IN the third of our trilogy on how Donald Trump might affect your pensions and investments, we turn to the threat to smaller companies and that of war.
In the past, financial models meant something, and this created the opportunity to look back to look forward. Times are definitely a changing, and it’s hard to see how these models will continue to work.
Last week we covered how, once again, Trump’s lies were showing through with his support of the tax regime to assist the highest earners and corporates. The highest earners benefit by a 1,681 per cent larger increase in post tax income than the lowest paid.
And so we dig further and find Trump’s proposal to remove a company’s debt costs as a relief against tax. Grade A companies (the more elite again) won’t suffer from this, whereas the smaller companies again, who have more borrowing, will.
For the corporate bond market, companies are measured from higher to lower grade based on their quality. Those invested in bonds below investment grade might be better placed elsewhere as this could easily become the next wave of defaults in a couple of years with bond prices falling at the lower end.
On the plus side you might consider the proposed change to capital costs in a company’s accounts. A company buying large capital items such as buildings and machinery may be allowed to offset that cost immediately as opposed to spreading over the years. This will drive the demand again for property purchase and capital goods, another ignition into the market.
And to the risk of war: Theresa May’s meeting with the Israeli minister will have been noted for his call for the UK to support Trump’s sanctions against Iran. Mr Netanyau says that “Iran seeks to annihilate us and says so openly it threatens Europe, the west, the world.”
Most comforting however, for all of those sick of war and conflict, was Theresa May’s clear loss of eye contact at all key points in that interview where it may well be that she disagreed entirely with what was being said.
Trump’s communications director (who incidentally stated that he finds out much of what’s going on from Trump via his Twitter feed) falsely announced Iran will come under pressure and are now ‘on notice’ after firing at ‘our vessel’, only to then be corrected that it was a Saudi vessel and it was indeed Yemen’s Houthi rebels.
Those with an interest in politics will know what he really meant by ‘our’ vessel but this sends shivers, not least of course because China is supporting Iran because of its oil and gas interests there.
The distinguished researcher, Professor Hudson is of the view that the US will simply try to pry Russia away from the allegiance of the Shanghai Cooperation Organization (SCO) and then deal with China and Iran separately. You can see that attempt potentially unfolding in front of your eyes now. It seems Trump is following Kissinger's view that China is smarter and larger so start picking away elsewhere first by ‘friending’ Russia.
He will fail at this because Russia doesn’t trust the US after all the broken agreements. The SCO controls 50 per cent of the world’s natural gas. Russia and China have a combined population of over 1.6 billion while the US has 326 million people.
If Trump fails at achieving his division above, it may well be his approach turns to that of further division and attack. He is, I’m sure, fully aware of his break with protocol with his interaction with the Taiwanese government.
Was that a bluff to show he can use this to break down the ‘one China’, or to enter into negotiations vis-à-vis North Korea, or to follow on with Trump’s chief strategist’s (Steve Bannon) view that “we are going to war in the South China Sea, no doubt”?
Like everything, our beliefs will lead us to that answer. John Pilger’s new movie “The Coming War with China” points to the U.S. surrounding China with 400 military bases of warships, bombers and missiles.
The appointment of Peter Navarro as the head of the newly established national trade council is another clue. He wrote the book, “Death by China” which states China is the root of all evil in the US.
Even if that doesn’t occur, a trade war would be catastrophic for the world but less so perhaps for China who have already spearheaded a regional trade bloc with many Asian countries pledging their support for it.
The outgoing US commerce secretary highlighted that in light of matters, China was now focusing on developing domestic industry to take the place of imports and that they were moving away from foreign developed products to indigenous developed products.
In either of these scenarios, western economies and markets will suffer the most.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a free, no obligation initial chat about your individual finances, call Darren McKeever on 028 6863 2692, email dmckeever@wwfp.net or visit us on www.wwfp.net. Follow us on Twitter: @WorldwideFP.
