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When Not in Doubt, Doubt


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The great French philosopher, Voltaire, once said, “Doubt is not a pleasant condition, but certainty is absurd.” I may get that tenet tattooed on my forearm! I was certain that, if Donald Trump won the presidency this past November, the condition of uncertainty would plague risk markets and cause a sharp flight-to-quality rally in treasury notes. I really had no doubt. After all, what exactly would a candidate who ran on the promise of dramatic change in fiscal spending, tax and trade policy, regulation, and international security agreements do if he took office? How would such a bold shift in domestic and global policy affect the markets and the global economy? How would the Federal Reserve respond to a policy of large fiscal spending at a time of near full employment?

Markets hate uncertainty and are prone to run to safety until they can get a clearer view of the immediate future. Perhaps more importantly, business (the actual economy) abhors uncertainty.

Business may hate the policies they must abide by, but at least they know what the rules are and how to follow them. When a high degree of doubt is introduced, planning and investment of capital halts until there is some clarity. Armed with these thoughts, I was certain that the reaction to Trump’s victory would be similar, if not greater, to the initial market reaction to Brexit. Moreover, to the minority of investors who believed Trump would win, their certainty in the flight-to-quality scenario was the same as mine.

However, a funny thing happened after the election. The markets became convinced that all of the potentially positive, pro-economic growth initiatives that Trump talked about on the campaign trail were going to come to fruition very quickly. It seemed that one famous investor after the next took to the airwaves with unbridled optimism that the new administration would supercharge the economy and return us to the boom time of the 1990s. Ray Dalio, CEO of Bridgewater Associates (the largest hedge fund in the world), exhorted that the new president’s policies would release the market’s “animal spirits.” Investment in business would surge as it was unshackled from burdensome regulation and tax policies. Risk markets skyrocketed, and relatively safe assets, like treasury notes and bonds, were slaughtered. The markets had a near-complete absence of doubt in this view. The markets were certain.

Now, as we near the actual changing of the guard, many things are not so certain.

As we can see in Congress, repealing legislation like the Affordable Care Act is a lot more complicated than just making a statement that you are going to repeal it. In a noble effort to bring good manufacturing jobs to American workers, Trump is threatening companies like Toyota Motor Corporation with a border tax if they relocate U.S. factories to Canada or Mexico. However, slapping a “big border tax” goes against the NAFTA trade agreement, which just can’t be torn up at will.

An example of the possible negative economic implications of dismantling NAFTA is the hundreds of miles of natural gas pipelines currently under construction in Texas and Mexico. Texas has abundant reserves ready to deliver across the border to a country unable to keep up with demand amid a growing economy and transition from fuel oil to gas for electricity generation. Simply building a wall and ignoring NAFTA could have serious economic implications in the U.S.

This is a reality that is occurring in the economy real-time. These are multi-billion-dollar capital investment decisions that are caught in a new degree of uncertainty because decision makers are now unclear as to how the new administration’s trade policies are going to affect them. All the world’s hedge fund managers and corporate takeover titans can talk all they want about “animal spirits,” but people who comprise the real economy cannot afford to violate the tenet put forth by Voltaire. A healthy dose of doubt is unpleasant, but blind certainty is absurd. Unfortunately, uncertainty in the real economy is a drag on growth. I do not think risk markets are taking this into account properly.

Stay doubtful, my friends!

Member SIPC & FINRA. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor.

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