Trump Honeymoon May Soon Be Over

A second day of falls on the ASX and the front page of the Australian Financial Review today remind us that the flawed exuberance following Trump’s win may be short lived.

Yesterday two heavyweight fund managers publicly warned of a tough year ahead for the Aussie sharemarket in the face of the effects of the tanking bond market and accompanying spiking yields.  One said:

"The rally in shares will probably last through Christmas, with the typical Christmas rally, but we think it will prove to be a sucker's rally…..The backdrop for sustainable growth weakens while uncertainty is clearly on the rise. This is a less than favourable development in the risk/return trade-off for shares. Given elevated valuations, risks are accumulating in shares."

The other predicted the ASX will lose 5% in 2017.

This comes at the same time that the IMF and then our RBA warn of the risks of Australia’s excessive debt.  From the AFR:

“Heavily indebted Australian households and governments are being urged to build greater financial resilience against a global economy facing fresh uncertainties following the rise of Donald Trump, the Reserve Bank of Australia and International Monetary Fund have suggested.”

To date the RBA have played down the effects of our record low interest rates in causing a property bubble.  However that changed yesterday in a clear acknowledgement that another rate cut could cause even more reckless debt uptake.  From new RBA chief Dr Lowe:

"It is unlikely to be in the public interest, given current projections for the economy, to encourage a noticeable rise in household indebtedness, even if doing so might encourage slightly faster consumption growth in the short term,"

Aussie markets have rallied alongside the US, in part because that’s what they do, but more independently because of the surge in commodities such as iron ore in the hope that Trump gets his massive infrastructure spending plans through congress.  The reality however remains that we are the most personally indebted nation in the world (read here for more) and rising bond yields could be extremely dangerous for us.

The other issue the IMF is deeply concerned about is the impacts of Trump’s self protectionist agenda and indeed the worldwide social move against globalisation, meaning “a return to populism or protectionism among big economies would reverse globalisation and weight on trade.  Nations will turn inward and there will be less global trade".  This they see would hurt Australia more than most.

“Puncturing any sense of self-congratulation for having survived the end of the resources boom, the IMF warns that Australia hasn't escaped worldwide "symptoms of the 'new mediocre'."