By Simon Bond

I hope you all enjoyed the Christmas and New Year break and had sufficient time to consider your investment options and outlook for the upcoming year. Over the break I used the time to read some relevant books in order to prepare myself as much as possible for the coming year’s surprises.

Four of the books were related to the US Presidential scenario; “The Making of Donald Trump”, by David Cay Johnston, “Great Again: How to Fix our Crippled America" by Donald Trump, “Electing Donald Trump”, by Newt Gingrich and Claire Christensen, “How Donald Trump won the 2016 Election” by Alexander Davis, and for self education purposes, the biography of Ian Fleming by Andrew Lycett. 

All very illuminating and interesting publications. What is crystal clear is that the 2017 investment year will be full of surprises. The consensus view will, more often than not, be turned completely on its head. The usual geopolitical worries will be amplified as Donald Trump continues to negotiate new deals and renegotiate old ones with countries and companies.

It is important to bear in mind that Trump is a “pluses and minuses” thinker. Wall Street and Washington, by contrast, think in terms of multiples and percentages. Trump is, above all, a dealmaker. This is what he loves most and what he excels at. He is not concerned with macro-economics. He wants to negotiate the best deal he can.

Right now, Trump is playing the “new CEO move.” That involves moving fast and decisively on day one to set the mood for the rest of the Presidential term. So far, Donald Trump has set the mood as an aggressive negotiator on behalf of the country, clawing and fighting for every American job. So far so good and consumer confidence has soared since the election.

In the past, U.S. trade agreements were made by Washington lawyers. The other side employed their best and brightest to negotiate trade deals. In the Trump Administration, America’s most capable negotiators will be the ones renegotiating old trade agreements and any new ones.

The Trump government will likely be run by some seven or eight individuals, namely the Secretary of State (Rex Tillerson), the Secretary of the Treasury (Steve Mnuchin), the Attorney General (Jeff Sessions), head of the newly-formed National Trade Council (Peter Navarro), National Security Advisor (Lt. General Michael T. Flynn), Secretary of Defense (General James Mattis), the Secretary of Commerce (Wilbur Ross) and Vice-President-elect, Mike Pence. (Clearly, Steve Bannon, White House Chief Strategist and Jared Kushner, Trump’s son-in-law, will be major powers behind the throne.)

However, Trump will be less radical than people think. Every decision or action by the new Administration will be focused on getting re-elected. Trump will only pick battles that are winnable and he will only implement as much change as he thinks the American population can handle and adjust to before the next election. (Assuming he wins re-election, his second term will be the time for radical change.) 

Donald Trump. Source: AAP

Trump is a master of symbolism, turning a small action, such as jobs at Ford and Carrier, and cost overruns for Air Force One, into the appearance of a major victory. Trump knows how to make his actions as visible as possible, even if they are more symbolic than real. He wants to avoid major “amputation” — to use the words of one astute observer — because he doesn’t want the U.S. economy to be weak before the next election.

Suppose inflation surprises on the upside, and long interest rates head sharply higher.

There is an enormous number of investors who purchased long-term assets with short-term financing which personifies the classic characteristics of a financial squeeze. These investments were made on the premise interest rates would stay “lower for longer”. As interest rates rise, these investors will find that they are paying more in interest than they are receiving in cash flow.