In today’s Money Morning…the cynical farce that is Aussie politics…Trump’s controversial first budget…the divergence between small and large cap stocks…why you should only focus on what is happening right now…and more…
Don’t you love Australian politics right now?
We’ve just had a budget where the Liberal Party introduced a bunch of measures that would not have looked out of place in a Labor government. And now Labor looks like it will block these measures in the Senate.
According to today’s Financial Review, Labor has issues with the budget’s education reforms. That’s despite the Libs basing their policy on the reforms suggested by Labor’s education adviser, David Gonski.
The Financial Review article states:
‘At the same time, Labor reaffirmed its opposition to the proposed Medicare levy increase to fund the National Disability Insurance Scheme, despite this being a replica of its own policy when in government, and it continued to poke holes in the proposed bank levy, including questioning the revenue it will raise. This is despite simultaneously promising to support the tax in the Senate.’
Don’t you think Labor is taking its role as ‘opposition’ a little too literally?
Aussie politics is a cynical farce and has been for some time now. The cynicism feeds on itself. As the electorate becomes more disillusioned, politicians become more cynical, thinking they can take advantage of our disillusion and disgust.
They might think that. But if they got their heads out of the Canberra bubble they live in, they’d realise that we think they are all morons.
Perhaps not as moronic as some nations have to bear, though. Donald Trump’s first budget wants to slash healthcare and food assistance programs for the poor, while boosting military spending by around US$50 billion.
It’s pure Republican.
No doubt there is a lot of waste and siphoning of funds in these programs. But for someone who talked about ending foreign wars in his election campaign, the increase in military spending tells you who is really in charge: The deep state.
These are the faceless power mongers who control things behind the scenes. And they are particularly prevalent in the military. US military spending is the greatest gravy train in the world. Touch it at your peril.
Whether Trump ever seriously intended to pull back on military spending is a moot point. He won’t.
Regardless, his first budget appears as controversial as everything else he does. Writing in The Washington Post, former Treasury Secretary and Democrat, Lawrence Summers, was (predictably) scathing:
‘Details of President Donald Trump’s first budget have now been released. Much can and will be said about the dire social consequences of what is in it and the ludicrously optimistic economic assumptions it embodies.
‘My observation is that there appears to be a logical error of the kind that would justify failing a student in an introductory economics course.
‘Apparently, the budget forecasts that US economic growth will rise to 3.0 per cent because of the administration’s policies — largely its tax cuts and perhaps also its regulatory policies. Fair enough if you believe in tooth fairies and ludicrous supply-side economics.’
Echoing politicians everywhere (except in Japan), Trump expects to balance the budget by the end of the decade. Let’s see how that goes…
Trump wants to do so by, in part, selling half the oil in the US strategic reserve. This was established in 1975 after the first Arab oil embargo. Give the US’s increasing energy self-sufficiency, this makes sense.
More importantly, draining oil reserves is not an issue to the deep state.
The news didn’t really affect the oil market though. Brent crude was up around 0.6% to US$54.20.
Stocks in general had another healthy rise in the US overnight. But there was one snippet of information that bears watching. From Bloomberg:
‘The small-cap trade got a lot less crowded.
‘Investors pulled $3.5 billion from the biggest exchange-traded fund that tracks the Russell 2000 Index last week, spooked by the steepest selloff in the domestically focused stocks since before Donald Trump’s surprise election win.
‘The biggest outflow in 10 years comes less than a month after small caps roared to an all-time high on speculation Trump administration policies would supercharge growth in the world’s largest economy.’
Bear markets always start deceptively. Usually, investors get out of small caps first. The capital then flows into the big caps, which pushes the indices higher.
So if you’re just looking at the S&P 500 or the Dow Jones index, you think everything is OK. But if the divergence between the small and large cap stocks continues, then it’s time to take some money off the table.
Now, just because there’s been a one-week panic selloff in small caps doesn’t mean a bear market is about to start. There are other factors that argue against such a scenario.
For example, credit spreads are very low. That means the market sees financial conditions as favourable. When things turn, capital usually flows into US Treasury bonds and out of higher risk corporate bonds, which causes the ‘spread’ to widen.
That’s not happening now. Or not yet, anyway. While it’s something to keep an eye on, there is no point worrying about what may or may not happen.
The only important thing in markets — or in life — is to focus on what is happening NOW. The future will take care of itself, and will unfold into the ‘now’ in due course.
If you’re hostage to worries about the future, you’ll never embrace the present. If you want to be a better investor, focus — and react on — only what is happening now. Leave the worrying to others.
Editor, Money Morning