Well, the election is over and we have a clear victor.
What kind of economy is President-elect Trump inheriting?
And what impact on it are his policies likely to have?
And what does this mean for investors? Where do the opportunities, as well as the risks, lie?
To discuss, we're fortunate to be joined again by Michael Green, portfolio manager & chief strategist at Simplify Asset Management.
Mike has strong opinions on the above questions, though his convictions are strongest that passive capital flows (aka, the “giant mindless robot”) will play a HUGE role in determining the future of financial assets over the coming years.
So where does he see them headed?
Here are my key takeaways from this interview:
Michael emphasizes a critical split between financial markets, which have been elevated by passive investing, and the underlying global economy, which shows signs of weakened demand. For example, oil prices remain low despite expectations for higher prices, which he interprets as a signal of economic weakness, particularly in China. Although China has achieved a trade surplus of nearly $1 trillion, this has been due to its reliance on exports rather than a growth in domestic consumption, illustrating China’s ongoing struggle with insufficient internal demand.
The U.S. economic landscape is increasingly split between asset-rich individuals, who benefit from rising interest rates due to their investments, and younger or lower-income workers, who face higher costs for borrowing. This division leads to different economic realities: while older, wealthier individuals see their wealth grow with higher rates, younger adults need to borrow for essentials, and they experience a tighter job market. The unemployment rate for those under 25 is notably higher than for other age groups. Michael points out that young people struggle to find jobs and internships, especially without access to gig economy options, like driving for Uber, which some states restrict for those under 25.
The Trump administration's use of tariffs as a tactical, negotiable measure rather than a hardline policy, aiming to pressure companies to move their sourcing away from China. For instance, companies may turn to other countries, like Vietnam, which would then agree to import more U.S. goods as part of the deal. This strategy, if successful, could stimulate domestic production and benefit the U.S. economy. However, if tariffs simply raise prices without stimulating wages or job creation, this approach may lead to reduced aggregate demand domestically, harming U.S. consumers.
Michael cautions that passive investing, which continually pours money into markets without considering asset valuations, has led to inflated market values. He warns that if the share of passive investments grows to 70%, valuations could reach unsustainable levels (up to 450% of normal), with the Shiller P/E ratio exceeding 150x. This reliance on passive investing has diminished price discovery, raising the risk of a severe correction. If passive inflows slow or reverse, there could be a crash with long-lasting consequences similar to Japan's 1989 market collapse.
Boomers, who control a large portion of financial assets, have mostly relied on passive investments and are now able to live off of fixed income rather than selling stocks, particularly in the current high-interest-rate environment. Michael warns that when boomers eventually begin to sell these assets, the markets may face significant strain. Additionally, passive flows from younger workers have not fully compensated for the potential outflows from retiring boomers, creating a demographic time bomb that could destabilize markets.
Michael advocates for long-term economic reforms to address structural issues causing wealth inequality. He highlights the need for policies that prioritize household formation and wage growth. Drawing parallels to Japan's experience in the 1980s, Michael suggests that if the U.S. shifts focus from short-term economic boosts toward meaningful reforms, it can create a more sustainable economic environment that supports the middle class and encourages domestic investment.
Michael advises older investors nearing retirement to reassess their investment goals, particularly by shifting to fixed-income assets that offer predictable returns. With equities at historically high valuations, he recommends avoiding the potential volatility of the stock market and instead focusing on safe income-generating assets, such as bonds. He also suggests that near retirees consider alternatives to stock investments, such as helping family members with home purchases, which can support family wealth and security.
Michael underscores the value of investing in one's family and community as a way to build true, lasting wealth beyond financial markets. He notes that much of American society has been conditioned to invest solely in multinational companies through index funds, often overlooking the direct impact that personal and local investments can have. By directing resources toward community and family-oriented investments, such as local business support or family education, individuals can foster real economic growth and social stability, which he believes are essential to sustainable wealth.
For the full interview with Mike Green, watch the below video:
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