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January 12, 2017 | Next?

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The Trump Bump’s running out of gas lately. The Dow was poised to crash through the 20,000 mark before the new year, but still hasn’t made it. After the goofy billionaire’s wacky news conference this week, it’s further out of sight.

What does this mean to investing in 2017? Your TFSA or RRSP contribution? Should you go aggressive, or play it safe? Will it be a great year full of Trumpian hormonal excess, or are we witnessing a shaming of American democracy that’ll spank the stock-flipping cowboys? My answer in a moment.

So what’s going wrong?

In a few words, the Donald may be all hot air, or at least more bravado than actual, workable policies. Markets were expecting that presser on Wednesday to flesh out his stance on corporate tax cuts or infrastructure spending and instead we saw him fighting with a CNN reporter, refusing to set aside ownership of his business assets, and spending most of his time talking about Russia. (Who cares?)

What he did manage to do was destroy the stock values of big pharmas by announcing (out of the blue) the US government would be negotiating for lower prices on behalf of consumers. Yup – something you’d have expected from the lips of socialist Bernie Sanders, not a flaming capitalist like Trump. This is the kind of unwelcome surprise markets don’t want from the leader of the free world, like the Tweets threatening to tax the doors off carmakers shipping product from Mexico (now completely permissible under current trade deals).

The worry is what this guy might do to Canada, currently led by a tat-wearing, left-leaning, deficit-loving, weed-friendly kid who never started a company nor hired an employee. Not that should matter. But this is Trump. Remember what he did to that disabled NYT reporter? Little stuff gets him.

The point is that Canada’s vulnerable, since 70% of our exports go to the same place, and a large chunk of our manufacturing sector is dependent upon free access to US markets. Way back in the Mulroney days we cracked the American border with the Canada-US free trade deal, which later morphed into NAFTA, covering the continent. There’s no doubt Canada and Mexico have fared well under that umbrella. And it’s a fact Trump couldn’t care less about these two amigos.

This week a gaggle of economists lowered their growth projections for our economy based on the fear of Trump. Meanwhile there’s concern the orange-haired populist will push his jobs-for-America agenda into the energy business, encouraging more fracking and production by US producers, bringing energy self-sufficiency for the first time in decades. So what? A gush of US oil could inflate supplies again – the same recipe which gave us $27 oil last winter, heartache in Alberta and a recession in Canuckistan.

Sure, a lot of this is conjecture. But that’s what markets do. They price in what’s known with what’s expected. The Trump Bump that crashed bonds, ignited equities and sent the US dollar skyward since the election was based on the expectation of big spending, fat tax cuts, expansion, deregulation, growth and inflation. That goosed bond yields and helped spur the Fed to forecast three rate hikes this year. Also important is the fact Congress is now controlled by rightist Republicans, making any Trump Tweet or media conference brag more likely to turn into actual American policy. Obama never had that luxury. Few presidents do.

What next?

You should expect volatility. Buckets of it. We’ve just had the biggest market rally since Herbert Hoover was president. A decent year’s worth of gains came between November 8th and the beginning of 2017. What markets so feared and dissed (a Trump win) was then embraced as a pro-business, profit-happy speculative romp. It would be silly not to expect a pullback if he fails to deliver the bacon after ascending to his deity status next Friday in Washington.

This guy is the most unpredictable man ever to walk into the Oval Office. He wields a great deal of executive power. And he’s a social media addict, with thin skin and the disposition of a prize fighter. Nobody knows where this is headed, and since there are no heir apparent Democrats in the wings, the Trump years could extend until 2024.

There has never been a more powerful reason to have a balanced portfolio, simply because you, me nor the pooch have any clear idea of what’s coming. We know the US expansion is real and will continue, Trump or no Trump. That will support equities. But the return of protectionism could seriously screw up Canada, the efficient flow of money and labour around the world, and help destroy the free trade little nations like ours depend upon. In short, it’s a bad time to have a giant mortgage on an inflated house, or be a day trader in junior oil stocks.

Stick with the plan. Forty per cent in fixed income (most of that in preferreds and corporate bonds), with the rest in growth assets (equity-based assets and some quality REITs). ETFs remain the best choice, since you get broad diversification, low cost and avoid owning individual stocks a Donald Tweet could slaughter. Keep 20% of your portfolio is US$, since currency fluctuations could be large. Make sure your exposure is to rate-reset preferreds which will benefit from inflation and higher yields. Fill the TFSA first, always. Put the bonds in an RRSP. Don’t keep more than 5% in cash.

Build the portfolio correctly, then forget about it. That way you get more time to work on burying the school buses in your backyard.

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January 12th, 2017

Posted In: The Greater Fool

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