In the last year, the world has changed a lot. Kim Parlee speaks with Brad Simpson, Chief Wealth Strategist, TD Wealth, about the “Trump effect” and discusses whether or not we are living in a world where the sun is setting for globalization, free trade and interconnectedness. Here is the full report.
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00:00:09.080 So, Brad, your latest note coming out titled "The Trump Effect."
00:00:13.280 What is the Trump effect?
00:00:15.410 Trump effect is I think we've seen it all around us.
00:00:17.997 We're in a period of some pretty big change.
00:00:22.370 And I think we want to really hit this home is
00:00:24.470 that we've had a complete change of narrative, investment markets, really
00:00:30.282 So first and foremost, I think it might be a good way to frame what that Trump effect is.
00:00:33.990 And the second part then is maybe a caution on that as well.
00:00:37.520 So pre-election, we lived in a world where we had deflation, or at least a concern
00:00:44.930 about deflation, where earnings were hard to come by, where the Federal Reserve
00:00:50.750 Board or central banks dictated most things and monetary policy was really
00:00:56.240 what things came down to, and that we were going to have slow growth and really low
00:01:03.830 volatility because the central bank always made that go away.
00:01:07.640 Seemingly overnight, we're all of a sudden starting to talk, A, from monetary policy
00:01:12.320 to fiscal policy, which for the last 10 years has been a dirty word, especially in Europe,
00:01:17.720 particularly due to German influence.
00:01:20.607 Now, all of a sudden, we're starting to talk about growth, maybe a concern
00:01:23.690 about inflation.
00:01:25.100 And of course, we've lived in an era before where free trade was the be all and end all.
00:01:34.220 And all of a sudden now, free trade might be a bad thing in this post-world order.
00:01:39.080 And the last step is beware of volatility because we have more of it coming.
00:01:45.150 So that's a lot of change overnight.
00:01:47.265 Yeah, well, it's like black and white, almost, in terms of what it's doing.
00:01:50.720 You know, it's funny.
00:01:51.430 You and I were chatting before we started here.
00:01:53.388 And you explained to me-- because in your previous note that came out,
00:01:56.660 the one called "Newtonian Wisdom," which talked about the problem
00:01:59.720 with trying to predict everything that's going on.
00:02:02.540 Can you distinguish for me, because you're framing up what the world is like today,
00:02:07.400 but you're not predicting.
00:02:09.889 So what's the difference?
00:02:11.210 Well, I think the big difference is that "Newtonian Wisdom" came out Election Day.
00:02:17.970 And now think of how many experts got that election wrong.
00:02:22.300 A, let's get the election wrong.
00:02:23.990 And then, B, if you got the election right and Trump won,
00:02:26.990 the whole world was going to fall apart, and stock and bond markets
00:02:30.350 were both going to collapse.
00:02:31.580 Well, he won, and stock and bond markets-- well, stock markets have been on a tear.
00:02:36.890 And, yes, bond markets have gone through, I would call, a minor, minor correction.
00:02:42.260 You read the newspaper every day, you would think there's been a massive change.
00:02:47.080 So on that very day, we published this piece about why experts get it wrong,
00:02:52.370 why predicting is so difficult. And at the end of the day,
00:02:58.610 when you read textbooks on managing money, it is based very much on the construct
00:03:04.400 that it's like mechanical physics.
00:03:06.470 And Newtonian wisdom is that, unfortunately, Newton
00:03:10.580 lost all his money in financial markets.
00:03:12.710 And so he said, I can understand the movement of stars and planets,
00:03:16.740 but I can't understand the madness of men in markets.
00:03:21.320 And really, I think the notion in that is that markets are behavioral.
00:03:25.940 They change.
00:03:26.780 They adapt.
00:03:28.010 And so we do not live in a world that is a closed system,
00:03:32.660 which is really what your engineers deal with when they're fixing an engineering
00:03:36.530 system like a conveyor belt. We live in an open system where we learn and we change.
00:03:41.510 So I think there is enough challenge for us to frame today and go,
00:03:46.550 this is where we are today.
00:03:48.260 Here's how we can outcome.
00:03:49.670 Here's the probable outcomes that are going to happen.
00:03:52.310 Here's the ones we think are most likely to happen in the near term.
00:03:55.640 And then, how do we manage the risks around that and also take care of the opportunities
00:04:00.650 around that?
00:04:01.310 And really, that is your job.
00:04:02.960 I mean, your job is to, again, build portfolios
00:04:05.120 that are going to perform well for individuals with their life
00:04:08.100 but also in this open system because you don't know what the new elements that
00:04:11.540 are coming in all the time.
00:04:12.686 And never more so than right now.
00:04:14.060 Indeed not.
00:04:14.990 And I mean, that's really one of, I think, the real refreshing things that we do,
00:04:19.730 is that we openly acknowledge that, A, we live in a very dynamic system in the world.
00:04:24.800 Flipside is our clients are very dynamic.
00:04:27.570 And so if you take those two elements together,
00:04:30.290 I think that trying to really forecast out a long way of all the things
00:04:34.010 that are going to impact that is really difficult to do.
00:04:37.370 Having said that, now, you did frame, again, that this
00:04:39.800 is a very different-- we've come through, I might even say, an inflection
00:04:44.690 point in terms of maybe the kinds of things that are happening right now.
00:04:47.850 And you talk about the fact that this could be the beginning of an era.
00:04:50.808 Could be, but we actually don't know.
00:04:52.580 Someone's going to call that later when they have the benefit of hindsight.
00:04:56.150 So having said all that, though, what themes are you seeing?
00:04:59.750 I mean, what's emerging right now?
00:05:01.490 Well, I mean, here are some of the things that we know,
00:05:06.970 and here are some of the things that we can make decisions based on.
00:05:09.870 Number one, a baton is being passed from monetary policy to fiscal policy.
00:05:14.220 So that's going to have an impact.
00:05:16.600 So really, I think that's the first one.
00:05:19.080 So by doing that, that is going to have a potential impact on inflation.
00:05:24.750 Now, when your whole portfolio was bet on that you're
00:05:27.540 going to have deflation and always interest rates going down, it is reasonable for us
00:05:31.830 to say with the changes that are potentially coming in the United States--
00:05:36.539 and I'm going to reference United States a lot of times
00:05:38.830 here because that's the driver behind these changes.
00:05:42.150 We're talking about bringing tax money back from globally and bringing that home.
00:05:47.130 That can have a big impact.
00:05:48.497 We're talking about changing and dropping people's personal spending
00:05:51.330 habits, which 3/4 of the world's economy just comes from people
00:05:55.159 going into their pocket and spending.
00:05:57.200 You reduce that, the amount of tax that's taken from that,
00:06:00.345 that has the potential to drive more growth.
00:06:03.530 You start driving more growth, all of a sudden,
00:06:06.120 you're going to start looking for companies that are having better earnings.
00:06:09.906 Finding companies with good earnings has been really hard to come by.
00:06:12.780 So that's another theme, starting to look for those earnings, particularly ones
00:06:16.170 from the United States.
00:06:18.060 Another theme that you want to think about is looking at it
00:06:20.825 in terms of if all this good news in the United States leads to a stronger US dollar.
00:06:26.610 And a stronger US dollar means potentially bad news for Europe
00:06:31.270 as Europe really struggles in that environment
00:06:34.365 because they're already struggling with this.
00:06:37.020 And the next piece you want to think of is in emerging markets, this is difficult.
00:06:42.150 And one thing we really want to point out, if you look at Chinese corporations,
00:06:46.260 they have somewhere around $18 trillion in debt,
00:06:49.530 in US dollar debt, sitting on their balance sheets.
00:06:52.320 Every time the US dollar strengthens, boy, that puts pressure on them.
00:06:55.680 So I think you want to think about portfolios in very North American terms as a theme.
00:07:00.090 And a lot of your risk management is going to come around your European exposure
00:07:04.890 and your emerging markets.
00:07:06.870 Each one of those is a two-hour conversation, I was going to say,
00:07:10.090 but I appreciate the outline.
00:07:11.520 Having said that, though, for someone who's watching,
00:07:13.847 if I was to run through the asset classes and just get your thoughts
00:07:16.680 on what you see right now.
00:07:17.730 And again, each one kind of depends on these things we talked about.
00:07:19.590 But bonds, what are your thoughts on bonds right now?
00:07:22.380 Well, one, we always have to remember the connection between a rising interest
00:07:25.822 rate and the price of a bond.
00:07:27.030 So first and foremost is that, first of all, bonds have more value today
00:07:31.740 than they did pre-election.
00:07:33.489 Interest rates for a 10-year US treasury move from a 1.7%, 2 and 1/2% today.
00:07:41.580 You see an awful lot of institutions purchasing 10-year bonds there.
00:07:44.672 So one of the things you'd say with bonds is that you still
00:07:47.130 want to own good government guaranteed bonds even though the yields are low.
00:07:51.090 But they're safe.
00:07:52.500 They provide a good rate of return.
00:07:54.000 And quite frankly, they may provide even a little bit of capital gain
00:07:57.690 after a little bit of the move that we've seen in the last, let's call it, four weeks.
00:08:02.430 Corporate bonds, I think, are still a big part of your portfolio.
00:08:06.700 But I think the same thing we'll get to with the equity side,
00:08:09.900 I think very domestic bias to it.
00:08:13.140 Companies that have a very growth orientation to them,
00:08:16.560 companies that are raising money to meet some of the infrastructure buildout
00:08:21.030 that we're talking about and some of the growth areas of the economy
00:08:24.510 that we're moving towards, I think that that still has a great part in people's portfolio
00:08:29.070 as well.
00:08:31.080 And then, when we get to the equity side of the equation,
00:08:34.950 still a core holding for people is owning good dividend-paying companies.
00:08:40.260 But let's add a caveat to that.
00:08:42.720 Most Canadian investors are underexposed to growth-oriented names,
00:08:47.820 and in particular, American growth-oriented names.
00:08:51.360 Our indices are a great domain for growth companies,
00:08:55.950 whereas the United States typically are, and with this change in policy,
00:08:59.970 could be even better.
00:09:01.660 And then I think the next step in this is that for those
00:09:06.930 who are inclined, have the right sophistication level
00:09:10.350 and experience in investing, there are alternatives
00:09:14.070 that, I think, make an awful lot of sense in an environment where
00:09:17.550 you can buy different type of investments that can help manage volatility.
00:09:22.030 And there's more, from the sounds of it, coming.
00:09:24.030 And there's more of that coming.
00:09:25.363 So either buying investments that are following a low volatility strategy
00:09:31.380 or trying to have exposure to portfolios that could be both long and short
00:09:36.980 are market neutral.
00:09:37.850 So trying to avoid-- markets go down, you've hedged yourself a little bit.
00:09:41.265 And I think that's going to make a lot of sense in the environment going forward.
00:09:44.640 Brad, always a pleasure.
00:09:45.540 Thanks so much.
00:09:46.175 No, thank you.
00:09:46.830 Brad Simpson, chief wealth strategist at TD Wealth.
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