Broomer's Blog

From the category archives: US

US

Hey Genius, You’re Worrying about the Wrong Deficit

The trade deficit dominates President Trump's attention and by some reports, he has been fixated on this subject since the late 80s when Japan seemingly threatened to take over the world. Clearly that episode did not end well for the Japanese economy, yet Trump has persisted in wailing about unfair trade practices with his main trading partners. To be fair, Trump's ultimate intention is to engineer freer trade is reasonable but is this really worth the risk of igniting a trade war to reset the balance?

Meanwhile there has been surprisingly little comment about the cost of his tax cuts. It may be more correct to consider these not as tax cuts but merely deferred taxation measures. Most of the personal cuts are earmarked to end by 2025 but even for the permanent corporate ones to be sustained, the money needs to come from somewhere. Otherwise it will necessitate cuts to expenditures. Trump reckons that the Laffer Curve will come to his rescue as the greater growth will lift tax revenues, but as this stage of the cycle this appears rather farfetched. Even using the fanciful assumptions in the White House projections, these tax cuts do not become self-funding over the next decade. While Trump believes that his policies will spur economic growth, there are good reasons to suspect that they won't.

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The Beauty Parade

Keynes famously used an allegory of a beauty contest to describe how markets behave in the short term. He posed the question of how you should go about betting on the outcome of a beauty contest. To be successful, you should not bet on who you think is the most beautiful contestant but those who you think the judges will consider to be the most beautiful. His point is subtle but distinct.

James Montier at GMO recently highlighted some apparent inconsistencies in the results of the Merrill Lynch Fund Manager Survey. He points out that a significant majority of fund managers now believe the US market to be overvalued,

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Pedalling Harder Just as the Brakes are Being Applied

My brother-in-law is a cycling fanatic. I asked him the other day if there is a technical term to describe pedalling while the brakes are being applied. He thought about this for a moment, before suggesting 'stupidity'.

It is almost 10 years since the financial crisis and the long drawn out recovery finally appears to be on a self-sustaining path. Monetary policy is gradually being tightened in the US, emergency rate cuts are being reversed in the UK and the ECB is dialling down its QE programme. With US unemployment just hovering above 4%, many monetary hawks will be thinking this is not before time.

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This Time It’s Different

It is often said that the most dangerous words in investment are that 'this time it's different'. The phrase resonates through stockmarket history as experts pontificated that old rules of valuation no longer apply and the current crisis/situation bears little similarity with what occurred in the past. The words were widely echoed during the 1990s tech boom, as they were during the depths of the bear market of 2008. Since the days when it was first formally identified by Graham & Dodd, the value philosophy has proved its worth and presented investors with one of the few reliable ways to earn super normal returns, since valuation levels typically revert to the mean. Indeed such is our respect for its power, it plays a principal role in Square Mile's tactical asset allocation process.

Reasoning that things are different this time is typically an expensive mistake. So, I almost fell off my chair the other day when I read that no less an authority than Jeremy Grantham was postulating that valuations may be reaching a new, higher plateau and that "it can be very dangerous indeed to assume that things are never different".

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Trump is going to end up with kimchi on his face

Donald Trump really does not need anyone's help to make him look foolish; he seems perfectly capable of doing this all by himself. Over recent weeks, I have been following his comments on North Korea with disdain and North Korean President, Kim Jong-un, must be relishing the propaganda victories that Trump has continually presented him.

My wife was born in Seoul, so I tend to follow events on the Korean peninsula with more interest than many. Events north of the border are often disturbing, sometimes weird and occasionally comical. This Telegraph report about Kim Jong-un's father provides some flavour to this. The people of the South are also incredibly proud of their small nation. Koreans are typically a passionate people and are sometimes referred to as being the Italians of Asia. If you are ever in search of an entertaining evening, I would strongly recommend taking a drink in a Korean bar when the national football team is playing.

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Is the Don Trying to Get a 90 year old Granny Pregnant?

Trump has already developed a reputation for using statistics like a drunk uses a lamp post - for support rather than for illumination. During the campaign trail, he brazenly talked about lifting the economic growth rate to 4% and even 5%. More recently the White House has produced a budget proposal incorporating a 3% p.a. growth rate for the next 10 years, which sounds a little more plausible but still ambitious when compared to history.

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You've got to love this guy!

“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me,”   Donald Trump.

For those more interested in facts, the dollar index is up 1.3% since the election result on 9th November.

What are Trump's policies?

Donald Trump’s Contract with the American Voter 

Some ideas appear sensible, others fanciful and a number downright idiotic.

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