In late November, 2016, shocked and concerned by Donald Trump’s dark horse Presidential victory, we published a research report to Framework members entitled “Investment Implications of a Trump Presidency”.

Five hundred days after publishing this document (which is linked below), we have revisited our forecasts made at that time, and were pleasantly surprised by the accuracy of our observations.

While we did not make a prediction that a porn star might be suing the President, or that Trump might be under simultaneous investigation by both a Special Prosecutor and the Southern District of New York, we did identify the tendency for a chaotic administration with a low degree of executive efficacy.

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In the nearly year and a half since Trump’s election, we see that the investment implications of the Trump presidency have tilted toward what we identified as our best-case scenario:

The best-case scenario appears to be what the market is pricing in post-election: President Trump will walk back populist campaign promises and become a business-friendly, low-tax, high-military spend Republican in the model of Reagan. Uncertainty due to the nature of Trump’s administration and style would be limited by a division of labor between the President and the Vice President: President Trump serving as the pitchman and Vice President Pence carrying out day-to-day responsibilities. Pence would resist his natural inclination to oppose Trump’s Keynesian policies directly, but would work with Congressional Republicans to restrict infrastructure spending even while approving spending for the military.

Were this to come true, businesses would likely have a tailwind at least in the short-run (an inflationary reaction might take some time to pick up speed), but benefits would more likely accrue disproportionately to the very wealthy. With little spending directed at commercially unattractive infrastructure spending (e.g., new sewer and water lines), over time, public safety disasters like the Flint, Michigan water crisis will continue to crop up in neighborhoods populated by the poor and working class. These crises would eventually strengthen the populist outcry and may lead to increased political upheaval in years to come.

In the best-case scenario, it is better to be exposed to equity markets over the next several years, but the longer-term prospects would be worse (because increased political strife and decreased national savings rates are not a recipe for strong growth over time).

Bullish investors have done very well by being long the equity market and our bearish positions in companies we believed stood to have the most to lose from lofty expectations for infrastructure programs and domestic economic activity – Caterpillar (CAT) and Union Pacific (UNP) – have been a gift of pain that keeps on giving.

However, investing is a marathon rather than a sprint, and the fact that our forecasts regarding policies and actions of the Trump administration encourage us to believe that our positions will prove profitable over time.

As a citizen of the United States, we are glad that the investment implications of the Trump presidency have not been nearly as negative as our worst-case projection:

The worst-case scenario appears to be what the futures markets were pricing in during the election night. President Trump, inexperienced in managing complex organizations and fundamentally disinterested in the duties of commander-in-chief, attempts to retain the support of his populist base by an aggressive attempt to push through campaign trail policy proposals in opposition to his own Vice President and most Congressional Republicans. Cabinet members, frustrated by being sidelined and undermined by the president’s children, resign and a quick pace and it becomes increasingly difficult to find qualified replacements.

The most symbolic and inexpensive of Trump’s campaign promises (e.g., special prosecutor for Hillary Clinton, Mexican border wall) are pushed through even as the scrapping of trade agreements and a slowdown in Europe and Asia cause the US economy to falter. A foreign military action or a domestic terrorism surprise creates additional stress within the government, and more qualified professional bureaucrats and soldiers resign. Social tensions increase, leading to large, disruptive protests that tend toward violence.

In the worst-case scenario, clearly it is better to reduce exposure to equities in the short-term. Longer-term investment opportunities will depend on the political and social response.

While we have experienced the Goldilocks scenario thus far, we think that it is too early for investors to breathe too deep a sigh of relief, for as we point out in our report, complex systems like societies, economies, and stock markets show a great deal of stability in one state, but can flip to a very different state very quickly. (Here is an excellent article from Quanta Magazine showing how seemingly stable complex systems can exhibit such a sudden switch to a different stable system.) The concluding two paragraphs of our report identify a few possible precipitating factors that might bring about a chaotic state change.

We would not be surprised to see Russia take aggressive military action in Europe or more aggressive military action in Syria near President-elect Trump’s inauguration. From what we can tell, Islamic State in the Levant (ISIL), al Qaeda, and other related terrorist groups’ capacity has been degraded following military actions in the Levant, but we would also not be surprised if a terrorist attack were directed at American soil, or at Trump-branded properties on or about the President-elect’s inauguration.

Were such an event to occur, we question the administration’s ability to absorb the shock, deal with it appropriately, and keep pushing forward with its domestic policy proposals. In our mind, unexpected global events could precipitate a rapid transition from a “best-case Trump” administration to a worst-case one.

We continue to be wary of the “Trump Bump” market and believe that over the long run, the Trump presidency will be recognized as one of the worst for the health of American industry.

Here is our full report, covering:

  1. The economic basis behind Trump’s electoral win.
  2. Trump’s stated policy objectives and likely effects on different sectors.
  3. A discussion of the likely inefficacy of the Trump administration.
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