The Trump Effect - What to Expect from the Market

Episode: 182
Originally Aired: November 15, 2016
Topic: The Trump Effect – What to Expect from the Market with Charlie Smith of Fort Pitt Capital Group

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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TOPICS COVERED:

Introduction of Charlie Smith of Fort Pitt Capital Group
Deregulation Should Drive Economy in Positive Direction
Pragmatism May Temper Policies That Appeal to Trump Voters
Innovation, Automation Killed Jobs and Benefited Just a Few at the Top
No Job Is Safe From the Accelerating Pace of Automation
Ideas About Full-Employment Economy May Change
Job Flexibility Will Be Key for Younger People
The Case for Holding the Course on Investments
Trump, a Political Unknown, Could Bring Volatility to Short-Term Markets
Stronger Dollar Would Impact Emerging Markets
Trump Appointees to Federal Reserve Board Could Spur Growth
Infrastructure Projects Could Put Trump Supporters Back to Work
Changes in Wall Street Regulations Could Push Banks to Lend More

Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.

1. Introduction of Charlie Smith of Fort Pitt Capital Group

Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg along with CPA and attorney, Jim Lange. Tonight, we’re going to be discussing the Trump effect on the markets, and to help us with that, we’re joined by one of our very favorite guests, Charlie Smith, executive vice president and chief investment officer of Fort Pitt Capital Group. Now, over the course of his 32-year career, Charlie has held leadership positions at several Pittsburgh regional investment firms. He’s been a frequent lecturer and commentator on the economy and the markets. You might have seen him on CNBC or read his work in the Wall Street Journal. Tonight, Jim and Charlie are going to talk about President-elect Donald Trump’s upset win and what it means for the markets and for you as an individual investor. They’ll cover topics like why the Dow futures plummeted just hours after the election and why the markets quickly rebounded, what we can expect from Trump, the first president who has never held office or served in the military, and how that unpredictability could affect the markets. Our phone lines are open if you have questions: (412) 333-9385. And with that, let’s say good evening to Jim Lange and Charlie Smith.

Jim Lange: Welcome to the show again, Charlie.

Charlie Smith: Well, thanks Jim. It’s great to be back. We got a great topic.

Jim Lange: So, I’ve seen a number of clients, and frankly, clients on both sides of the fence, that is liberal Democrats and conservative Republicans, since the election, and as you may expect, some of the liberal Democrats are thinking, “Oh no, we’re in trouble. This country’s going down the tubes, markets going down. Should I convert to cash now or should I wait until he becomes president and then convert? Because it’s going to be misery.” Then, I have some conservative Republicans who say, “Ah, finally! The shackles are off! We’re going to get some tax relief, some regulation relief. Now, I want to go whole hog into the market and I’m just as excited as I can be!” Well, which one is right? Or is it a combination of both or, perhaps, neither?

2. Deregulation Should Drive Economy in Positive Direction

Charlie Smith: Well, you know me pretty well, Jim. We don’t tend to go off the deep end in either direction ever, never have, never will. We’re thinking that some of each side is correct. Frankly, Donald Trump has said so many things over the years that are in direct contradiction to what people believe his policies might be. You know, we’ve talked in the past about global warming. He has said basically things that were polar opposites with regard to that topic. So, to begin with, it’s really hard to judge where he’s going to end up, but there are a few fundamental characteristics of a Trump administration that I believe are going to be important to pay attention to. And Number One is your second comment about deregulation, and I think that’s probably going to be the primary driver of a fairly positive economy and a fairly positive stock market over the next year to 18 months. All else equal, obviously, but we’ve seen some surveys, particularly from small and midsize business people, in the past week that show their attitude towards new investment, hiring and growth has really improved since election day, and I think that’s going to be one of the key drivers. That’s on the positive side. On the negative side, with regards to his positions on trade, I think the jury is still out, and that’s really I think what most economists would regard as the biggest potential negative from a Trump presidency is what are his positions going to be with regards to changing the basic terms of trade with Mexico, Canada, China, some of the other nations that he has specifically mentioned in his campaign as nations which have given us the bad side of the deal in many trade deals that we’ve set up.

Jim Lange: Would it be too optimistic to think that he said what he thought he had to for the campaign, regardless of what he actually feels, or at least to some extent, and that some of the extreme things that he said in the campaign will actually never see the light of day and that he will actually be a little bit more pragmatic in his recommended strategies? Is that one of your hopes, and is that a possibility?

3. Pragmatism May Temper Policies That Appeal to Trump Voters

Charlie Smith: Well, he is a successful businessman. Pragmatism, I think, is one of his base characteristics. But he did have a definitive constituency in this election. The many millions of people who feel as if globalization in general and the movement toward freer trade and a huge volume of financial transactions around the world has left them behind, and that constituency, all you had to look at were the results that came in after about 1 a.m. last Wednesday when the states of Pennsylvania and Wisconsin came through for Trump when it was totally unexpected. I think that was the mark of the constituency I’m talking about. The folks that have really seen their lives turned upside down by the changes we’ve seen over the last 15 to 20 years in international trade, the folks that have really lost, to a certain extent, due to globalization, and I think that constituency is one which he’s going to have to be responsive to in his governing.

Jim Lange: Well, let’s talk about that for a second because I, by nature, am a free-trader, and I actually think that there’s advantages for all sides. Of course, fair trade is much better than unfair trade. But isn’t part of the changing nature of the economy that things change and individual sectors or individual groups of people be affected? So, let’s say, for discussion’s sake, that you work for a buggy-whip manufacturer, and you were the best buggy-whip worker on the planet and you knew buggy whips, and you thought that your life and your job was secure for the rest of your life, and then along comes the automobile, and all of a sudden, there isn’t really a demand for buggy whips, and instead of making, in today’s dollars, $60,000 or $70,000, you have to go work for $30,000, if you can even find that. And you’re angry, but that wasn’t Obama’s fault. That wasn’t Hillary’s fault. And if Trump is elected, I’m not sure what he would do differently for that type of person. So, I wonder really what he can even do, and frankly, I would fear him trying to … now, I know that this is going to irritate some of the liberals, but I would actually fear him trying to go back on a lot of trade agreements that we have.

4. Innovation, Automation Killed Jobs and Benefited Just a Few at the Top

Charlie Smith: I know exactly what you’re saying. I would frame your question (in) a little bit more straightforward way as, are those jobs coming back? And you’re saying that they’re not. Essentially, those jobs have been lost to innovation. We’ve seen foreign competition, which is basically the labor rate’s 1/10^th, 1/20^th what they are here in the U.S., taking those jobs overseas. But that question, I think, the key issue that so many of the workers in the Midwest states that I was talking about have is that the benefits of these trade improvements and these increases in trade have flowed disproportionately to a very small group of people, and the reason that they’re upset is that those benefits have not been distributed more broadly. And I think you can only do so much in terms of trying to turn the clock back. You can help these folks by providing a certain amount of income support, and I think part of their argument is that that support just hasn’t been there. And I think another aspect to this is that the people that have seen their livelihoods move overseas or be replaced by technology haven’t really seen the benefits flow into consumer prices because the Fed has been so aggressively maintaining an inflation rate of 2 to 3 percent. So, think about how productivity works. Over time, productivity is supposed to drive down the real cost of goods. And so we’ve had a recession, we’ve had an economy which is growing moderately, and we’ve seen all these benefits to the financiers and the people owning the businesses that are doing the trading, but the cost of consumer goods that should flow out of the bottom of that hasn’t been falling. We’ve seen inflation maintained at a 2 percent level, so that the real benefits of productivity and lower cost that should come from trade haven’t flowed through to the system because the Fed and the banks have been preventing the deflationary forces.

Jim Lange: Well, one of my fears regarding … and you mentioned trade and technology, one of my fears is that technology is going to advance at such a pace that frankly it’s going to replace a lot of workers.

Charlie Smith: Oh absolutely. It will.

Jim Lange: And, by the way, not necessarily just people in the blue-collar areas. I just heard a talk where the person was talking about the role of physicians. So they used the example of a dermatologist who, if you’re a young dermatologist and you come out of school and you take a look at a lesion, you know, maybe, based on your limited experience and knowledge, you may not be able to diagnose it. If you’ve been doing it for 30 years and you’ve seen 5,000 of them, you have a much better chance.

Charlie Smith: Right.

Jim Lange: But if you take a picture of it and put it into a computer, who has a database of 10 million, that that computer’s going to do a better diagnosis than the 30-year veteran. And is this not happening all over the place?

Charlie Smith: It’s happening everywhere. It’s happening in our industry with indexing and robotic advising.

Jim Lange: Yeah.

Charlie Smith: You’re right. The white-collar industries, white- collar businesses…

Jim Lange: And, God forbid, to lawyers, too!

5. No Job Is Safe From Accelerating Pace of Automation

Charlie Smith: Well, maybe there is hope, actually! No, but the idea that there’s any avocation which is safe from automation is faulty. Twenty years ago, the idea that we would have a vehicle which could operate itself pretty much autonomously in the craziest situations in city traffic was just literally unbelievable. And the progress happens in a non-linear way. It happens so fast and it surprises people. And so, the idea that any profession is immune to this is silly. So, we’re going to have millions of people displaced. The next big wave, in my opinion, is going to be long-haul trucking. We’ll have people that will pick up the vehicles at interstate exits and make deliveries to the warehouses that are just off the interstates, but the computers will be operating the vehicles on the interstates, where the number of variables, in terms of traffic and weather, is manageable. But you’re exactly right. We’re going to see revolutionary changes as far as removal of labor from the equation that our social system is going to have a hard time dealing with.

Jim Lange: Well, that’s what I think about. So, you know, talking about the long-haul truckers, I don’t know what the exact regulations are, but I assume that they’re not allowed to drive more than 10 hours, 14 hours, whatever it is, a day, where if you have a machine, they can go for 24 hours. So it’s going to be more efficient. You don’t have to pay them. Probably, after the system is done, it’s going to end up being safer.

Charlie Smith: Absolutely.

Jim Lange: So where are those guys going to go? Where are the cab drivers going to go? Where’s even the Uber drivers going to go?

Charlie Smith: Right, right. They’re in a sort of a short-term way station right now in an industry that’s going to be terribly disrupted.

Jim Lange: Right, and so, to me, some of these things, I’m not sure if there would be a huge difference, let’s say, between a Clinton and a Trump administration because these things are coming down the pike with either of them.

6. Ideas About Full-Employment Economy May Change

Charlie Smith: Right, and I think this election, a continuation of the same sorts of forces that we saw with the Brexit vote, the people who have seen their livelihoods displaced, disrupted by these secular, big-wave-type changes basically saying, “Hey, stop the bus. We want to get off this route. We don’t like this route. We want you to do something differently.” And as you said, there aren’t a whole lot of options for the people who are trying to manage this. The idea that we’re going to have a full-employment economy with only 4 or 5 percent of the available workers unemployed, I think, may have to change. We may have to redefine what employment/unemployment equation looks like.

Jim Lange: All right, well, let’s even say that’s true, or let’s say it’s not. What impact will that have on the investor? So, let’s say that, at least in my market, I tend to work with people who are either approaching or they have already retired, so maybe them finding employment, or maybe they’re towards the end of their career, so them maybe finding employment or losing employment for the next five years might not be such an important event, but they do need that money to work for them for 30 years.

Charlie Smith: Right. The winners have been the capitalists. I mean, essentially, we’re talking about a movement from labor to capital. The financial returns coming from a labor input and being swapped over to capital, that’s essentially what automation is all about. So, the folks that need to work another four or five years before they can begin to allow their capital to provide their income, they’ve got some issues. When we’re young, we’re told to save as much as we can to try to build up a nest egg, and the folks that have made it to their retirement are now leaving the labor force. They’re advantaged, and they have been advantaged for the last 15, 20 years because of the improvements of the returns on capital.

Jim Lange: Well, let’s talk just about those folks for the moment. I know who’s paying my bills, right? It’s not the 30-year old kid who might be displaced for employment. Is that person going to be better off because of Trump or Clinton, worse off, or do you think that, let’s say, the Trump bite will not be as bad as his bark, and the Clinton, let’s say, hope wouldn’t have necessarily brought in economic prosperity?

7. Job Flexibility Will Be Key for Younger People

Charlie Smith: Well, economically, I think a young person, a 30-, 35-year-old, in terms of their investments, should be thinking very long-term. So, for those folks, I’m not sure that either a Clinton presidency or a Trump presidency would have made a big difference in terms of their potential … the outcome on their investment horizon going out to their retirement, they have so much time between now and when they’re going to retire. So, I’m not sure if a Clinton or a Trump win would’ve made that much difference to them. I think the characteristic of the younger folks that is going to bode well for them is their flexibility with regard to their willingness to change jobs and really redefine who they are. They have the youth going for them in that their willingness to be more adaptable, I think, will serve them because if there’s any change that’s happened in my business career, it’s been from the time when I first got in, and you would work for a company for maybe 15, 20 years and then maybe one other company in your career, and then you’d get a pension and you’d be done. The amount of time that most people will spend with any one company now has probably been cut to 20 percent of that. You spend your working career at maybe seven or eight different companies now, and you have a portable profit sharing or a 401(k) plan that you take with you from job to job, and you can come out just as well on the other end if you’re careful with that 401(k). Unfortunately, a lot of people aren’t. But the point is that the adaptability of younger people is so much greater, and I think that’s a characteristic which is going to carry them through almost no matter who is running the show, with a certain limit.

Jim Lange: All right, well, I know, speaking personally, I have a 21-year old daughter who will end up with a degree in software engineering, like her mother, and her mother actually did closer to your model: worked for just two companies, built up a 401(k) plan, and had we decided that she would not stay at home, she’d probably still be where she was, or maybe one other company, where my daughter, when she comes out, from what you’re telling me, she’s going to be at one place for a couple years, and it’s not going to have a defined benefit plan, and then she will have to move somewhere else as either her interest, or, more likely, the company’s interest, changes.

Charlie Smith: Or the changes we were talking about a few minutes ago are imposed upon her and her company.

Jim Lange: OK, the buggy whip.

Charlie Smith: Exactly. We’re going to have a whole lot more buggy-whip manufacturers (going out of business) in the next 10 or 15 years because the pace of change is accelerating.

Jim Lange: OK. One of the things I really do want to, I guess, reiterate is that you sound like you’re not terribly scared about, let’s say, some of the things that he has said that he might implement, nor are you fantastically optimistic that this is the best thing that could’ve ever happened and we’re going to go into a huge market, but more kind of just steady and stay with your principles. I think one of the things that I remember, you were talking about a different advisor — and I don’t want to mention their name because they did not stick with their core values — and you criticized them, not necessarily because they weren’t right but because they switched their methodology and their values midstream and it did not work out well for them, where you’ve had pretty much certain core values your whole career, as far as I can see.

8. The Case for Holding the Course on Investments

Charlie Smith: In the investment world, it really is hard to change your stripes. As I probably said on the show many times, if you don’t know who you are, Wall Street is a very expensive place to find out, and by that, I mean the basic intellectual and psychological characteristics that go into building a portfolio are immutable, and if you have a portfolio which is a high-beta, high-volatility growth portfolio, yet you’re a cheap Scotsman like me, you are going to have a hard time running that portfolio because there’s a cognitive dissonance there between how you’re behaving in the real world and who you are. And a money manager who has a successful style, whether it be value, momentum, growth, you know, there’s all kinds of ways to skin a cat, but if you’ve got a style that’s worked for you and it goes out of fashion for three years, four years, five years, and all of a sudden, your clients are migrating away, and you decide, “I’ve got to change my stripes,” there’s a good chance you’re going to do it exactly (at) the time when your previous style is coming back into vogue, and you’re going to be out of phase with the market at that point, and then you’re really lost. So that, to me, is a key variable here.

Jim Lange: So, Charlie, when the Brexit vote hit, I was a little bit surprised that you were just kind of a ‘Don’t get all flustered, don’t sell everything, this is just …’ I don’t want to say noise. It’s an important event. But this isn’t something that’s going to rock the market on a long-term basis. How would you assess the Trump victory, because we did see, I think, the most volatile day in our entire stock market going down and then back up. Why did that happen? Why don’t we just start with that? Why did the market go down like crazy and then go up like crazy?

Charlie Smith: Markets move on surprise. Markets move on information which is, by definition, not discounted in prices already. And so, as you mentioned, the Trump win surprised a lot of people. We saw the polls that indicated that … national polls, the averages, had indicated that Clinton was going to win by 3 to 4 percentage points, even the day before the election. And when, at 1 or 2 in the morning on Wednesday, the numbers came in and it appeared, and it became certain, that Trump was going to win the Electoral College. That was a huge surprise for the markets, and there were many, many investors worldwide, particularly outside the U.S., I believe, who were sort of off-sides, and they needed to get their books, their managed assets, into a position that they believed was commensurate with a Republican administration. All the different potential scenarios for the future that went with a Trump win versus a Clinton win, they had to get built into their portfolios instantly.

Jim Lange: Do you think it would’ve been different if it would’ve been a more traditional Republican candidate, maybe like (Marco) Rubio?

Charlie Smith: I don’t know. I think a surprise of that size, whether, you know, the size of the surprise, absolutely I don’t think makes a huge difference. A more traditional candidate like Rubio, I don’t think would’ve had a chance of winning. I think the fact that Trump was an ace persuader, perhaps one of the best persuaders in the history of the U.S. presidential candidacy, I think set him apart purely for his campaigning skills. But I think that the markets around the world basically said, “Look, we were expecting one thing and we got another, and we need to fix that in terms of our portfolios, how our portfolios look, and we need to do it quickly.” So, the futures markets were the place where they could implement that, and that’s why we saw an 800-point swing in the Dow futures and a 100-point swing in the S&P 500 futures to the downside, and then a snap back within just a few hours. By midday on Wednesday, we’d recovered all that and a whole bunch more.

Jim Lange: Why do you think we recovered then?

Charlie Smith: Well, first of all, the sense that what you mentioned when we first started the show, the shackles were off, I think began to permeate, and I also believe that the speech Trump gave on Wednesday morning, in which he basically said, “Look, I’m going to be the president for all the people.” He didn’t have his phone in his hand and wasn’t tweeting out crazy stuff as he said it. I think that gave, at least initially, a certain amount of comfort to people all over the world that, at least in the initial portion of his administration, this guy could be sensible. And so, that gave investors a sense that, “OK, we didn’t go completely down the rabbit hole here. We’ve got a fairly sensible person here, and at least we’re able to say, at that point, let’s look at his policies,” and we got beyond the craziness of a Donald Trump campaign and said, “OK, what did he really want to do?” And they looked at the tax, particularly the big corporate tax-cut numbers, the deregulatory agenda that he has, and they said, “OK, we’ve got a chance to make a better economy. Instead of a 2 percent growth economy we’ve seen for the last eight years, we have a chance to see 3, 4 percent as a potential growth rate.” So, faster growth meant better earnings, and that meant higher stock prices.

Jim Lange: Because we do have a non-traditional candidate, somebody that has neither experience in government nor the military, would you expect greater, let’s say, volatility, just because the markets don’t really know what’s going to happen, maybe over the first year or even four years?

9. Trump, a Political Unknown, Could Bring Volatility to Short-Term Markets

Charlie Smith: All else equal, yes, I would. As I said before, and we’ve been talking about, he is very much an unknown quantity in terms of him not having any political experience, military experience, as you mentioned, but his statements on so many different topics have been contradictory over the past five or six years. He’s been in the public eye now for 20 years, so he’s had a chance to make statements that have directly contradicted one another on so many topics. So, it’s hard for the markets to know if he’s going to behave in a contradictory way, saying one thing one week and then doing something differently a week later. That, by definition, is volatility. So, if that’s the way he’s going to govern, definitely there’ll be a whole lot more volatility. We also said he’s a pragmatist, and I think that’s probably the aspect of his personality that we’re going to see more of as he recognizes the gravity of the position that he’s in. I think he’s already learning that. I think that’s something that I think also gives Wall Street some comfort.

Jim Lange: Well, I think so, you know, even, for example, maybe backing down, “Well, maybe not a wall. Maybe we can go to a fence,” or something like that.

Charlie Smith: Great example.

Jim Lange: I think we have a question. How about if we have Dan read the question and then you can take a shot at it?

Charlie Smith: Sure.

Dan Weinberg: Yep, we got a call from Sharon from Pittsburgh. She didn’t want to go on the air, but she did have this question about portfolio allocation. She says, “Should we be including more or less international stocks with the backlash from increased globalization and uncertainty about U.S. relations with the rest of the world?”

10. Stronger Dollar Would Impact Emerging Markets

Charlie Smith: Absolutely, a terrific question. One of the key variables here will be the dollar. In the short run to the intermediate run, that is, the next three months to a year, I would expect we’re going to see a stronger dollar, and that’s going to mean that particularly the developing and the international markets, the emerging markets that have seen historically the most growth due to their exports are going to have a little more difficulty. Many developing nations, emerging markets have debt that’s denominated in dollars, and as the dollar strengthens, those debts get a little more difficult to repay. So, I think if the result of a Trump presidency is continued strength in the dollar, and that’s probably going to be the result because the U.S. economy is growing more strongly, and interest rates are rising here in the U.S. relative to the rest of the world, if that happens, the dollar’s going to be stronger and it’s going to be more difficult for the emerging markets and developing economies around the world to compete, and so they won’t do as well. So, I would expect, at least over the next year to year-and-a-half, we might see the international markets not performing as well as the U.S. market. Now, that said, if you’re a younger person and you’ve got an international position in your portfolio, that doesn’t necessarily mean you sell it because all else equal, over the very much longer term, the U.S. economy’s mature. We’re not going to grow as fast as China. We’re not going to grow as fast as Malaysia. We’re not going to grow as fast as Australia. And all else equal, again, faster growth means higher financial-market returns. So, the answer to the question is, over the next year, year-and-a-half, international investments may not do as well, particularly the emerging markets, but over the very much longer term, and if your horizon is anything greater than three, four, five years, you want to have those international positions. So, I would say maybe wait a year and then add to them.

Jim Lange: Well, not to be contrary, but I will. You have always been … well, maybe it’s not a fair characterization, but mainly more of a value guy than a growth guy.

Charlie Smith: Yes. Oh, absolutely!

Jim Lange: So, my family’s portfolio that you are managing certainly has more value than growth, and now we’re talking about price-earnings ratios, meaning that a value company would have, let’s say, greater earnings relative to the cost of the security compared to a growth. Would there not be an argument that some of these international, and even emerging markets, and you mentioned a couple of the countries, that they have a relatively favorable price-earnings ratio that might be a good thing to get in now, which presumably would go against what you said?

Charlie Smith: Right, exactly. Markets, international markets in particular, I think have been reflecting a healthier U.S. economy now for a couple years. You know, we’ve heard this so many times. The U.S. economy relative to the rest of the world is the best house in a bad neighborhood. We’ve heard that many, many times. The U.S. economy’s been growing slowly but faster than a whole bunch of economies around the world. So, what’s happened is, the multiples in the overseas markets, even Europe, developing markets, have been weaker, as you just said, relative to U.S. multiples. So, they’re cheaper, but I think they’re cheaper for a reason because the short- to intermediate-term prospects for those markets aren’t as good as the U.S. So, you not only have to measure A) what the market, or the company for that matter, is selling for today, and say OK, maybe it’s cheap, but what are the prospects short, intermediate and longer term, and then take those prospects and measure them against the price that you’re paying and decide where value is. And so, the answer to your question is, I think the markets overseas, in particular, are cheaper because their prospects generally aren’t as good in the short run. Longer term, yes. They’re going to grow faster than the U.S., so you need to be invested there still.

Jim Lange: Well, let’s go to another one of the topics that I know that you like to talk about, and that is the Fed and the interest rates and goals for inflation. You mentioned that earlier. Why don’t I just kind of give you an open mike and talk about what you see as happening in the Fed and what the impact on the everyday investor is?

11. Trump Appointees to Federal Reserve Board Could Spur Growth

Charlie Smith: Sure. Well, as you know, for basically the entirety of the Obama administration, we’ve seen a Federal Reserve which has been creating new money in the system in order to prop up financial assets. In the initial period of late ’08-early 2009, they were doing it very aggressively by driving interest rates to zero and aggressively buying securities with newly created money, so-called QE. That QE really ended in the latter part of 2012, early 2013, and ever since, they’ve been sort of maintaining their bond buying, not nearly as an aggressive level, but they’re still buying bonds. The Fed has been trying to support and liquefy the system generally for eight years now. I believe that the marketplace has really gotten skeptical about the Fed’s ability to engender growth, and I think we have eight years of evidence now, and we haven’t had a single year where GDP surpassed 3 percent real growth. The only administration in the entire U.S. history where we had an eight-year period without a 3-percent growth in real GDP. So, the markets are skeptical that what the Fed’s doing is really able to push the economy into a growth mode. They’ll give the Fed credit for basically providing a backstop, but we don’t need a backstop anymore. We need animal spirits and the willingness to take risk to take over again so that we can get some real growth, and I think what we’re seeing now is, with Trump coming in, markets are saying, “OK, Trump is now going to be able to appoint two Fed governors immediately.” Janet Yellen’s term ends in early 2018. Mr. Fischer, the vice chair for the Fed, his term ends then as well. So, it looks as if Donald Trump is going to be able to turn the tide at the Fed and maybe put some folks in there who are more willing to let the markets define where interest rates should be, and, in a sense, take the Fed’s thumb off the scale.

Jim Lange: All right. Now, does that scare you in that maybe businesses are going to have higher interest rates, or does that excite you because fixed-income portfolios might actually get more than 1 or 2 percent? Or a little bit of both?

Charlie Smith: Well, I think it excites me for a totally different reason.

Jim Lange: OK.

Charlie Smith: It excites me because we’ll finally get an understanding of what the broader marketplace, investors with trillions of capital around the world, what they really believe the interest rates should be, not only in the U.S., but if these policies are repeated in Japan, which has basically been in the doldrums now for 30 years, 35 years, that we will finally see what the true nature of the economy is, and then we can begin to adapt. Because if the Fed has been artificially sort of propping us up, we don’t have to adapt. We don’t have to be really as good as we could be as a society and as strong as we could be as entrepreneurs and business people, and we need to get that prop taken away so that we can see what reality is and deal with it. So, I think that’s what gets me excited. I’m frankly, as an investor, tired of paying so much attention to the Federal Reserve. You know, the Fed has called the tune now for eight years. I want to get back to studying what the businesses that I own are doing, how they’re adapting, how they’re making their way in the world, rather than having to worry every week when I come into the office, what is the Fed going to do this week?

Jim Lange: Charlie, one of the things that I was thinking, and this might be a positive, is when we think of Washington, the immediate thought is gridlock. So, President Obama had limited success getting what he wanted done done. He got some of it done by executive order. He did get Obamacare, and maybe if we have time for that, we’ll talk about that. But one of the things that I was thinking is, let’s say that there is a relatively good idea that might be shared by Democrats and Republicans. So, let’s just say infrastructure, perhaps some public-private partnership with some money going into airports and roads and tunnels and bridges, et cetera. And let’s say, for discussion’s sake, that Hillary had come up with the identical plan that Trump came up with, or her team or Trump’s team. Realistically, the odds of Hillary getting it past a Republican Congress probably would not be that great. Let’s assume it is a good thing. Is it a good thing that maybe Trump has a better chance? Not that he won’t get some pushback, but would he not have a better chance of getting some things done, and hopefully, the things that he will want to get done and has the ability to get done will actually be positive.

12. Infrastructure Projects Could Put Trump Supporters Back to Work

Charlie Smith: Yes, and I think this is one way, whether it be a large infrastructure bill that’s fully federally funded, or it is some sort of a privately funded partnership, this is a way that Trump can address the constituency that I talked about before. This is the way specifically he can put some of the former blue-collar workers, folks that have seen their livelihoods disrupted, displaced, destroyed in some cases, by globalization and the huge increases in trade. Their lives can be, to a certain extent, some of them at least, can see them put back on track and they’ll have a job to do it with.

Jim Lange: All right, and the job meaning the labor on some of these infrastructure projects?

Charlie Smith: Exactly, whether it’s cement finisher, driving a Caterpillar, whatever it might be, whatever trade, and we’ll obviously have to spend some money training people as well. But I think that’s one win-win that I think, as you said, the Democrats, had they proposed it, it probably had a pretty decent chance of passing if it was smaller. Trump will get a bigger deal through because he’s a Republican and it’s a Republican Congress, and I think that’s the way to a certain extent that Trump can address the constituency that, frankly, elected him.

Jim Lange: All right, well, you mentioned some of these things might have a better chance of getting through, like infrastructure. President-elect Trump is talking about increasing the budget for the military. As an active money manager, is some of this information interesting to you, and does it cause you to look at, say, defense firms or even Caterpillar, just as an example, that might benefit? Or is that information already out there and we’re too late? It’s like real estate. Everybody has a property that they should have bought 30 years ago.

Charlie Smith: Right. There’s another old saying on Wall Street that if it’s in the press, it’s in the price. It’s already in prices, and we saw Caterpillar shares rally, I think, 10 or 12 percent in the space of two days after the election. So, it doesn’t take long for the markets to sort of integrate the new information here. So, let’s talk defense first. The defense group really throughout the Obama administration, and he’s not known particularly as a hawk; you know, if you’re a drone builder, absolutely, but in terms of the reduction in the number of people, the number of soldiers, in the various theaters around the world, that’s been a pretty significant reduction under his purview. So, I think you need to pick and choose. I think there’s a pretty good possibility that, particularly the remote warfare that we’ve begun to really emphasize under Obama, is going to become an even bigger portion of our armament. So, the aerospace, the systems, the satellite, the space warfare, you know, the Lockheed Martins, the Boeings of the world, should definitely be participants in any rearmament that Trump does. I don’t think he’s necessarily going to be aggressively building up the size of our Army, for example. He’ll be spending probably with much more of a rifle-shot approach than a shotgun approach. So you need to pick and choose. So, that’s the defense area. One of the other areas that rallied very strongly on Wednesday was drug and biotech.

Jim Lange: That was going to be my next question.

Charlie Smith: Yeah, that was largely a function of the talk that had come from the Clinton camp over the previous 18 months or so with regard to her diligence or efforts to eventually control drug prices, and that concern has been removed to a certain extent in the week since the election.

Jim Lange: All right, well, we have another question. Perhaps if Dan can read it, you can respond.

Dan Weinberg: This is just a question that popped into my head. A lot of people are obviously worried about the potential for social divisions after this election, the vulnerability of maybe a minority group and the culture war, that sort of thing. Is Wall Street always sort of too insulated from this? Does it pay attention to that? Do the markets ever get concerned? Is there a point at which the markets would get concerned?

Charlie Smith: Wall Street is very much insulated from these problems up to a point. There is a tipping point, I guess, at which even the capital markets begin to pay very close attention, and I think we’re an awfully long ways from there. I think that would be an indicator, frankly, that the social problems that you’re referring to that have … you know, we’ve seen riots, we’ve seen protests that have, in certain places, turned into riots in some cities. If they were to begin to permeate the entire nation and happen in places that people didn’t expect, places that are historically been viewed as Republican areas, the markets would take notice very quickly and probably react. But for now, it’s sort of as if, OK, these are the people that we would expect would be upset with this election and will sort of monitor it, but it’s not really in the fronts of the minds of investors. But it’s something that, if it doesn’t go away in the next week to 10 days, and if we are seeing escalating protesting and even rioting in our major cities a month from now, it’ll definitely be something that the markets are paying very close attention to at that point.

Jim Lange: Very close attention meaning a potential downturn?

Charlie Smith: Yes, absolutely, because the indication is that our civil society has ruptured to the point where we can’t even go back to doing our basic business of running our country.

Jim Lange: Well, one of the things that President Obama said that was I think kind of telling is well, the sun is going to rise tomorrow. You know, with Trump, with Hillary, there’s certain conditions on the ground that aren’t going to change, and I’m getting the mood from tonight that that’s a little bit the way you’re thinking is that, you know, there might be a few good things, maybe more than a few good things, maybe a couple bad things, but that overall, people should not panic, people should not change. So, for example, maybe being specific or maybe being general, can you tell readers what you have been telling some of your clients, and are you, let’s say maybe even rebalancing just because the markets went up? And now, all of a sudden, people are overweighted in stock?

Charlie Smith: One of the moves which has been entirely surprising to me, and I think surprising to a certain number of investors, was the incredible strength in the bank group over the past week, the assumption being that Trump is going to cause the economy to grow, the growth to spike, interest rates potentially to spike, and we have seen a big move up in the 10-year in the longer bonds. So, therefore, the yield curve is going to steepen, that is, long-term rates will go up, short rates will stay low, and the banks are going to be able to lend and make a whole lot more money. So, that’s pushed the bank group up 10, 12, 15 percent in the space of a week. That, to me, has been overdone. So, if I was a short-term trader, I would probably be taking some of my profit in the banking area.

13. Changes in Wall Street Regulations Could Push Banks to Lend More

Jim Lange: And what do you think the impact of the Dodd-Frank potential changes would be? Or do you see even that as a plus?

Charlie Smith: I think that there’s going to be some loosening of the capital standards that have been so aggressively increased under Dodd-Frank. I think there’s actually a chance that in the next few years, we may see a reinstatement of the old Glass-Steagall law, which basically divided commercial banking and investment banking. If you remember, that law was repealed at the very end of the Clinton administration, and that set the stage for many of the shenanigans that went on in the mortgage market in the early part of this century. So, I think, further down the road, Steve Bannon, who is the new chief strategist for Mr. Trump, is very much a proponent of reinstating Glass-Steagall, and I think that may be something where we get a trial balloon on that here before too long early in the administration, and I think that could be very much a positive for not only the banking sector, but the broader economy as well.

Jim Lange: Well, I know in the past that you have talked about the banks having money that they didn’t want to lend out.

Charlie Smith: And they still do. Billions.

Jim Lange: All right, and maybe there would be greater incentive for them to lend some money so they can make some more money.

Charlie Smith: Well, that’s what this steepening of the yield curve, the increase of long rates while short rates have stayed low, that’s what is expected to incentivize the banks to begin to lend all this capital that they’ve got on their balance sheets.

Jim Lange: All right. Well, this has been a great hour. Very honestly, this has been reassuring to me personally.

Charlie Smith: Terrific.

Jim Lange: Hopefully, it will to our listeners, and listeners on both sides of the fence. Is there any final thought that you’d want to say with about a minute left?

Charlie Smith: Yeah, actually there is. Well, one of the things to watch for, and this goes to Dan’s question, is how the various people on the different sides of the political aisle within your own family interrelate, because this is an election that has divided families. I mean, I’m hearing stories from friends of mine who have kids who live on the West Coast or even kids that live in the same household that are basically saying, “Look, you just don’t get it, Dad. You don’t get it, Mom. This guy is a crazy man and I’m afraid.” And people are saying things like, “What do I tell my kids? What kind of an example does this gentleman set for the world?” And so, I think as we begin to reconcile those issues within our own families, we’ll be able to get a sense for whether the country is able to move on from this.

Jim Lange: Thank you again, Charlie. You’ve been a terrific guest.

Dan Weinberg: And a reminder, all of The Lange Money Hour episodes are archived soon after they air on the Lange Financial Group’s website, www.paytaxeslater.com under ‘Radio Show.’ Special thanks as always to the Lange Financial Group’s marketing director, Amanda Cassady-Schweinsberg, and to KQV’s Bruce Sakalik, who’s at the controls for us tonight. I’m Dan Weinberg. For Jim Lange, thanks so much for listening, and we’ll see you next time for another edition of The Lange Money Hour, Where Smart Money Talks.

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