Trumponomics 101 – The Opening Act: Bonds Tumble, Bad News For Intel, Nvidia and AMD?
If there is one thing market hates, it's uncertainty, and the fate of the US economy following Trump's win is anything but certain. Today we will be going over some of the finer points of his economic agenda and how they will effect the US economic backdrop as well as some of the big stocks we follow.
One of the first and foremost things that president-elect trump will apparently do is cancel the Trans Pacific Partnership in an effort to bring home jobs. This will have two primary consequences, one of which can bme stated to a very high degree of certainty. First of all, if the effort succeeds, then prices should generally go up for the industries that are affected. Secondly, this will be an important pivot in Asia and leave China free to reign supreme (since this was supposed to be a trade bloc exclusive of China). The logical question that must follow is whether the jobs generated by this act are enough to offset any potential momentum loss in Asia?
Potential cancellation of TPP, tax holiday and repatriation under Trump
The answer to this question is not so simple. Firstly, the TPP wasn't going to have much effect to begin with. The monetary net effect of TPP to the US was going to be negligible in nature, the real win was in the U.S. defining labor, environmental and copyright rules of the global economy as well as a demonstrating a resolve to a geopolitically important region. In other words, the importance of TPP had very little to do with actual monetary benefit and a lot to do with its strategic importance.
With the partnership more or less dead in the water, China is now free to do as she pleases and as the country with the largest GDP in the region while on the other hand any offsetting effect would be close to zero. A counter argument claims that this was going to be something beneficial to both the US and China as there were rumors that the US is considering bringing China on board in a second round of talks and the country had silently been accepting of the deal. In any case, while the TPP cancellation will create a few jobs, the US will retreat further from the global village (which has been a curious trend as of late in almost all regions of the world) and book a strategic loss in the Asian theater.
Also keep in mind that the confusingly similarly abbreviated TTIP (the Transatlantic Trade and Investment Partnership between the US and the EU) is also seemingly dead in the water (as we reported previously here). Both agreements theoretically offer corporations the decades long lobbied for possibility of being able to sue national governments for policies which damage earnings. So of 3 candidate trade deals in recent times, only CETA (the Canada-EU deal) with these sorts of provisions seems like it will go ahead. Some will view this as yet another nail in the coffin of globalisation, others will of course view the ratification of CETA as the first major cut in death by a thousand cuts to the concept of the nation state and the rise of corporations.
Second off, we have a possible corporation tax cut and the repatriation holiday with corp tax potentially being lowered to 17% during Trump's regime as well as a once off 10% rate for any companies repatriating funds to the US from abroad. This move is of course designed to trigger an inflow of money that is being stored offshore on two counts: 1) encouraging companies to bring back operations in foreign subsidiaries and 2) utilize a possible one-off policy to bring back the cash piles held off shore (currently over £2 Trillion as we reported). Apple is probably the biggest example of a company which might utilize the latter, if not the former. Keep in mind however, that since the UK has been lowering corp tax to attract investment, any corp tax cut will have to compete with the UK for the operations part of the ideology (something which has recently scored the UK investment wins with Google and Facebook).
Affect on Bond and Equity markets
It is doubtful whether Apple would want to move its operations to the US mainland, but it will undoubtedly want to take advantage of any one-off tax cut that Trump's regime might offer. Another facet to this reasoning is that assembly lines are becoming more and more automated these days. The human factor is dwindling to an all time low, so cheap labor is something that is quickly shrinking as a factor on which companies choose their locale. While there is still a significant offset, progress in the Chinese labor regulatory environment, increased sweeteners back home and a highly automated assembly line could eventually see a drastic shift away from globalization.
The global bond market is suffering and approximately a Trillion USD have already been wiped out in large part due to the expectation of inflationary spending by the US government and the expected equities bonanza which would follow such a period. Because of the higher expected required return, it will become more expensive for companies to borrow in a post-Trump US since they will have to pay more interest. An example of this is the fact that 10-year US t-note yields have jumped from 1.8% to 2.4% - which is an absolutely huge jump for something as 'risk-free' and stable as the bond market.
Expectation of growth however, has driven the US equity market upwards in anticipation of inflationary spending and any growth incentivizing policies. All of this is of course based on the assumption that spending gets approved and at this point, I think we will talk about the last point of note: Trump's constant back-footing on major policies which could put him in hot water with his fellow Republicans.
So far, Trump has made a lot of u-turns after becoming the presidential-elect and while this may seem like a good thing to many, his increasingly Democrat colors might not be appetizing to hard lining Republicans. He has decided against appointing a special prosecutor for Clinton, decided not to repeal and replace Obama care and the much discussed wall at the Mexican border may be fencing in some places. Combine this with the fact that he is primarily an individualistic person and definitely not a team player could see him at odds with the Republican party. Breitbart is already calling him out on "broken promises". Since congress controls the spending, and if they can't agree on spending/budgets we may see any Trump driven economic growth vanish without a trace.
Bonus: Debt overview of the PC market: Intel (NASDAQ: Intel), AMD (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA)
The tech stocks that we regularly follow will also be impacted by the trump presidency. Intel will undoubtedly be offered to bring its factories back home but considering the complexity of the silicon production line - it remains to be seen whether this will happen. In contrast, both Nvidia and AMD cannot really be expected to bring their business back home, since they both are primarily design houses and outsource production of their GPUs to TSMC and won't find an alternative in the near future.
Probably the most potent impact will be on raising funds. The good news is, AMD has already raised quite a lot of money and will simply be paying this back for the time being. Intel, AMD and Nvidia have a lot of debt due by 2026. Keep in mind a Trump presidency will max out at 2024, so the last 2 years are only their for completeness' sake. On average, Intel corporation has 1.67 Billion due per year, Nvidia corporation has 410 Million due per year and Advanced Micro Devices has 203 Million due per year.
All companies have at least one year where nothing is due before Trump's presidency ends. Since interest rates on borrowing are expected to rise, there is an upside to having an increased debt load right now (provided the going concern assumption is met). The first graph represents the debt due per year for all three companies, and we can see that in absolute terms, Intel has the highest amount of borrowing. This is something that is completely natural for a blue chip stock like Intel.
To adjust for the size differences in the three companies, I have included the debt amounts adjusted by market cap. What this will give us, is the debt due per year, on every dollar of company's stock. On an average basis, Nvidia has 0.8 cents of debt due per year on every dollar, AMD has 2.2 cents and Intel has 1 cent due on every dollar of the company's value. Another relevant metric would be debt to equity, and this would show us pretty much the same patter, with AMD being the most burdened with a D-E of 423.9, Nvidia following with 57.9 and Intel at 43.7 on the dot.
As many will know, debt is often rolled forward with additional debt in normal circumstances, something AMD recently did a good job of doing as we reported in their debt restructure here. In hindsight, this might be an even better deal than it initially seemed given the current state of bond yields and the likely direction of them in a Trump presidency. AMD of course is the poorest of the 3 firms in question in cash terms. If interest rates go up as expected, you may find Intel and Nvidia decide to start paying back some of their debt and perhaps not rolling so much of it.
There is still a lot of economic policy to play out from a Trump presidency (as well as of course the prospect of some vote recounts). But assuming that one goes ahead, our analysis remains to keep a firm eye on disunity between the President and congress. Inflationary spending to drive growth is something which is more of a Democrat policy than a Republican one, particularly if that spending is more on infrastructure than the military. It may be that the Republican party is able to unite despite the quite different factions which reside under its banner. If Trump manages to do a reasonable job of bringing jobs back to the US and driving economic growth, that may be enough to quell any dissent in the short to medium term.
One wonders though whether his refusal to specifically answer the question during the debates as to whether he would seek to appoint Supreme Court judges to overturn Roe Vs Wade means that he does still potentially have an ideological gap with many in his party. If disagreements turn sour and the purse strings get tightened, things could get ugly. Nobody wants a US default, it's one of the few things which would be measured as an immediate cataclysmic event.