The trouble with buying promises….

Tuesday 4th April 2017

The trouble with buying promises….

‘April is the cruelest month….’

T.S. Eliot had a point with the opening line of The Waste Land. To the man-on-the-street, this April is indeed a cruel month….

It comes hard on the heels of February – when inflation hit its highest level since 2013. And on the coat tails of March – when the gloom index rose to a 40-month peak.

And the gloom keeps coming. Price rises abound – across the board.

Spring might have been in the air over the weekend. But it is prices that have springs in their heels – bouncing up to ever-higher levels.

  • Harder, tougher, tighter….

April 1st passed by relatively unnoticed – but you’ll soon feel its effects in your pocket. Things got more expensive on April Fools’ Day. ….

NHS prescription charges rose 20p. TV licenses rose £1.50. Many local authorities increased council tax bills. Water bills rose. Car tax rose on smaller cars. Some mobile phone companies upped prices to reflect inflation. Energy companies raised prices again….

Life just got that bit tougher. That’s how it happens. It’s how things go from bad to worse and then to worse still – a little at a time….

Your salary doesn’t stretch quite so far. Your pound buys less. More fat must be trimmed from your budget. Your belt must be pulled tighter still. Things gets harder over time – little by little….

The slope doesn’t suddenly become a sheer cliff-face. The gradient changes gradually. You might not even notice, if your legs didn’t ache so much and you weren’t blowing so hard….

But worry not. Meditate on this as you climb….

The weak pound, rising prices and stagnating wages make us feel poorer and things seem harder. But the global economy is thriving.

At least, that’s what the signs seem to be saying….

  • A corporate bonanza….

The MSCI World Index contains 1652 stocks from all sectors across 23 developed countries. It’s a common benchmark for ‘world’ stocks. View here.

The Index currently stands at an all-time high. Global stocks have never been stronger. Company values are standing tall.

That’s great news for investors with skin in the game. And its great news for the companies behind those stock prices. Business must be better than at any other point in time.

Profits are what make companies more valuable to investors. Profits are what drive stock prices. On this evidence, increased profits are in the bag….

  • Out at sea….

Another indicator says global economic waters are warm. The Baltic Dry Index measures the cost of shipping commodities. View here….

The index hit a low in February last year but has rallied since. The cost of shipping commodities is increasing.

That’s good news for the global economy. Shipping prices rise as demand for shipping commodities grows….

Dry bulk commodities are generally raw materials used in the production of some finished unit. So, demand for commodities to be shipped is a good indicator of future economic activity….

The index lags behind December 2013’s all-time-high, but is heading the right way. And the rate of ascent is steep. Ground has been made quickly.

  • Magic words – the driving force….

But look closely. Both charts reveal lift in the final quarter of 2016 – just as Donald Trump was elected US president.

A Trump victory was expected to crash markets. But when the American public voted him in, something else happened. A wave of optimism drove markets to previously unseen levels.

Not just in America. But across the developed world. The Trump effect was global. All markets rode higher on the same rising tide….

Trump had a positive impact on the markets. It wasn’t anything he’d done. But he said the right things. Things American capital wanted to hear….

He pledged to launch a £1 trillion infrastructure package – a boon to business worldwide. And to return manufacturing jobs to the US. And to cut taxes. He would make America great again. It was wind to the global market’s sails.

Markets didn’t wait to see if actions measured tallied-up to words. Or how swiftly. They simply reacted. They took word for deed.

And that’s why global markets and stocks stand at high-water marks this morning. Trump’s magic words drove them there.

  • A President in trouble….

But let us pause for reflection….

What started so well, in a groundswell of optimism centered on making America great again, has disintegrated quickly.

Trump hasn’t been in office 100 days and already his presidency is described as a ‘triple-bogey’ and a ‘train-wreck’ – to borrow two terms from last weekend’s American media….

There are issues with truth, presentation and respect. Trump is at odds with his party, the press, his intelligence agencies, the Federal Reserve, government workers and a growing swathe of ordinary Americans – many of whom voted for him….

In just 70 days Trump has achieved something Presidents Nixon, Carter and G W. Bush took years to crack – a Gallup approval rating lower than 35%.

Trump is a President in crisis just 10-weeks into the job. He might already be in the early stages of a fatal tail spin. If so, it ends one way. In a fireball of twisted metal, ego and gas.

It is inconceivable he will serve a second term. And he’s long odds to even get through the first….

  • The big ‘What if?’

A good proportion of the current values in global stock prices are based directly on the electioneering promises of Donald Trump.

The same hot-air continues to keep markets elevated. Optimism remains intact. For the time being….

Right now, investors are enjoying the view and hoping to fly higher. Nobody is worrying about crashing.

But, at the same time, Trump’s presidency descends deeper into farce, fire-fighting and death-match wrestling. Rewriting America’s future appears to be on the back-burner.

Maybe Trump will get his act together shortly. Or get a lobotomy. Maybe the circus is part of some ingenious plan.

But, what if Trump can’t do what he said and can’t make good on his various pledges and promises. What then?

  • The trouble with buying promises….

Those promises helped inflate global markets. They fueled an expectation of growth. They bolstered optimism levels.

The market heard what it wanted to hear and put its money down as though words spoken on an election campaign were deeds performed in office.

Investors bought the promises. They swallowed them whole. The price of corporate stock rose – worldwide. But ahead of any real profits being earned. And that’s the crucial point.

Stock values went up despite no real addition to the bottom line. Despite no actual orders in the book. Despite no genuine work in the pipeline….

When Trump’s promises fall flat, what then for global stocks, global growth and global optimism?

There can surely only be one destination at that point – down. Fast too. Not so much guided flight as falling like a stone.

Global performance and prospects are not quite where the charts suggest. Maybe markets have been hasty. Stocks are priced up on abstract promise rather than concrete event.

Events have been factored in on faith – well ahead of time. The market has booked corporate profits before they have been earned.

Soon it will become clear that Trump’s promises are like discontinued bank notes – still pretty but ultimately worthless. Then markets will correct to pre-Trump levels. At least.

Maybe not tomorrow. Maybe not next month. But soon. A correction is coming.  It cannot be avoided.

That’s how it looks from here….

I’ll be back with more next Tuesday morning.

All the best,

Dave Gibson

Money Truths