Three aspects of Donald Trump you should know

Donald Trump fills the newspapers, shocks the establishment, and puts the fear of God into do-gooders of all countries. Consider the following three aspects:

1.
Schumpeter
Austrian economist Schumpeter became world famous by describing the process of “creative destruction,” which is inseparably connected with all new creations. What Schumpeter has described for the eonomy and what oftentimes takes place out of the public spotlight can now be witnessed live by everyone in the public sector.

But:
What did you expect when the leading actor and producer of the most successful “executioner show“ on U.S. TV became president? The show is so important to him that he remains its producer despite his presidency. He temporarily handed his real estate business over to his children—it seems to be secondary.

In construction jargon: Donald, the wrecking ball. His special ability at the moment is questioning things that have been considered taboo and challenging people who thought their benefice secure.

Just take the example of NATO.

It’s nothing new that Europeans have jumped on the bandwagon by enjoying protection and having others pick up the tab. It’s the tone that has changed. The communication resembles that of a marshal, far removed from the polished manners of diplomacy, which is much valued, especially in Europe. And Trump doesn’t beat around the bush like many other politicians do, which some find refreshing.

Trump is currently doing what anyone does whose phone bill is too high: cancel the contract and wait for a better offer—always an improvement over the standard plan offered at the store. This may be no different with trade agreements. “Brooklyn’s Finest“ as Hollywood might say. Trump calls it “the art of the deal” in his 80ies bestseller. Germans may call it “Holzhammermethode”—sledgehammer approach. Foil fencing is a different thing.

2.
Mighty Adolf

The petulant child in the White House who‘s bossing everyone around and has a need for constant reassurance about how great he is will naturally reach his limits at some point.These will be presented by people who we may not even know yet today. Steve Forbes gave us a taste the day before yesterday—yes, the guy with the magazine—when he pointed out that the border tax is a crazy idea, costing American consumers thousands of billions of dollars. And as I‘m writing this article, Bloomberg is reporting that Trump has apparently consulted with his Secretary of State and—opposite to his previous tweets—has now agreed to honor the One China policy during a phone call with Xi.

Do you remember Mighty Adolf? He was touted the strongest man in the world at carnivals. Then came along Pippi Longstocking. You know what happened next. American Wild West movies tell a similar tale. The louder a gunslinger brags about how well and fast he shoots the more danger he get himself into. Ultimately it’s enough if one man is faster once, and that’s it—once upon a time in the Wild West.

But don’t underestimate Trump and Bannon. Both have been successful not only in New York but also in Hollywood and that is and always will be the toughest business in the world. It is very telling that southpaw boxer Bannon today makes most of his money as cofounder of the left-leaning TV show Seinfeld.

Do not unterestimate Trump and Bannon. Both were successfull in New York and Hollywood and Hollywood still seems to be the most tough business in the world! Interesting to read about Bannon, active on the conservative site, but earning most of his private money as co-inventor of the left leaning TV show Seinfeld.

3.
Rebuilding

There are certainly demolition contractors who build houses, but that‘s not the norm. It may therefore soon be over with the new splendor. It’s either minute details, high noon, or pragmatism. Just imagine the billionaires announce in the kitchen cabinet that the border tax is nonsense and present him with the choice between making the tax so insignificant that it won’t hurt or calling it off entirely. Would you be surprised if Trump tweeted that he changed his mind? (This apparently just happened with China.)

The wave of success will not last forever. It‘s one thing that CEOs feel like they‘re at the Oscars when they announce at the Oval Office which new factories they’ve been building. It’s another thing that the gravity of the harsh reality will set in sooner than Trump would like.

The anchors on American stock market TV couldn‘t hold back a few comments this week. For example, the new construction of a factory in the amount of $7 billion announced by Intel’s CEO is nothing new. That same factory was promised Obama when he took office. At that time the factory was supposed to cost $5 billion. It was added smugly that Intel was the company in Silicon Valley most distant from Trump during the election campaign. Well, if it isn‘t a Greek gift! Trojan horses have appeared time and again, and many in California have studied Ulysses quite thoroughly.

We will see what Trump is made of. He is, without a doubt, a wannabe dictator who is trying to figure out all day long how he can unhinge the separation of powers, which would fit his vanity best. What does money mean when you have the most power? I trust in the stability of U.S. institutions (Alexis de Tocqueville) and pray that I’m not wrong.

It‘s much more likely

that Trump will become pragmatic. At the end of the day, he has built his skyscrapers, hotels, and golf courses, which, in principle, isn‘t antibusiness. I expect that he’ll do the things he’s always done: make deals, take out credits, and try to turn every single negotiation into an advantage for himself. U.S. government bonds might get downgraded as junk sooner than some expect. Trump certainly knows the ropes here. Making as much debt as possible is part of the business model for many real estate developers. This would certainly not be good news for the dollar in the medium term. On the other hand, it’s not a reason to significantly reduce the stock quota at this time.

My impression at the moment

is that all conversations about stocks revolve around their prices being too high and that, as a result, one has to be cautious (i.e., not too many stocks). That’s the Wall of Worry. The classical situation in which stocks rise. It won’t get any better! And just because Europe is cheaper at the moment doesn’t mean that U.S. stocks will fall. But if stocks in the U.S. continue to rise, then what has happened for a few months now may be the case: a sharper rise of European than of American stocks.

If a total disaster in Europe fails to materialize and the demise of the European Union, of the euro, and of the entire Western World is called off, then you should hold European stocks—and not too scarcely. It looks like there may be a politically motivated correction in Europe in the spring, but as for the current outlook on late 2017, everything is pointing to stocks rising in net terms, especially in Europe. Simply because there is significant accumulated demand in Europe. The political racket is certainly warranted, but we buy stocks because businesses aren’t national economies.

It’s a well known fact that ETF buyers do this differently, but look at the chart below. It shows that the stock picking market has been in full swing for a while and, as a result, we have been able to significantly outperform all relevant indexes with our approach. The chart, by the way, shows numbers after our active management fees and includes ETF fees. Most comparisons are always based on the index. However, you can’t buy the index per se, and ETF fees are nicely brushed under the carpet to the benefit of ETF vendors.

Exchange-traded funds (ETFs) will have it more and more difficult in the future.

We were very pleased with the development of our fund in January.

We  made adjustments to positions which, contratry to expactations, didn’t follow the general upward trend. We therefore sold Novartis, Lafarge, and Cembra Money Bank altogether. Since early February, we‘ve started to include some new companies in the portfolio to newly invest cash, which has increased to 18% by late January.

A new investment topic we have been considering is companies which are not impacted by the current worldwide increasing protectionist tendencies and which therefore—unlike in the past— show revaluation potential. Of interest in our search are local businesses as well as flexible companies with an ability to quickly adjust to changing circumstances. Because these types of companies benefit when globalization carries on as usual but offer better protection when the situation changes temporarily, we believe that stock picking continues to make sense and that we’re still likely to achieve a DAX performance with half the volatility.

Border Adjustment Tax

may soon be history. Unfortunately we can’t ignore Donald Trump’s idea today. Lists with companies which would be particularly affected by the tax have been circulating. Think manufacturers of luxury bags or watches which are produced outside of the U.S. and whose production can’t be relocated to the U.S. Price increases for these products by 20 or 30% in the U.S. as a result of the new tax isn’t a pleasant prospect.

The situation is different for companies—such as suppliers—with numerous factories which can very flexibly adjust their production across national borders. For these companies the Border Adjustment Tax can give rise to new competitive advantages or expand existing ones. Of course, the bargaining power of the suppliers plays a significant role as well. For easily replacable parts it will be difficult for manufacturers to pass on the cost of the tax. Suppliers with a strong market position have much better chances to use this situation to their advantage. This, of course, also holds true for manufacturers of luxury items. An outstanding market position is particularly valuable in difficult situations, regardless of what is being produced and sold.

We agree with Pascal Lamy. In the excellent Oddo forum in Lyon on January 5^th he said: “I do not believe—as many do—in a new process of deglobalization. The driver for globalization is technology and therefore globalization goes on.”

AP Moeller Maersk

The world leader in the container shipping industry this week published its numbers for the previous year, which we found rather disappointing. Our engagement is showing comfortable profit; the setback from these numbers has already been compensated.

Our take on this week’s development:

The market was disappointed because guidance had not sufficiently pointed out the possibility of further depriciations in the oil business. Furthermore, the container business isn’t in the black yet. As far as depriciation, it needs to be noted that this is a loss from valuation adjustments in the oil and gas business. For one, there’s plans to sell the latter; in addition, oil from the North Sea has been recovering. Just this week the Israeli Delek Group made a tender offer for Ithaka, which is also doing business in the North Sea. Buying price: $1.2 billion. These types of takeover activities hold, by all means, interesting business opportunities. And Maersk has always said that it would sell oil and gas. But it deliberately didn’t specifiy when.

As background information it should be added that Moeller Maersk isn’t only the market leader in the container shipping industry. The company counts among the most important and, in the long term, most successful businesses in Denmark. After the death of its founder his successors have been making more of an appearance again. The surprising announcement of the resignation of the chair of the board fits into the picture. Former SAP CEO Jim Hagemann Snabe will be the new chairman. Not a surprise, given these facts, that Moeller Maersk doesn’t shy away from collaborating with internet giants such as Alibaba directly as of late. The owners are on deck, pros are at work, and the sector offers immense opportunities due to its rapid technological change.

The whole world is talking about Fintech, which is taking place in the gobal transportation industry. The IT challenges are almost identical with those of banks, and so is the savings potential. This played a major role for our participation in Hapag Lloyd which we started building in the spring of last year. The very positive price development is proof that we‘re no longer the only ones who feel this way.