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Larry Berman: Why the Trump-fuelled rally is misguided - and how I've adjusted my portfolio Add to ...

To begin, I look forward to finally seeing Donald Trump’s tax return. I really hope he gives lots of money to charity – for his sake.

I applaud efforts to legally minimize taxes, as well. It is the prudent thing to do when investing. But, for now, I think the generally positive market response is misguided. I understand the volatility move because a Trump win was not priced in, and a Republican sweep was not on anyone’s what-if list. The fast money players are re-adjusting positions, throwing trillions of dollars into motion.

The people have voted, as they voted in the U.K., as they may vote in France, Netherlands, Germany, and Italy next year. The world is shifting to the protectionist right; this was the bearish Trump outcome many were fearing. The world’s growth challenges are deep — too deep for traditional monetary or fiscal policies to fix. That fact has not changed; it’s just been pushed aside. Trump’s 100-day policies will not matter much for the economy. It will for Obamacare and it will for Dodd-Frank, but not likely for the economy. First, the Tea Party in Congress will not likely let him spend at will, as the market seemingly believes based on the money already in motion. They will not likely let him cut taxes in a big way either. Bond yields have jumped in preparation for more supply, but let’s ponder the reality.

Consider that the Obama administration borrowed $9-trillion over eight years, while local governments strapped on about $3-trillion — doubling the national debt! This 12 trillion is about 6-7 per cent of GDP annually. With zero interest rates, the best and most diverse economy in the world grew at an a pathetic 1.4 per cent. So were it not for all that debt, the U.S. economy would be shrinking at about 5-6 per cent annually. We are still in the Great Recession, the massive deficit spending and zero rates are masking the economic ills. That cannot continue.

Global debt is toxic for growth. The average world GDP over the past decade is 2.3 per cent, compared to almost 5 per cent in the Golden Age (1946-1973). Those days are not likely coming back in my lifetime. We are in a low-growth world for decades to come. Demographics and debt levels virtually assure it. Sorry to be a downer, but hope is not an investing strategy, probability is.

The stock market’s response to the election results surprised me, as it did many. For a few hours on Tuesday night, the primary scenario I covered last week played out well: Gold spiked, long bonds rallied, and stocks cratered. That said, I covered half my short before the election and trimmed my profitable gold position too. Risk management is the most important consideration when investing, not opinion.

Looking at the market response, I wonder if we missed something obvious. There has been lots of cash building up on the sidelines. The markets do not like uncertainty, but now a layer of uncertainty has been lifted, putting money back in motion. With all due respect to the great economic thinkers Keynes and Friedman, that probably means more economic volatility is in the future, but that is not necessarily a bad thing.

Managed economies won’t likely work well with the current demographic headwinds. Thirty to fifty years ago, when society was younger, stimulus policies worked. Infrastructure projects like ripping up a road and fixing potholes are not the same as building that road to connect two cities so that commerce could flourish. Beyond creating some temporary employment, once the bridges are fixed and the roads are repaved, that infrastructure job disappears again.

That said, I am more excited about the restructuring of the U.S. economy over the next four years than I have been in the past eight. But initially, the changes are likely to be economically painful. Protectionism is not the solution. Industries like coal are not coming back. He will claim he can open the mines back up, but there probably won’t be many buyers. Utility companies have already invested in the move towards natural gas and alternatives; moving backwards would be wrong. The rhetoric is interesting, but the practical application in unlikely, like so many of the policies he has promised to “make America great again.”

The biggest dislocation is around the changing interest rate outlook. The reality is that the U.S. government is once again up against the budget ceiling, and while they will raise it at the eleventh hour as they have done in the past, it will be with the promise of some fiscal pain. Surprisingly, the Fed is still expected to raise rates in December. We expect they will not back up much more. The interest rate-sensitive areas like REITs and utilities are getting cheap, and I am now building exposure to these quality dividend plays. I’ve sold half of the 5 per cent U.S. health care (XLV.N iShares Health Care) position in my growth fund, along with the industrial (XLI.N) and consumer cyclicals (XLY.N). As gold sells off, I’m adding some gold stock exposure (ZGD.T) for the first time since late last year. Never forget, diversification is our best tool.

Tune in to Berman’s Call Monday’s at 11am ET or catch one of my upcoming talks at a city near you on how you can better manage your portfolio.

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