Trump May Equal Volatility, but Volatiliy Doesn’t Equal Risk

Trump May Equal Volatility, but Volatiliy Doesn’t Equal Risk

January 28, 2017 in Macro

It is a new year, and my crystal ball was supposed to have become magically unfogged by the turn of the calendar. Well, I hate to disappoint you, but it hasn’t. Unlike our new president, I lack certitude about the brightness of our future.

My thinking is caught between two quotations from Mark Twain. The first is, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” And the second: “I’ve lived through some terrible things in my life, some of which actually happened.”

On one side I am in agreement with the majority who expect Trump’s policies to benefit the economy: lower corporate taxes, foreign corporate cash repatriation, deregulation, and so on. This inclines me to pause and reflect, not just because I find myself in the innately uncomfortable position of agreeing with the majority but because these in-your-face positives are only part of the new president’s package.

Trump’s ascendancy also brings a lot of uncertainty – something the market is ignoring, for now. The business-oriented pragmatism that it loves today comes with nationalistic and protectionist “job creation” rhetoric that may result in trade (or even conventional) wars. U.S. foreign policy, trade, and military alliances that have been in place since World War II are being questioned by the new president.

In addition, Trump has been elected at a time when the U.S. economy is quite levered. His “growth” policies will likely bring higher interest rates, which are both positive and negative for the consumer – they help savers and punish spenders. Higher interest rates would most likely be a net negative for corporations, whose average debt load has doubled since the financial crisis. And finally, higher interest rates will be a negative for the government, whose interest expense in 2016 was at the same level as in 2007, despite the debt load almost doubling. Thank you, low interest rates!

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