There’s something about Donald (to worry about)

Last week, I penned a piece that posited worrying less about two big Donald Trump (DJT) related issues that are getting significant media attention – tariffs, and him getting a 3rd Presidential term.

The tariffs are an irritating way for some realignment to both global supply chains, as well as to the reliance the world has on singular geographies. By that I mean, the EU (and by extension NATO) has an almost singular reliance on the US to deliver the backbone of defence spending. No other country in the NATO alliance spends anywhere near what the US spends, and often not hear the agreed target on defence, but the implicit defence guarantee that the US has provided has meant that other countries (NATO or not, and Australia included) have been able to ride the coattails of that US spending.

Equally, a significant portion of global manufacturing and processing has been outsourced to China. Whether it be making widgets, or manufacturing washing machines, or refining rare earths, or the supply of critical pharmaceuticals, or around 80% of all solar panel production, with the benefit of hindsight, it seems like much of the developed world at least has decided that the concentration of all of that activity in China is sub-optimal.

And in classic DJT style, because he loves sticking it to the media and the “elites” in the USA, he has been making comments, as have people in his orbit, about him getting a third term as President of the United States (POTUS).

The Constitution forbids any third Presidential terms, in two separate spots actually, so there is literally zero to worry about - - the 22nd Amendment and the 12th Amendment have taken care of it.

Here’s that original piece here:

About the Donald - you should worry less about these 2 things - Sebastian Ferrando | Livewire

Now, onto the one thing that is getting very little play but, I think at least, is a genuine concern for the US economy, and for US markets. By default, that means it’s a genuine concern for all markets.

Law firm retribution – worry more, go read about it

One thing about DJT that many people admire is his dogged toughness. That is, when things don’t go his way, he’s a fighter, and he will prosecute his case until he runs out of options. In the American legal system, this means appealing legal decisions you don’t like to the highest court available to you.

Here’s where that gets interesting – Trumpy has taken this to a different level. He has started priming the pump on these appeals by declaring every judge in the country who doesn’t agree with him as a “leftist activist judge”.

Then he files an appeal.

The legal system in the US is as robust as any on the planet. It is a country of laws and that premise delivers so much stability and financial flexibility that is hard to gauge in dollars – it’s an astounding amount. But DJT wants to bend it to his will, to deliver the results he wants and to some degree, to isolate the judges that don’t agree with him.

But it goes one step further – he’s also engaged in a vendetta against a series of high-profile law firms and law practitioners who were involved in cases against him. For example, he has signed an Executive Order that specifically targets firms like Perkins Coie, as well as Covington and Burling, because they were engaged in cases that targeted his interests. He has also focused-in on the state District Attorney (DA) in New York, Letitia James, as well as the county DA Alvin Bragg. To be fair, they both went after him hard and made it part of their (political) identity to “get Trump”. However, that doesn’t give DJT an open licence to break any-and-all things in his pursuit of vengeance. And it shouldn’t given he’s, you know, the POTUS. But let’s be clear about something - - this second Trump term is to some degree a 4-year vengeance tour.

But what does this mean for markets?

The reason the US has the exorbitant privilege of the world’s reserve currency is many-fold. The size of the economy, the transparency, the economic flexibility, amongst many other reasons - - including the rock-solid set of tried-and-tested laws that people have so much faith in. That ensures the US’s role in global finance, in business, and in politics, and especially the US dollar’s role.

The US dollar underpins an enormous amount of what happens financially, globally, every single day. So much so, John Connally, the Treasury Secretary under President Nixon in the 1970s, is famous for his quip, “it’s our currency but it’s your problem.”

But as I mentioned, the system of laws that the US runs is enforced through the network effect in place of norms. Then along comes DJT and he penetrates the (as it turns out, somewhat thin) veil of norms that uphold those laws.

So what’s the answer?

One problem - - there are no answers, there are only trade-offs. This is all, arguably, interesting but not important information from an investment perspective. Or is it? The truth is, DJT has an outsized ability to impact your investment portfolio, as evidenced by one comment delivering essentially a year’s worth of S&P 500 gains in 2 hours and 42 minutes back in April.

That said, what should investors do with this information?

Investors should build a plan. The answer is always, to the extent global events are always going to happen and they’re always going to impact you, build a plan.

And that plan will potentially have different elements.

For example, one part of your balance sheet (notice, not liquid assets, or cash – I’m including all of it, the debt too) might be set aside for lifestyle. That’s your house, maybe a second place, your car/s, a boat if you have one, that kind of thing. Another part of your balance sheet, if it’s big enough, might be the legacy part. That’s the portion that you’ll never use and that you invest with someone else’s timeframe in mind. Often kids.

The last part of your balance is your piece; the piece you need to do all of the things that you want to do. It endows your spending for the rest of your life, and provides a buffer for when this kind of volatility event happens. And that’s important - - this volatility is planned for, and it’s OK when it happens. Unless something in your plan has changed, or unless you actually need the money, or unless you genuinely can’t sleep at night, the plan should stay in place.

The plan is broad too. It includes stocks and bonds, cash, private markets, growth alternatives, defensive alternatives, and maybe even some cash. The point is, you can’t get away with buying negatively geared residential real estate and buying 10 franked-dividend-paying Aussie stocks. The dirty little secret is that you could never get away with that because you’ll underperform by so far, it’ll literally change your retirement.

If you need help building a plan, get that help. You don’t have to consult an advisor but I’m pretty sure you didn’t design your last kitchen renovation, or insert your own hip replacement, or do your last oil change in your garage, or teach your kids algebra.

Experts exist for a reason, go ask them.

Good luck out there.