Could Donald Trump be America’s Maggie Thatcher?

published 21 December 2016

161221-trump-b — Will Donald Trump be "aggressive and thoughtful" or "aggressive and reckless"?

Ray Dalio is the head of Bridgewater, one of the world's largest hedge funds, and a very successful investor.

Bridgewater itself is famous for being an odd place to work. The culture is aimed at getting everyone to think hard about their views and to challenge each others' thinking.

Some of the ways in which it does that sound like they'd be somewhat hard to put up with for anyone that didn't buy into that culture. But I don't have to work there.

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And holding people to account for their calls is no bad thing in an industry that tries to make money by predicting the odds of various outcomes.

Anyway, he's an interesting thinker, and while I don't always agree with his take on things, his analysis is pretty rigorous.

So I was interested to see that he seems to be rather optimistic about Donald Trump...

Trust the locals when it comes to domestic politics

As a Scot, I've marvelled at how many outside commentators seem to believe that Scottish nationalism is morally a cut above other forms of nationalism, usually because it suits their own arguments in a "the enemy of my enemy is my friend" sort of way.

Same goes for the eurozone. During the Greek crisis, I made the intellectual error along with lots of other people of assuming that it would end with Greece leaving the euro. I failed to understand that voters perceived the euro, the EU and their own politicians very differently to the way that I was reading the situation.

So most of the time, when we're looking at other people's politics, we just project our own prejudices, and then draw our conclusions from that. And of course, that's why most people in the global establishment bubble got this year's election results entirely wrong.

What's my point here? I dislike many of Donald Trump's attitudes. And I feel that his vindictive streak does not bode well for his judgement. But I'm not convinced that any of that can tell us anything about how he'll actually govern in practice, or about what it means for investors.

So I'd rather pay attention to what a local who understands this stuff, and whose business depends on trying to get it right, is saying. Which is why Ray Dalio's piece struck me as interesting.

What we talk about when we talk about animal spirits

Now, I've always hated that phrase, "animal spirits". It's a woolly term that gives rise to woolly thinking.

John Maynard Keynes used it in his 1936 book, The General Theory of Employment, Interest and Money. He described animal spirits as being "a spontaneous urge to action rather than inaction". It describes people deciding to do things based on "spontaneous optimism" rather than "the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities".

Keynes was writing a long time ago, and his description of animal spirits anticipates behavioural economics by quite a long way.

But it's not very helpful. It gives rise to this sense that there's no rhyme or reason to people's feelings of optimism or pessimism. And it means you can pin low spirits on pretty much anything you like just change the argument to fit your own biases.

Why are "animal spirits" lacking now (if indeed they are)? Just cos. Cos Brexit. Cos Obama. Cos central banks. It's the economist equivalent of retailers blaming the weather when they issue a set of dud results.

The reality is that people do things for reasons. They may not do them based on mathematically rational calculations in the narrowest sense homo economicus has always been a terrible model to follow when trying to get a grip on human behaviour.

But equally, they don't just spontaneously decide to throw caution to the winds and start a business or build a factory because they wake up in a good mood.

Ultimately, people make decisions based on incentives. Incentives matter. They matter so much. And when Dalio talks about igniting "animal spirits", what he really means is shifting incentives.

So why will the Trump regime encourage people to start investing and growing again? Because Trump "wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power".

In fact, Dalio reckons the shift "will probably be even more significant that then 1979-82 shift from the socialists to the capitalists in the UK, US, and Germany when Margaret Thatcher, Ronald Reagan and Helmut Kohl came to power".

Dalio's point is not so much that Trump will make lots of tax cuts or boost spending. It's that an administration that is welcoming and hospitable to business, will incentivise entrepreneurship and investment, because money goes to where it is treated well.

"Remember how quickly money left and came back to places like Spain and Argentina? A pro-business US with its rule of law, political stability, property rights protections, and (soon to be) favourable corporate taxes offers a uniquely attractive environment for those who make money and/or have money."

But is Trump too inexperienced and unpredictable? That's where the local knowledge comes in. Dalio seems to think that Trump's cabinet will help on that front. "Many of the people entering the new administration have held serious responsibilities that required pragmatism and sound judgement, with a notable skew towards businessmen."

The big question for Dalio is, will the government be "aggressive and thoughtful" or "aggressive and reckless"? "We are pretty sure it won't take long to find out."

What might this mean for investors

From an investment point of view, there's nothing concrete we can take from this. But if Dalio's right, it does suggest a few things.

Firstly, the bond bull market would really be over. And you can't necessarily expect a soft landing.

Secondly, the US dollar bull market would much as I struggle to accept it really only just be getting going. A corporate-friendly US would attract a lot of homeward-bound capital. You might even see multinationals get a lot less multinational.

Thirdly, the businesses best-placed to benefit would be small companies in sectors that don't depend on much government business. Others, that feed mainly on skewed incentives within America's bureaucracy I'm thinking the healthcare system is a very obvious one might not do so well.

Finally, if you're investing in the US, I'm not sure that plain vanilla index-tracking is going to be the way to go anymore. The overall market is expensive, and certain parts of that market are going to get hammered, while others are going to be buoyed by change. So we'll need to be more picky.

The next four years will be "incredibly interesting and will keep us all on our toes", says Dalio. If that sounds double-edged, well, it's meant to.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.