upwards. As for Europe, France is worrying the Germans, and Germany is worrying everyone else. On top of that no one can see anything other than bad news for Europe in a Trump world.
With these worries in mind, it was no surprise that gold and gold miners had a good week, up 3-4%. The prospect of lower interest rates make non-income producing gold look more attractive. Greater global uncertainty because of a Trump-dominated world also helps, along with nearer term risks of conflict escalating in the Near East.