Donald Trump’s cuts not too taxing

THE “disruptions” keep coming for investors in both major sectors: property, where they make their own decisions, and the share market, where they mostly leave it to the “experts”, writes Terry McCrann.

There has been an “unenthusiastic” reaction to the Trump tax plan.

THE “disruptions” just keep coming for investors in both major sectors. That’s property, where they make their own decisions, and the share market, where they mostly leave it to the “experts”.

President Trump unveiled his tax proposals early Thursday morning our time.

In the two days of trading that followed, Wall St essentially went sideways. Our market edged higher, but that was before the overnight Friday (small) drop on Wall St.

The big difference is that Wall St is trading just below its all-time record — a level that is close to 50 per cent higher than the record it reached before the 2008 crash. Our market, in contrast, is still more than 10 per cent lower than its pre-2008 record.

Further, as I discussed earlier in the month, our market seems to have hit something of a brick wall around this level. Wall St might have as well, but, as noted, much higher. And whatever else happens, there is no way we are going higher unless Wall St does.

My take is that the “unenthusiastic” reaction to the Trump tax plan was a good sign. At least investors didn’t give it a thumping thumbs down, or even sell simply on the “buy the rumour, sell the fact” dynamic.

The plan was totally as expected and indeed promised by candidate Trump: proposed big cuts to both corporate and personal tax. The corporate rate is supposed to fall from 35 to 15 per cent; the top personal rate is to come down to 35 per cent.

But there’s a long, long way to go. We might eventually get there and we just as possibly might go nowhere. That’s why I thought Wall St’s reaction was positive.

If we’d had either a big drop on the basis of major disappointment, or a further surge from already stretched share values on the basis of nothing much more than hysterical hope/hype, we would have been setting world markets up for major volatility and rolling “disruptions”.

A Wall St going sideways won’t shoot the lights out of our share
prices, but a Wall St going sideways at these record levels will put a very nice floor under our market.

The really disruptive event was the first measure of what happened to the US economy overall in the March quarter. This showed it also essentially going sideways in what might be called the “first Trump quarter” but is really the “last Obama quarter”.

For complex reasons nothing at all should be read into those numbers. The really important question is whether Fed head Janet Yellen will understand this.

That’s the next “disruptive” event we face — early Thursday morning again. That’s when the Fed will announce its latest interest rate decision.

Before the GDP number surfaced, I thought there was a very, very good chance that the Fed would announce a “surprise” rate increase. The “experts” certainly didn’t (and don’t) expect one; indeed, they were split 50-50 on whether we were even going to get one after the next meeting, in June.

I say “we” because an official US official rate increase is the entire world’s rate increase. It might not flow directly on to your mortgage, but it will ultimately flow on at least in part.

If Yellen was both smart and read the data accurately, she should deliver a hike. But the one thing we know is, is that she’s the great “blinker”.

Any sign that Wall St’s heading down or would plunge on a hike, and she backs off.

But if you can’t hike when Wall St’s at these levels, and accept a few million (and the odd billion) coming off “fat cat” fortunes on a market fall, you almost can never hike.

So, we’ve got Thursday morning coming up — our Reserve Bank won’t be “disruptive” tomorrow afternoon, it will leave its rate unchanged.

Then the French election at the weekend. Now it’s assumed the “centre guy” will win and win easily. That’s probably going to be true, although I don’t think it’s quite the certainty assumed.

But the important thing that’s been missed in that analysis is that even the “business-as-usual centre guy” winning will be “disruptive”. Because a “business-as-usual Europe” is not adjusting to the dynamic changes underway post-Trump and post-Brexit (and everything else).

The property market might also be flatlining. It’s too soon to call a major fall, but some correction could be in prospect.

We’d need a big increase in rates (or a big jump in jobless) for a major fall. But the small — and focused — increases in rates is enough for a correction. The other big disruption could be China. “Something” is going on over there, just exactly what is not entirely clear.

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Originally published as Donald Trump’s cuts not too taxing