Monday, 27 February 2017

Trump Policies To Cause Market Volatility

Many political developments since Donald Trump’s inauguration have demonstrated a departure from official protocol and generally accepted ‘presidential behaviour’.  Most of these deviations, whether tweets, disrespectful media comments, or outspoken statements to other leaders, have been mocked and ultimately encouraged a micro-analysis of his every move.

One thing that perhaps cannot be faulted regarding his political habits to date: Trump has been true to his word and stuck by the campaign pledges he made.  Indeed he has set off at breakneck speed to implement them.  A potential consequence of this is that he if continues to pursue the policies so heavily discussed during the campaign, soon we could see movement regarding tax policies and proposed tariff implementation.  Exactly what it will do to the Federal Reserve's balance sheet is a major side issue and whether it will pass through Congress, is another, but there is certainly cause for concern.
Possibly the biggest mystery of the Trump presidency so far is how true to his word he will be regarding pledges made on trade protectionism.  After the recent visit from Japanese prime minister Abe there was a distinct lack of media reporting on the subject.  We know little detail about the talks, which is strange considering Trump had previously put Japan in the basket of a currency manipulator and US job destroyer leading to perceived unfair trade imports. Japan was firmly in the tariff crosshairs along with China, Germany, Mexico and any other country that contributes to the US trade deficit. There is no question that this could be the most difficult of his pledges to see through, but any backtracking on promises made could cause uproar from car manufacturers and coal miners alike who are expecting old jobs back. 
Most economists agree that any trade tariffs are bad for mutual prosperity and go against free-market economics which have existed for the last 40 years.  Tariffs make goods and services more expensive for the end consumer and lead to an inefficient allocation of capital and sub-optimal cost bases. It may preserve jobs or reintroduce previously redundant ones in the short-term but in the long run, turnover and profits fall as output becomes uncompetitive and prices rise. Those same preserved jobs ultimately have to go anyway as employers struggle to compete.
There is historical precedent for such a protectionist stance in the form of the Smoot-Hawley Tariff Act of 1930, designed to protect the US economy from cheap foreign imports thereby preserving US jobs, which was believed would subsequently lead to a recovery from the economic depression of the time. The aftermath for markets was a further 10% fall in the S&P 500 and rampant inflation three years later as prices spiralled (although not all of this can be directly linked)  . Imports into the US fell by 60% causing an initial fall in inflation but as other countries subsequently retaliated, inflation spiraled and global trade fell by 30% leading to a global recession. Developed nations saw their exports fall by 30-40% whilst the US suffered most with exports falling by 60%.
It is this experience that most disturbs economists regarding Trump’s anticipated trade policies. Having appointed Peter Navarro to head the newly formed White House National Trade Council, the anti-China thinking seems unlikely to change – it is just a question of how aggressive and vocal it becomes.  As with the travel ban, this could erupt over a weekend from an executive order or a tweet. So far, none of the media splashes have caused market consternation. However, it could only be a matter of time before we encounter a trade proclamation that is truly disturbing, leading to market volatility.
The lack of media substance from the Japanese premier’s visit suggests that Trump’s protectionist ambitions remain in place. To the outside world, it was all smiles, but if Japan is getting 100% US military support, there must surely be extensive negotiating leverage that will be exploited as Trump pursues his trade agenda.  

The current low levels of volatility in the markets look sustainable for about as long as it takes for an incendiary anti-China tweet to be typed.  This most sensitive area of trade conflict is likely to rear its head before long and bring the most contentious of Trump’s policies to the forefront of investor’s minds. It is unlikely to go down well with markets, and investors should prepare themselves for some volatility during the months ahead.

Wednesday, 8 February 2017

How To Manage Your Money - a beginner guide (Part Two)

So, you’ve started budgeting your money, you’re building credit, and you’re spending less than you earn.  Now comes the next part: saving for the future, which for a lot of people can be even more daunting.  Far too many people find excuses to put this off, perhaps because it seems too far away to matter, or it feels impossible and overwhelming.  However, the consequences of not paying attention to this from an early stage can be far reaching. The earlier you start saving, the better off you’ll be later on in life.  Not only that, you’ll also spend less effort trying to get there later.

Remember those sections in your budget discussed last week called Savings and Investments? Start trying to make sure you’re adding to these as a matter of habit.  If your employer uses direct deposit and your monthly salary goes directly to your bank account (which tends to be the case for most of us), you can ask for different portions of your pay sent to multiple accounts.  You can use this to send money to a separate savings account that you don’t have a debit card for, or that’s not easy to transfer to your regular checking account. Note - The money you never have access to is the easiest to save.

Having money in a savings account will help you save for little things, like your emergency fund or a new computer. But your real, long-term savings are going toward something far more important: retirement.  One day you’ll want to stop working, and you’ll need a big chunk of savings to keep you going in your golden years.  A modest savings account isn’t the best way to do this, and this is where more sophisticated and structured investments will come in to play.   If you can allocate a portion of savings into some fairly simple, low-risk investments, it will make money for you while you sleep—and over the course of years and decades, that can add up to an awful lot.  

Long-term investments can may come in part from your employer.  Many companies offer pension plans that you can fund with money deducted from your paycheck before taxes. In some cases, employers will also match some or all of what you contribute, which means you’re literally getting free money just for having an investment account with them.  Company pensions are by no means risk-free however, and the rapidly increasing pensions deficit in countries like the US, UK, France and Germany unfortunately means many final salary schemes are no longer available to new employees.  This means more and more people are turning to private pension schemes to help fund their retirement.

Investing doesn’t have to be complicated, either—it doesn’t mean picking winning stocks or timing the market.  If you’re just starting out and don’t yet have the knowledge or market understanding, you can even use an online service to do it all automatically for you.  These can guide you through the process of setting up an investment plan based on your age, goals, and risk preferences – and will then automatically pick which companies or industries to invest in.   If you prefer a more personal touch when discussing financial priorities, then you are best consulting a professional advisor.  By employing the services of an IFA you should be able to find the investment product that is best suited to your specific needs, but be sure to do your research carefully.  Ensure the firm advising you are fully licensed and legally able to operate wherever you might be living.  Holding the correct FCA license means a company can provide truly independent advice and should have access to a much wider range of products and providers.  More importantly by working with a properly licensed advisory firm you have the additional peace of mind that they can be held accountable for any advice and services they provide.

Getting started with long-term investments will often be one of the hardest parts of your financial life because, when you’re just starting out, you don’t have much money.   It is important that you re-examine your investments every time you get a raise or a new job that pays you more. When you make more money, it will of course be tempting to upgrade your life with a new car or apartment to match your new budget.   This is known as ‘Lifestyle Inflation’, and while it’s okay to move up, the smartest among us will make this priority number one, reaching financial independence that little bit sooner.