After Donald Trump won the presidential election 2016, the financial markets have reacted very dynamically, but investors also do not seem very determined about what the political shift would mean to the global markets.
Yet they would not be to blame, especially when even the world’s greatest hedge fund managers have diversified, different views. Some foresee rapid growth, whilst others still remain cautious. We introduce both in this article.
The bullish investors from the Quantum Fund
The two investors who once worked for George Soros’s Quantum Fund have a bullish view on the global economy after Mr Trump’s presidency. One is Stanley Druckenmiller, who worked for Mr Soros when the fund famously and successfully shorted the British pound amid Black Wednesday in 1992.
In an interview with CNBC, he explains his bullish view. ‘I have a large bet on economic growth. How do I do that? I’m short bonds globally. I’m short bubbles. I’m short bunds (German bonds), I’m short gilts (Greek bonds), I’m short Italian bonds, I’m short US bonds. That’s all respective of not some disaster with deficits but with stronger growth,’ he says.
In terms of macroeconomics, when the economy grows, interest rates rise, which means bond prices fall. ‘I think interest rates are going to go up,’ he explains, ‘when you have absurd interest rate levels, and you combine it with a change in expectation on economic growth, interest rates have to go up, and I think they’re going to go up a lot more worldwide.’
He is also bullish on stocks. ‘I like the sectors in the equity market that respond to growth.’ Regarding the currency market, he adds, ‘I really like the dollar, particularly against the euro.’
Jim Rogers, who founded the Quantum Fund with Mr Soros, also agrees to the expectation of rising interest rates, in the interview with CNN on Mr Trump’s presidency. ‘He says he is going to cut taxes, which is great for everybody and for the economy. He says he is going to spend a lot of money on infrastructure. I don’t know where the money is coming from, but that’s what he says.’ On interest rates, he says, ‘Interest rates are definitely going up in years. No question about that. Not just the United States, but the rest of the world.’
The ‘Bond King’ wants risks of rising rates
On the other hand, DoubleLine Capital’s Jeffrey Gundlach, known as ‘Bond King’, remains cautious. According to Reuters, he insists Mr Trump does not have ‘a magic wand’ to rapidly improve the economy. He points out that rising mortgage rates and monthly payments are not positive for consumer sentiment.
We find him very true, especially looking into the recent GDP data.
In this article, we reported that the only elements that were growing were the personal consumption and the exports, and the former was supported by low auto loan rates, and the latter was supported by the rebound of the energy prices. Both, unfortunately, would be hurt by the rise in interest rates and the strengthened dollar.
Ray Dalio points out the biggest risk
At last, here is the opinion we trust the most. Ray Dalio, the founder of Bridgewater Associates, refers to the biggest risk of Trumponomics. Mr Dalio published his view on the new president’s economic policies on LinkedIn.
Although he first predicted the big shift from the world of sluggish growth and low inflation to the world of increased growth and higher inflation, he implied some darker view later. ‘The question will be when will this move short-circuit itself—i.e., when will the rise in nominal (and, more importantly, real) bond yields and risk premiums start hurting other asset prices.’
What does this mean? Our readers would know what it means very well. He is saying the reverse of the investors’ portfolio rebalance caused by quantitative easing would eventually happen.
The massive monetary easing that has happened worldwide pushed investors from low-risk assets to risk assets; from government bonds to corporate bonds and from corporate bonds to properties or stocks. This is called portfolio rebalancing, and rising rates would have to reverse the capital flow. For more details, please see the following article.
However, we suppose President Trump knows the risk. He explicitly mentioned the risk in the past. Then, what would he do?
We are still in progress of predicting the markets with Mr Trump’s presidency, but there is a lot more than what others can say about it.