The Donald picks up Reagan's economic trump cards

Donald Trump is starting to press some proven vote-winning buttons on the economic front.

Summary: Donald Trump is dusting off Ronald Regan's economic blueprints in his battle for the White House.

Key take-out: What Trump is offering Americans will be very attractive to many voters - but not to markets.

Key beneficiaries: General investors. Category: Economics, fixed interest, commodities. 

The markets and just about everybody you meet, both here and in the US, say that Donald Trump has no hope of being President of the United States. While I don't disagree, today I am going to look more closely at the alternatives facing the US. There are also three other subjects I want to canvas.  

  • How far will the term deposit battle go?  
  • Is Australia facing a housing glut?  
  • And finally, the nickel market has a close link to what is happening in the Philippines. 

Reagan repeats?

We all know what Hillary Clinton promises if she becomes President. She wants to raise minimum wages, increase social spending and fund this by "taxing the rich". In practice she will increase the US deficit and possibly lower the US dollar. 

Wall Street expects her to win and if at any time in the coming months she looks like losing then Wall Street would fall sharply.

And if she was actually to lose there would be a serious correction. And our market would follow Wall Street.

I am not in the business of predicting the winner but, like everyone else, I think Clinton will win. However, it is important to realise that what Trump is offering Americans will be very attractive to many voters, so we could have swings that might cause an upset win.

Trump plans an across-the-board income tax reduction and consolidating American income tax rates at 12, 25 or 33 per cent. He will also slash company tax. He will fund this by stopping a series of loopholes which Trump says he has personally exploited in past decades. Trump says that the American tax code is so burdensome and cumbersome that the nation wastes 9 billion hours a year in tax code compliance, which will be substantially reduced under his plan. 

At the same time he has refined his attitude to trade and says that he is totally in favour of trade and does not favour US isolationism. But he wants trade deals that produce more jobs and higher wages for American workers.  

The tax cuts and trade remarks are exactly the sentiments that Ronald Reagan used to become US President. I located a photo of a young Donald Trump shaking hands with Reagan, which I publish below. 

No one thought Reagan could win but he did because he pressed the right buttons for Americans. Again this is not a prediction, but merely a market alert. 


Back to Australia

As you know I have been alerting Eureka readers for some time of the dangers of the apartment glut and we now have Chinese rescinding their contracts because they can’t get funding either from our local banks or out of China, because of the Chinese clamps.  

It is obvious that the situation could become very nasty and cause a deterioration in China-Australia relations because our banks indicated (but did not make binding offers) that the money would be available.

But there remains very strong demand by Asians to invest in Australia and while some Chinese can't find the money others are a replacing them, at least in Sydney. 

At the heart of whether we will have a long-term glut is migration. I know many Australians, including many Eureka readers, are reluctant to accept extra migration. There is no longer consensus on the migration front but we should not forget there are a large number of people in Asia and huge numbers in the Middle East who want to come to Australia. That population pressure is not going to stop. And so while we may have a short-term apartment glut which might spill over into softer house prices, I don’t think we are going to have a collapse unless it is a part of a total-world setback which affects the ability of our banks to fund their loan portfolio.  

And so on the back of a small fall in interest rates we saw a surge in the buying of dwellings in many areas of the market, particularly in Sydney and Melbourne. It was a reminder that with superannuation becoming less attractive Australians are going to invest more and more in their residential homes and in investment dwellings.  

My younger friends who don’t own a home look at every piece of hopeful evidence that emerges indicating that a housing price collapse is around the corner. This applies particularly to those in the media. Be wary of these stories while understanding that there could be a one-bedroom apartment glut in Melbourne. 

Longer term, the migration rate will determine dwelling prices. 

Deposit rates

Last Saturday morning I was broadcasting on 2UE on the subject of interest rates including term deposit rates. The announcers didn’t realise that the increase in deposit rates did not apply until August 19. It is worth repeating my earlier alert to make sure Eureka readers and their friends don’t take up one-, two- or three-year bank deposits at the current published rates. If you raise the issue with the banks they will normally offer the higher rates coming on August 19 rather than risk losing your deposit.  

Because of the change in regulations requiring a greater proportion of longer-term local deposits, there are predictions we are going to have a deposit rate war between the banks. But notice what Bendigo Bank predicted this week. It stated that if there was a war and deposit rates kept creeping higher, then Bendigo Bank would go to other avenues for funding. The bank has the scope to do that. 

My guess is that there won’t be too many more deposit war salvos like the one we have just seen  the banks hope that these higher rates will give them enough deposits. (Remember, of course, that bank deposits are not for everyone, but for those seeking to lessen their overall risk they are an important portfolio segment.)


Finally every time I read about the harshness of the new president of the Philippines I think of the nickel price. You will remember that nickel has been savaged in the market because the Chinese are using what is called "pig nickel" (nickel with impurities) for kitchen and other household stainless steel products. This has slashed the demand for pure nickel. 

The Chinese have dirty and inefficient plants that produce pig nickel. Originally they bought their nickel concentrates from Indonesia but that source has now been stopped because the Indonesians want to convert their nickel into metal in Indonesia. 

Source: Bloomberg, Eureka Report

The Indonesians were replaced by the Philippines, which became the largest supplier of nickel concentrates to China. But the new Philippines leader  who was voted in on May 9  has shut down about a quarter of the nickel mine production due to environmental concerns, and there are more mine closures to come. 

This is a tough government which is supporting the police in the vigorous campaign against drugs. This toughness, which has led to a spate of police killings of suspects, is causing some fear among executives in the mining industry and people don’t want to protest when their mines are shut. Meanwhile the nickel price creeps higher but needs to go further to restore profits in the industry.

Source: Bloomberg, Eureka Report

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