O’Sullivan Wealth Management Investment Update - Confidence

May 10, 2018 | Kevin O'Sullivan


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The Trump presidency has been controversial at almost every level, polarizing people across the US and the world...

Confidence is a curious thing.

 

You can tell someone to feel confident while providing facts and proof, and yet it might have little effect. Conversely someone can suddenly feel confidence without any substantial underlying support for why they feel that way.

 

The Trump presidency has been controversial at almost every level, polarizing people across the US and the world. People will either take the stance of being adamantly for him despite flawed policies, or staunchly against him not wanting to acknowledge any strengths he has brought to the presidency.

 

It’s interesting to note that prior to the 2016 election, the US was among the developed nations that were struggling to stimulate their economies. Interest rates were plumbing historic lows, a result of the Great Recession of 2008, with aggressive Quantitative Easing programs in place to inject money into the system. The economy wasn’t responding in any significant way, because businesses, investors and consumers lacked confidence in the economy. Deflation was a concern, and central bankers were struggling to find a solution while having exhausted most if not all of their options.

 

With the 2016 election of Donald Trump, everyone expected the stock markets to fall steeply the next day, but the opposite happened. The markets entered a strong rally that lasted almost 14 months.

 

With all of the pre-election talk of investment in infrastructure, America first, tax cuts, and so on, a large portion of the participants that make up the economy were energized with confidence. Trump had won the election and the markets responded in anticipation of the policies that would stimulate investment, and engage business to grow the economy in the US.

 

Now, just over a year later, central bankers are focusing on how to control potential inflation that is expected to come into view.

 

We often view the flow of money as being vital to economic success, much as the flow of blood coursing through a living body being the essence of life. Without that life-giving flow, or if there is any blockage or constriction, the body will suffer. And so it is also true that any blockage in the flow of money will cause disruptions in the flow of business. But with the economy, confidence is that key unquantifiable energy that is the catalyst or spark that initiates the flow of money, and keeps it moving.

 

But, as noted above, confidence is a curious thing. Too little causes stagnation and deflation, too much leads to runaway asset bubbles or irrational exuberance, as coined by Alan Greenspan. There is also the confidence that investors have placed in fraudulent schemes, where they have lost everything. And confidence placed in little-known startups that led to household names, like Microsoft.

 

But we now find ourselves in a situation where the US economy has emerged from a long, stubborn and challenging period of slow growth. In doing so it has begun to pull other developed nations along with it. European countries that were also struggling with deflationary trends have begun to reverse their quantitative easing programs, and are now beginning to look at a future of raising interest rates. Deflationary pressures had even forced the European central bank to charge negative interest rates on cash balances.

 

We may agree or disagree with Trump’s policies, but it would appear that one positive effect of his presidency has been to stimulate economic confidence and break through the economic stalemate that held the US within the grip of looming deflation. The irony is that, with all of his other distractions, he has not mentioned this as a direct result of his tenure in office. Could this be an unintentional consequence, or was it his plan all along and he just hasn’t brought it to our attention yet? We’ll have to wait to find out.

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